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Is the Netflix (NFLX) Deal with Disney (DIS) Really That Great?
Netflix (Nasdaq: NFLX) exuberance came and went. Shares are up 14 percent on the session as investors enjoy the idea of an exclusive licensing deal with Disney (NYSE: DIS), but there are a few key points to mull.
1. Terms weren't disclosed. No one is sure how much Netflix is paying for the content. The trend in the media marketplace is that the gap between streaming content and physically delivered content (i.e. - DVD, VHS) is becoming wider and wider, with streaming content prices soaring.
2. Netflix will get high-profile Disney direct-to-video new releases, which will be made available on Netflix starting in 2013. Fair enough.
3. Netflix will have to wait until 2016 before being able to cash in on Disney's theatrically released feature films, which include Disney, Walt Disney Animation Studios, Pixar Animation Studios, Marvel Studios and Disneynature. Netflix will need to last through some pretty stiff competition before really being able to cash in.
Still, the overall deal seems kosher. At least Netflix will be able to dump the awful knock-off content it was providing.
Wedbush Securities Michael Pachter said he doubts the Disney films will attract enough subscribers to offset the expense.
"These costs are going to sink Netflix," he said.
Pachter has been urging investors to sell their Netflix stock because he believes the company will either lose money or post puny profits for the years to come.
Netflix's rising costs for Internet video rights have emerged as a major source of concern as the company's earnings have dwindled during the past year. The company, which is based in Los Gatos, Calif., already has warned that it may record a loss for the last three months of 2012, which would be its second quarterly loss of the year. Depending on the size of the potential fourth-quarter setback, Netflix could finish this year with its first annual loss in a decade.
Even before signing the Disney deal, Netflix owed $5 billion in Internet video licensing fees during the next five years, including $4.5 billion due before the end of 2015. Netflix's annual revenue this year is expected to total about $3.6 billion.
Wible, the Janney analyst, said Netflix may have wanted to strike a deal with Disney several years before the movies can be shown on its service to bolster investors' confidence in the company. That, he said, could give Netflix a better chance to sell bonds or stock to raise more money to pay Disney and other studios for Internet video rights.
"The biggest uncertainty is whether Netflix will use this as an excuse to raise capital," Wible said.
Starz played down the loss of the Disney rights. In a statement, Starz said it would now have more money to invest in developing original TV series. Netflix also has been financing exclusive episodic programming and had similar played down its loss of Starz when that deal expired in February.
After Disney defects to Netflix, Starz will still hold the first-run rights to films released by Sony's stable of movie studios That deal applies theatrical releases through 2016 from Columbia, TriStar, Screen Gems and several other Sony-owned studio.
Liberty Media plans to spin off Starz into a separate, publicly traded company early next year.