Disney’s Netflix Deal Gives Top Billing to Online Movies

Netflix Inc. (NFLX)’s deal with Walt Disney Co. (DIS) to stream new releases, including those from Pixar and Marvel, signals online viewing has become mainstream and poses a major threat to traditional pay TV.

Starting in 2016, Netflix gains exclusive U.S. TV rights to movies from Disney, the world’s largest entertainment company, according to a statement yesterday. That gives the Los Gatos, California-based video service new films in a time frame historically reserved for premium channels like Liberty Media Corp. (LMCA)’s Starz, as soon as seven months after theaters.

The accord underscores the shift away from a decades-old model in which studios prospered by offering blockbuster films to home viewers on DVD and premium cable channels such as Starz, Disney’s current pay-TV partner. Subscription and on-demand services are becoming an important source of revenue for studios coping with shrinking DVD sales. Netflix, the online leader, is now a competitor to Starz, HBO and Showtime.

“This is a big win for Netflix,” Jaison Blair, an analyst with Telsey Advisory Group in New York, said in a telephone interview.

Financial terms weren’t disclosed. Tony Wible, an analyst at Janney Montgomery Scott LLC who follows both companies, projects Netflix will pay Burbank, California-based Disney more than $350 million a year. Barton Crockett, an analyst with Lazard Capital Markets, estimated Disney gets about $200 million a year now.

Exclusive Programs

Netflix gets immediate access to classic titles like “Alice in Wonderland” and “Dumbo.” Next year, the service adds direct-to-video titles, while new films start in 2016. According to IMDB.com, Disney plans to release Marvel’s “Dr. Strange” and Pixar’s “Finding Nemo 2” that year. The studio hasn’t announced any 2016 pictures.

The deal is a coup for Netflix Chief Executive Officer Reed Hastings, who faces emerging competition in online video and pressure to sell the company from billionaire Carl Icahn. He said last month he expects Icahn, who controls almost 10 percent of the company through stock and options, to start a proxy battle.

Hastings has been pushing to make Netflix available around the world, arguing people will pay for near-instant access to content online instead of scheduled TV on premium outlets such as Time Warner Inc. (TWX)’s HBO or CBS Corp. (CBS)’s Showtime.

The agreement highlights efforts by Ted Sarandos, the chief content officer at Netflix, to obtain exclusive rights to films in the same pay-TV time frame as HBO, Showtime and Starz, or about seven months to a year after theaters.

Sony Rights

Netflix beat out several competitors for Disney pictures, Sarandos said, without identifying them. The company will bid aggressively for exclusive rights to Sony Corp. (6758) films when that studio’s contract with Starz ends around 2016, he said.

“They negotiate a long way out and we’ll be at the table for each of them,” Sarandos said.

Paula Askanas, a Sony spokeswoman, said the company had no comment on Sarandos’s remarks.

Netflix fell 3.8 percent to $83.37 at the close in New York. The shares have advanced 20 percent this year, including yesterday’s 14 percent surge. John Malone’s Liberty Media added 0.8 percent to $106.40. Disney rose 0.6 percent to $49.59.

Courtnee Ulrich, spokeswoman for Englewood, Colorado-based Liberty Media, didn’t return a phone call seeking comment.

Films from “Star Wars” creator Lucasfilm, which Disney is buying for $4.05 billion, will be included once the purchase is completed, Sarandos said today at a UBS AG (UBS) conference in New York. He was interviewed by Harvey Weinstein of the independent studio Weinstein Co., which also has an exclusive Netflix deal.

Deeper Library

The Disney deal won’t trigger a price increase, Sarandos said. The company will keep up an emphasis on exclusive content, and is considering ways to promote its original shows, including Web ads, he said. Relations with Icahn are “very positive,” according to Sarandos.

With Disney, Netflix will be able to stream current or catalog films from several studios.

Viacom Inc. (VIAB)’s Paramount Pictures, home of the “Star Trek” series, Lions Gate Entertainment Corp. (LGF), owner of the “Hunger Games” films, and Metro-Goldwyn-Mayer Inc. sell to Netflix through their jointly owned cable channel, Epix. Relativity Media LLC has an exclusive multiyear agreement with Netflix, as does DreamWorks Animation SKG Inc. (DWA), maker of the “Shrek” movies.

Kids’ Programming

Yesterday’s agreement makes Disney the first major studio to bypass a traditional cable-TV outlet with its movies.

With pictures geared to children and families, Netflix can build a base of subscribers less likely to cancel for competing offerings, said Scott Devitt, an analyst with Morgan Stanley (MS) who has a buy rating on the shares.

“The company is focusing on building a highly differentiated content catalog aimed at kids, which is a demographic that has relatively homogeneous tastes,” Devitt wrote in a research note.

With 30 million users worldwide, Netflix is extending its lead over competing video services by Amazon.com Inc. and Redbox Instant, from Verizon Communications Inc. (VZ) and Coinstar Inc. (CSTR), which begins public testing this month.

Domestic Customers

Netflix is also adding exclusive programs such as “Lilyhammer” and “House of Cards” as it seeks earlier and fuller home-video access to studio movies for its customers.

The company has about 25.1 million U.S. subscribers, compared with 20.7 million for Starz as of October.

Disney embraced online media sooner than its competitors, becoming the first major studio to sell and rent TV shows and movies through Apple Inc. (AAPL)’s iTunes. The company’s largest shareholder is the trust of late Apple co-founder Steve Jobs.

One risk for Disney is that viewers will cancel their traditional pay-TV service, costing the company subscription revenue it gets for networks such as ESPN and the Disney Channel, according to Michael Morris, an analyst with Davenport & Co. in Richmond, Virginia.

“Disney has been clear they are platform agnostic,” said Morris, who recommends the stock.

While Netflix bolsters its film lineup, the announcement doesn’t settle a tug-of-war among investors over the company’s prospects, said Arvind Bhatia, a Sterne, Agee & Leach analyst who has a neutral rating on the shares.

With about $4.5 billion in streaming content obligations due before the Disney films are available, and losses from international expansion, Netflix must increase subscribers or raise its $7.99-a-month price for unlimited viewing to remain viable long-term, Bhatia said.

“It’s a big get, but clearly there are several unknowns out there to determine if it’s a good get,” Bhatia said. “Though we don’t know the financial terms, it’s clear this was not a cheap deal.”

To contact the reporters on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net; Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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