Netflix Gains Disney Streaming Rights in End Run on Cable

Netflix Signs Disney Accord Gaining First-Run Right to Films
Netflix Inc. , based in Los Gatos, California, surged 8.5 percent to $82.45 at 2 p.m. in New York after gaining as much as 9.8 percent. Photographer: Scott Eells/Bloomberg

Netflix Inc., the online video service, signed a multiyear accord to carry Walt Disney Co. films, marking the first time a major studio has bypassed traditional cable-TV outlets.

The agreement starts with movies released in 2016, the companies said today in a statement, without disclosing terms. Netflix will replace Liberty Media Corp.’s Starz Entertainment when its output deal with Disney expires in 2015. Netflix surged the most since January while Liberty Class A tumbled.

The deal is a coup for Netflix Chief Executive Officer Reed Hastings, who faces emerging competition in online video and pressure for a sale of the company from activist investor Carl Icahn. U.S. subscribers of Netflix will get access to movies from Disney, including its Pixar and Marvel releases, as soon as seven months after they open in theaters, a time frame traditionally reserved for premium pay-TV channels like Starz.

“It was a long slog, but ultimately we displayed enough sustainability that Netflix became a real and viable option for the pay-TV window,” Ted Sarandos, the video service’s chief content officer, said in an interview.

Netflix, based in Los Gatos, California, surged 14 percent to $86.65 at the close in New York, more than doubling its year-to-date gain. Liberty Media, based in Englewood, Colorado, slid 4.9 percent, the most since May 17, to $105.56. Disney, the world’s biggest entertainment company, was little changed at $49.30.

Seeking Sony

The Disney accord separately gives Netflix immediate access to older classics such as “Dumbo,” and new direct-to-video releases in 2013. The company doesn’t gain movies from “Star Wars” creator Lucasfilm Ltd., which Disney is buying for $4.05 billion and doesn’t yet own, according to Jonathan Friedland, a Netflix spokesman. He declined to say whether they would be included later.

For Netflix, with 30 million users worldwide, the Disney agreement extends its lead over competing video services from and Verizon Communications Inc. and Coinstar Inc.’s Redbox Instant, which is set to begin public testing this month. Netflix is 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.

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

Movies’ Cost

Netflix probably agreed to pay in excess of $350 million a year for Disney’s movies, estimates Tony Wible, an analyst with Janney Montgomery Scott in Philadelphia.

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

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

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

DreamWorks Animation SKG Inc., which puts out two to three films a year, also has an agreement with Netflix.

Children’s Tales

With a Disney catalog largely geared to children and families, Netflix can build a solid base of subscribers who are less likely to cancel service for competing offerings, said Scott Devitt, a Morgan Stanley analyst who has a buy rating on the shares.

“In a shrewd move by Netflix, 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.

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 the losses incurred as it expands internationally, Netflix must increase its subscriber count 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.”

Netflix expects billionaire Icahn, who controls almost 10 percent of the company through stock and options, to start a proxy battle as he seeks a sale, Hastings said last month.

In 2010, Disney extended its digital distribution deal with Starz through 2015. Today’s agreement will replace that pact when the latter expires.

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

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