Netflix Adds DreamWorks To Bolster Kids' Content

Investor's Business Daily

Netflix (NFLX) hopes Kung Fu Panda and Shrek can beat the tar out of Dora the Explorer and SpongeBob SquarePants.

Netflix on Monday announced a multiyear original content distribution deal with DreamWorks Animation (DWA), the studio behind the "Shrek," "Madagascar," "Kung Fu Panda" and "How to Train Your Dragon" franchises.

Netflix didn't disclose the terms, but said it was "the largest deal for original first-run content in Netflix history.

The deal encompasses more than 300 hours of new programming, including original TV shows "based on the studio's beloved franchises and characters." The first of the new series is expected to begin airing in 2014 in all territories where Netflix operates, including the U.S., Canada, Latin America and Europe.

Children's Hour

The deal shows the importance of children's programming in Internet video.

It comes just two weeks after Amazon.com (AMZN) secured a host of kids' shows from Viacom (VIA) that used to be carried by Netflix. Those shows include "Dora the Explorer," "SpongeBob SquarePants," "Victorious," and "The Backyardigans." Viacom had a licensing pact with Netflix that expired in May.

Original Licensed Content

Netflix walked away from renewing the Viacom deal because it wanted to focus on licensing particular shows as well as pursue original content in the HBO vein. Amazon also is funding original shows, with two sitcoms and three children's shows slated to premiere in 2014.

New DreamWorks shows for Netflix will be inspired by characters from the studio's hit franchises and upcoming feature films as well as the Classic Media Library, which DreamWorks acquired in July 2012 for $155 million. That library includes such characters as Rocky & Bullwinkle, Mr. Magoo, George of the Jungle and Casper the Friendly Ghost.

Netflix signed an earlier deal with DreamWorks in February that will bring an original series for kids based on the upcoming DreamWorks movie "Turbo," which premieres on July 17. The series "Turbo F.A.S.T." picks up where the movie about a speedy snail leaves off.

Also coming exclusively to Netflix in the U.S. and Latin America next year will be DreamWorks feature films "The Croods," "Turbo" and a big-screen adaptation of "Mr. Peabody and Sherman," which opens in theaters in March 2014.

Youssef Squali, an analyst with Cantor Fitzgerald, said in a research note that Netflix's deal with DreamWorks "fills a hole left by Viacom's kid's programming (moving to Amazon) and does so on a differentiated (and) exclusive basis.

The DreamWorks content should make it easier for Netflix to attract and retain subscribers, Squali says.

Pricey Programming

Wedbush Securities analyst Michael Pachter says the Netflix deal with DreamWorks Animation raises the same red flags as the streaming video service's other recent content deals.

"We continue to believe that Netflix's original content deals are costly, and although we believe that they will serve to add subscribers for the company, it is not clear to us that original programming will have a lasting benefit," Pachter said in a research note. "In our view, because Netflix doesn't own its original programming, it is highly likely that the programs will be aired elsewhere once Netflix's exclusive broadcast window closes, and we think that the company faces ever increasing subscriber churn in the future as its original content deals expire.

Netflix and Amazon have emerged as main rivals in the over-the-top TV market where video is delivered over broadband Internet connections. These services compete with traditional cable and satellite TV providers.

Other current and potential Netflix competitors include Apple (AAPL), Google (GOOG), Hulu, Intel (INTC) and Microsoft (MSFT).

Netflix shares rose more than 7% to 229.23 and DreamWorks Animation gained 4% to 23.74. Meanwhile, Amazon rose 1.5% to 278.06.

Netflix charges $7.99 a month for its streaming video service and Amazon's service works out to $6.58 a month. Amazon's video service is part of its Prime subscription service, which costs $79 a year and includes free, two-day shipping on products from the e-commerce website.

Amazon also differs from Netflix in offering new release movies on pay per view in addition to its subscription, all-you-can-eat offering.

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