Netflix, Disney Sign Exclusive Deal

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Netflix Inc. (NFLX) has entered into a multi-year licensing agreement with Walt Disney Company (DIS) for the exclusive right to stream the latter’s content to its U.S. subscribers. The financial terms of the deal were not disclosed.

According to the terms, starting 2016, Netflix would be able to stream movies from the Disney Studio and its associated studios instantly after release.  Moreover, Netflix would gain access to Disney’s direct-to-video releases starting 2013.

The current deal is a big positive for Netflix and has come at a crucial time. The company lost streaming rights of Disney movies as the Starz deal expired in February 2012.  Back in mid 2011, the license renewal talks between Netflix and Starz Entertainment LLC fell through due to non agreement related to financial matters. We believe that the deal would be incrementally beneficial for the company in attracting new subscribers as well as retaining the old ones.

We believe that the partnership agreements with Hollywood studios and the overall improvement in content make its streaming services distinguishable from other service providers such as HBO and Amazon’s (AMZN) Prime Instant Video. Apart from recent movies and documentaries, Netflix is also boosting its original content portfolio to entice new subscribers in the U.S. and International markets. Backed by these factors, Netflix’s subscriber base increased from 25.3 million subscribers in the year-ago period to 31.8 million unique subscribers in the third quarter.

Moreover, with its own content delivery network, Open Connect, Netflix’s video library will be directly connected to Internet service providers, ensuring smooth and fast data transfer that would eventually enrich the customer experience.

However, the company continues to see cost escalation due to higher license and renewal fees. Netflix needs to pay $5.0 billion for streaming content obligations, out of which $2.1 billion is to be paid within the next 12 months. Coming to the current deal, industry experts expect Netflix to pay between $200 million and $350 million annually to Disney. Going forward, these huge payment obligations would weigh on the stock.

We have a Neutral recommendation on Netflix over the long term. Currently, Netflix has a Zacks Rank #3 (Hold).

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