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August 11, 2010
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A leading provider of online movie rental services, Netflix Inc. (NFLX) signed a multi- year movie licensing deal with the movies-on-demand and online company, EPIX. EPIX is a joint venture between Paramount Pictures, a unit of Viacom (Via.B), Metro-Goldwyn-Mayer Studios Inc. (MGM) and Lionsgate (LGF). Financial terms of the deal were not disclosed.
Under the agreement, Netflix will stream movies online to its subscribers from EPIX’s library and new releases from Paramount, Lionsgate and MGM, beginning September 1, 2010. Netflix subscribers will be able to see these movies only after ninety days of their release on EPIX. According to LATimes, Netflix will pay $1 billion for the deal.
This agreement reflects a continuous 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.
Recently, Netflix signed a long-term, exclusive movie licensing deal with the media and entertainment company Relativity Media LLC. The agreement allows Netflix to stream more than 10 movies solely produced by Relativity and scheduled to release over the next 12 months within a short span of time.
Recently, Netflix signed a long-term, exclusive movie licensing deal with the media and entertainment company Relativity Media LLC. The agreement allows Netflix to stream more than 10 movies solely produced by Relativity and scheduled to release over the next 12 months within a short span of time.
We believe these deals reflect Netflix’s strategy of delivering first-run movies online, which the subscribers can access through different platforms such as personal computers, laptops, mobile phones and different consoles like Xbox 360, PS3 and Wii as compared with the conventional DVD order-by-mail system.
The company also entered into a partnership with Starz Entertainment LLC that allows Netflix to offer new movies from The Walt Disney Co. (DIS) and Sony Corp. (SNE), over the Internet.
We believe this string of partnerships will allow Netflix to increase its market share, broaden its subscriber base and open up new avenues for top line growth over the long term.
Netflix remains focused on Internet streaming as well as international expansion as it continues to upgrade its digital delivery, thereby broadening its subscriber base, in our view. Recently, Netflix announced the expansion of its movie subscription services over the Internet to Canada.
Moreover, we contend that this deal will partly mitigate competition, going forward. Netflix faces stiff 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.
Netflix has more than 13 million subscribers who pay $8.99 for unlimited DVDs by mail and films streamed over the Internet. Netflix exited the second quarter of 2010, with approximately 15.0 million subscribers.
Recommendation
We believe that Netflix remains focused on improving its subscriber base by offering its services through high speed Internet and an upgraded content delivery that will ensure increased profitability going forward. We maintain an Outperform rating on a long term basis (6-12 months).
Currently, Netflix has a Zacks#1 Rank, which implies an Outperform rating on a short-term basis (1 to 3 months).
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