Netflix shares rise on optimism about Disney deal

AP News
Posted: Dec 06, 2012 4:42 PM
Netflix shares rise on optimism about Disney deal

NEW YORK (AP) — Netflix this week may have found in Disney the happiest place on earth. Shares have been on a magical ride since Tuesday when the company announced a deal that puts some Disney staples in its library immediately, and will allow Netflix to show the studio's movies shortly after they leave theaters in several years.

THE SPARK: The multi-year licensing agreement announced this week is a breakthrough for Netflix as it tries to secure more exclusive programming for its popular service that streams video over high-speed Internet connections. The Los Gatos, Calif., company will better be able to compete with traditional pay-TV channels such as HBO, Starz and Showtime.

THE BIG PICTURE: Under the agreement, Netflix's streaming service gets the exclusive U.S. rights to offer Disney's movies during the period normally reserved for pay-TV channels. That period typically starts about seven months after movies leave theaters. The subscription service can then usually show the movies for an 18-month stretch.

Starz, which failed to renew its deal with Disney, retains the rights to all Disney movies released in theaters through 2015, with Netflix picking them up on films released in 2016 and beyond. Disney's direct-to-video movies will come to Netflix next year, while classic films will be released to Netflix immediately.

The deal marks the first time that one of Hollywood's major studios has sold first-run rights to Netflix instead of a premium TV network. But the privilege comes at a hefty price. Financial terms weren't disclosed, but analysts estimate that Netflix will pay Disney more than $350 million annually.

The cost of the deal will require Netflix to accelerate its subscriber growth or consider raising its prices — something that management vowed not to do after rankling customers with rate hikes last year. And CEO Reed Hasting seems committed to landing compelling movies and TV shows to attract more customers, rather than taking that risk again.

THE ANALYSIS: Stifel Nicolaus analyst George Askew backed his "Hold" rating for the stock, calling the move a "bold step."

"Exclusive content will strengthen Netflix' subscription business model and we applaud the company for this action," Askew wrote.

In order to justify the estimated price tag, Askew believes Netflix will need to add an additional 3.7 million new annual U.S. subscribers, up from about 25 million today, which will be tough and could put the company's profitability at risk.

Caris & Co.'s David Miller was less optimistic and cut his rating for Netflix shares to "Below Average" from "Average." With the on-demand part of the deal not taking effect until 2016, he questioned whether it will do much to boost the company's subscriber growth over the next two years.

Just over two years ago, Netflix shares were pushing toward $300. On Monday, before the deal was announced, Neflix shares could be had for $76.

THE SHARES: Up nearly 3.4 percent, or $2.80, to close Thursday at $86.17. Shares are at a seven-month high.