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Fox's "Arrested Development" on Netflix

Zacks Equity Research

Netflix Inc. (NFLX) is set to exclusively stream the new season of the Twentieth Century Fox’s cult-comedy series “Arrested Development” for the subscribers of the U.K. and Ireland from early 2013.

Arrested Development had received critical acclaim after it debuted in 2003. Despite the show winning six Emmy awards and a Golden Globe, its viewership declined with every passing season and higher production costs compelled Fox to discontinue the show in late 2006.  The first three seasons of the show were already available for streaming on Netflix, and the huge response that it received compelled the company to revive the sitcom's production.

Netflix subscribers will also be able to stream other series from Fox’s library such as Modern Family, The League, Lie to Me, Sons of Anarchy and The Killing. Moreover, Netflix had already been streaming 24, Prison Break and It's Always Sunny in Philadelphia from Fox’s library since it debuted in the U.K. and Ireland in January this year.

We believe that the new content will not only improve Netflix’s competitive edge in the U.K. and Irish market, but will also boost subscriber growth going forward. The company is trying to gain a foothold in the U.K. and Ireland, as there is no dearth of streaming providers with good and popular content. Moreover, Internet penetration and use is high, so the market is ripe for the kind of services provided by Netflix.

Of course, this also means that competition is stiff. Therefore, similar streaming services such as Amazon.com Inc.’s (AMZN) Lovefilm, and other online players such as Channel 4, the BBC, British Sky Broadcasting Group Plc and ITV Plc are already present.

However, the video on demand market in the U.K. is expected to surge by 35% to £379 million from a mere £11 million just five years ago, according to Screen Digest. Therefore, if Netflix is able to provide comparable services, there is no reason why it should not be able to grab a share of this million dollar opportunity.

Netflix’s future growth strategy in the international market is entirely based on the online streaming business. In the recently concluded quarter, its international subscriber base increased by 1.21 million net subscribers on a sequential basis. Revenues from international operations increased 48.3% sequentially.

We maintain our Neutral recommendation over the long term (6-12 months). Despite the higher costs, we think that Netflix will probably see sales strengthening, as subscribers take note of its improving portfolio. This would ultimately enable the company to build a strong position for itself.

However, we believe that increasing costs related to licensing and renewal fees and higher capital expenditure due to international expansions can hurt growth in the near term. We currently have a Zacks #3 Rank on Netflix, which translates into a Hold rating in the short term.

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