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July 7, 2010
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The agreement allows Netflix to stream Relativity’s major movies online for a subscription only months after release in DVD format.
According to Associated Press (AP), the deal reflects Netflix’s strategy of delivering first-run movies online, which the subscribers can access through different platforms such as personal computers, laptops and mobile phones, as compared to the conventional DVD order-by-mail system.
This agreement also reflects a shift in distribution deals after theatrical releases. Previously, rights to broadcast movies were pre-sold to pay TV channels for as long as nine years after their release. With this agreement, subscribers can have a first-hand experience of the movies before they are broadcasted by the pay channels.
More than 10 movies solely produced by Relativity are scheduled to release over the next 12 months and will be available online exclusively for Netflix subscribers in 2011.
Relativity’s strong box office record (50 Relativity films have become "Top 10" box office releases during the past two years) and solid product pipeline (produces or finances 20 to 30 movies a year), will boost Netflix’s top-line growth in the long term, in our view.
Moreover, the deal with Starz Entertainment LLC enables Netflix’s online service to offer new movies from The Walt Disney Co. (DIS) and Sony Corp. (SNE), thereby adding to its growth story.
Netflix continues to face competition from Blockbuster Inc. (BBI) and Movie Gallery Inc. Netflix also experiences completive threats from Red Box, the kiosk company owned by Coinstar Inc. (CSTR) that rents DVDs for $1.00 per night.
One of its notable competitors, Hulu Plus, launched preview services recently with an emphasis on current and library broadcast television by adding new movies fresh from the theaters and DVDs. Another competitor, Epix, with its mix of linear TV, VOD and online, is rolling out across major cable operators.
However, we believe this agreement with Relativity will somewhat mitigate competition going forward. We are also of the opinion that this agreement will allow Netflix to increase its market share, broaden its subscriber base and open up new avenues for top-line growth.
Netflix has more than 13 million subscribers who pay $8.99 for unlimited DVDs by mail and films streamed over the Internet. Netflix has recently gained massive popularity from its availability on the iPad.
The expectations of a tremendous growth from the new licensing deal are reflected in our short-term Outperform rating (for the next 1-3 months), implying a Zacks #2 Rank.
However, over the long term (in the next 6-to-12 months), we have a Neutral rating on Netflix.
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