Netflix logo
Netflix, Inc. (NASDAQ:NFLX) signed a multi-year content agreement with The Walt Disney Company (NYSE:DIS), The deal includes first pay TV window distribution of films from Disney, Walt Disney Animation Studios, Pixar Animation Studios, Marvel Studios and Disneynature. Ben Swinburne, Morgan Stanley (NYSE:MS) media analyst, estimates The Walt Disney Company (NYSE:DIS) receives $100-150MM from Starz per annum (for 2012, 14 films at $8-10MM per film). According to Morgan Stanley’s analysts, this agreement is significant because it proves that Netflix, Inc. (NASDAQ:NFLX) is able to access content that it was previously boxed out of when its agreement with Starz expired in February.

What is included in the deal?

Netflix, Inc. (NASDAQ:NFLX) will receive first pay TV window distribution rights for new theatrical release films beginning in 2016. Additionally, starting in 2013, all direct-to-video new releases will be available on Netflix. Finally, Netflix, Inc. (NASDAQ:NFLX) signed a separate multi-year catalog deal that will include such Disney films as “Dumbo”, “Pocahontas” and “Alice in Wonderland”.

What does this mean for the stock?

Netflix, Inc. (NASDAQ:NFLX) may see increased traction with domestic streaming subscribers as parents can now subscribe to Netflix and access classic Disney catalog films. The research firm analysts are modeling 26.7MM domestic streaming subs vs. management’s guidance range of 26.4-27.1MM subs. 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 homogenous tastes.

Validation of Netflix’s domestic business:

Morgan Stanley analysts believe this content deal represents more than just incremental content. In their view, Netflix, Inc. (NASDAQ:NFLX) has just received a going concern endorsement by The Walt Disney Company (NYSE:DIS)’s business development group. If there were any ability to pay concern, it is unlikely such a long-dated deal would have been signed.