Netflix, Inc. (NFLX) and Disney Sign Deal: Exclusivity But What Price?

Netflix and Disney announced an exclusive, multi-year deal for premium pay-TV content, which includes first-run live-action and animated releases from the Walt Disney Studios beginning in 2016. Included in the agreement are direct-to-video releases, as well as catalog content, like Pocahontas, Dumbo, and Alice in Wonderland. Netflix Strategy Evolving Towards Exclusivity?

Analysts at Barclays believe that Netflix, Inc. (NASDAQ:NFLX)’s content acquisition strategy has been evolving towards one of exclusivity, with originals programming like Arrested Development and House of Cards playing a large part, as its prior strategy of offering a broader quantity of content has become one of increasingly lower barriers to entry given the increasing investments from deep-pocketed competitors such as Amazon. An exclusive deal with The Walt Disney Company (NYSE:DIS) differentiates the Netflix, Inc. (NASDAQ:NFLX) content from Hulu Plus and Amazon Instant Video; however, as this is a longer-term evolution, and the near-term reaction in Netflix, Inc. (NASDAQ:NFLX) shares may be overdone.

Why Would Disney Do This?

In doing this deal, The Walt Disney Company (NYSE:DIS) is choosing to bypass the traditional pay-TV ecosystem by delivering its first-fun films over-the-top beginning realistically in 2017, presumably creating some friction with traditional distributions, although theatrical content is becoming less important to premium networks. The content companies have long maintained that they are platform agnostic, so long as they are receiving maximum value for their content. For Disney to enter into this deal with Netflix and bypass the traditional / linear pay-TV window.

Analysts at Barclays believe that Netflix’s offer was more than what The Walt Disney Company (NYSE:DIS) was offered by Starz and more than what Disney thought other potential bidders would pay.

Expect the Deal to Pressure LMCA Shares, But Reaction is Overdone; Deal Further Emphasizes the Importance of Original Content For Starz:

While many expect this announcement to pressure Liberty Media Corp (NASDAQ:LMCA) shares, as it will create concern about Starz’s longerterm business, and its dependence on movie content as a way to drive subscribers, Barclays analysts believe that the reaction, while implies a roughly two turn compression in the implied value of Starz within Liberty Media Corp (NASDAQ:LMCA), is overdone.

The loss (in the long term) of the Disney movie content further emphasizes the importance to Starz of developing a robust original content offer. Starz will only begin to lose the Disney output in early 2017 (as the Starz/Disney deal covers movies released through 2015 and reaching the pay TV window through 2016).

Cost of Deal Unknown

Barclays estimates that Starz Had Been Paying ~$250MM/Year for Disney Movies, and New Deal May be a Significant Premium: While Netflix and Disney haven’t announced the terms of the deal, they estimate that the current Starz/Disney deal at roughly $250MM/year, variable depending on the volume and box office of the Disney slate in a given year.

Disclosure: No position