Netflix and The Walt Disney Co. Dec. 4 announced a significant multi-year licensing agreement that will make Netflix the exclusive domestic pay-TV service (following the retail window) for first-run, live-action and animated feature films, beginning in 2016.
At that time, new Disney, Walt Disney Animation Studios, Pixar Animation Studios, Marvel Studios and Disneynature titles will be available for Netflix’s domestic subscribers to stream on connected televisions, tablets, computers and mobile phones. The agreement also includes Disney’s direct-to-video new releases, which will be available starting in 2013.
Financial terms of the agreement were not disclosed. Interestingly, the timing suggests Disney might not renew its pay-TV distribution agreement with Starz LLC, which expires in 2015.
Starz unwittingly helped Netflix’s nascent SVOD service blossom after signing a $30 million-a-year digital distribution agreement in 2008. That deal, which rival media competitors characterized as highway robbery, was not renewed when it expired in February — with both parties feigning indifference.
Separately, Disney and Netflix reached agreement on a multi-year catalog deal that enables subscribers to stream titles such as Dumbo, Pocahontas and Alice in Wonderland today.
“Disney and Netflix have shared a long and mutually beneficial relationship and this deal will bring to our subscribers, in the first pay-TV window, some of the highest-quality, most imaginative family films being made today,” Ted Sarandos, chief content officer at Netflix, said in a statement. “It's a bold leap forward for Internet television and we are incredibly pleased and proud this iconic family brand is teaming with Netflix to make it happen.”
Janice Marinelli, president of Disney-ABC Domestic Television, said the SVOD pioneer has legitimized the over-the-top video distribution business model.
“Netflix continues to meet the demands of its subscribers in today's rapidly evolving digital landscape, and we are delighted that they will have much earlier access to our top-quality and entertaining slate,” Marinelli said.
CFO Jay Rasulo Dec.5 told investors at the UBS event in New York the deal was concluded after careful analysis of the inventory and windowing of Disney's movies and catalog titles.
"We clearly took that strategy into consideration as did Netflix as we sat down to talk about this deal," Rasulo said.
While Disney may be thrilled with the deal, analysts are puzzled by an agreement that undoubtedly raises the bar in SVOD license fees. In fact, CBS CEO Les Moonves was giddy talking about it at the UBS event. Why? As go Disney's SVOD license fees, CBS won't be far behind.
Eric Wold, analyst with B. Riley & Co. in Los Angeles, wonders if increased competition from Amazon Prime Instant Video, Hulu Plus and Comcast's Xfinity Streampix may be making Netflix management do some irrational things, including overpaying for content. Wold said that even at $300 million in incremental content costs, it would take more than 3 million net subscribers to offset that spending.
"Netflix may be struggling to understand all the dynamics going on in the domestic SVOD market – especially given the significant misjudging of their subscriber growth guidance this year -- and this may just be another sign of that," Wold said.
Indeed, Wall Street scuttlebutt suggests Netflix may have to raise addtional funds to pay for it all.
Regardless, Wedbush Securities' Michael Pachter can only wonder at the excessive spending on content previously dismissed.
"They hated the [Starz] content in January, said nobody watched it ('less than 2% of viewing hours'); now it’s essential at any price," Pachter said. "I think this shows that content owners have a lot of leverage over Netflix, and are squeezing them. I won’t be surprised if they never make as much as $100 million [in profit] again, which is pretty shocking for a company with an enterprise value of $5 billion."