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Analyst: Netflix Content Costs to Top $1.9B by 2012

18 Apr, 2011 By: Erik Gruenwedel

License fees to more than offset lower disc distribution costs

Netflix’s streaming content license fees are projected to increase at least $500 million this year from $180 million in 2010 — more than wiping out much-ballyhooed savings from reduced disc postage and distribution costs, an analyst said.

Michael Pachter, with Wedbush Securities in Los Angeles, said the exponential rise in Netflix’s license fees revolve around recent benchmark content deals completed with pay-TV channel Epix and The Walt Disney Co.

He estimates Netflix will pay Epix $190 million annually during five years for repurposed movies from Epix co-owners MGM, Lionsgate and Paramount — available 90 days after initial broadcast. Pachter expects Netflix to shell out $150 million to $200 million annually for a renewed deal with Starz Entertainment — with the current $30 million per year agreement set to expire in this fall.

The analyst believes Netflix will pay on average more than $107 million per year per studio for repurposed movies from Walt Disney Studios Home Entertainment, 20th Century Fox Home Entertainment, Universal Studios Home Entertainment, Warner Home Video and Sony Pictures Home Entertainment. He says Netflix will pay even more for TV content, with separate studio deals ranging from $100 million to $200 million per year.

Pachter says Netflix will realize about $200 million in reduced postal fees after 2012.

“When we sum up all of the likely deals, we can only conclude that Netflix’s cost of streaming content is likely to rise dramatically,” Pachter wrote in an April 18 note. “Many of our competitors have assumed that postage savings would exceed the increase in content costs, and we believe that such an assumption is patently wrong.”

Despite Netflix halting the release of individual rental data in 2006, Pachter, based on 50% of Netflix’s 20 million subscribers primarily streaming, suggests the average sub rents about 8 discs per month. In the statistic Pachter assumes that 90 minutes to 120 minutes of streaming is the equivalent of one disc rental.

He said the average Netflix sub rented 2.4 new release discs and 1.6 catalog discs per month.

“The striking thing about this analysis is that it reveals that the new-release DVD rental is relatively unchanged since the advent of streaming,” Pachter wrote. “This makes eminent sense, given that streaming content is, at best, available one year after release on DVD, and suggests that streaming can be a substitute for most catalog DVD rentals, but cannot be a substitute for new-release DVD rentals.”

The analyst maintains an “underperform” rating on Netflix shares. The company reports first-quarter results April 25.

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