That’s one of several questions swirling in financial circles about Netflix’s new agreement to license the pay TV rights to Disney movies beginning in 2016. But there’s wide agreement that the outlook for Starz just became a little dimmer. The Disney movies it currently licenses constitute some of its most popular programming. “Approximately half of its content output comes from [Disney],” ISI Media’s Vijay Jayant says. “The Starz originals are not yet in a position to make up for the loss of [Disney] content, and we suspect that it will drive a further deceleration of the Starz business fundamentals.” That worrisome news comes at a sensitive time for Starz: Its parent, John Malone’s Liberty Media, is about to spin the premium TV channel off into a separate, publicly traded company. Malone hinted that it might become takeover bait, saying that “everybody can use a big brother.” Lazard Capital Markets’ Barton Crockett just cut his price target for Liberty by $8 to $134 noting that the Netflix-Disney pact raises “more questions about the long-term viability of Starz.”
Investors share the analysts’ concerns: Liberty Media stock fell 4.9% following the disclosure of Disney’s deal with Netflix. The Street also believes that the agreement is great for Netflix: Its shares popped 14%. (Disney was merely +0.02%.)
But the bets on Netflix appear to be mere guesses since nobody knows how much it will pay for Disney’s films (financial terms were not disclosed in today’s announcement). That’s why Barclays Capital’s Anthony DiClemente says the enthusiasm for Netflix ”may be overdone.” He notes that the streaming company probably had to offer a “significant premium” to the $250M a year he estimates Starz pays for Disney’s films. Janney Capital Markets’ Tony Wible says the number to beat is $350M, which is why “we would not be surprised if [Netflix] would need to raise capital.” And Jayant says that Netflix “could have paid in the $400M ballpark per annum” to land Disney. With so many details unknown, the pop in Netflix stock seems “excessive” to Sterne Agree’s Arvind Bhatia, who wonders whether it reflects a lot of short covering.
The deal also looks like an about-face for Netflix CEO Reed Hastings. In January he sounded indifferent about the prospect of losing streaming rights to Disney’s films when his carriage deal with Starz was about to expire. The 15 titles available at the time, including Toy Story 3 and Tangled, “currently constitute about 2% of our domestic viewing” he said in a letter to investors that seemed designed to reassure them that the loss was no big deal. “Why would Netflix management look to sign an exclusive deal for Disney content if they have previously stated that exclusivity is irrelevant and Disney content was not a major driver?” B. Riley & Co analyst Eric Wold asks.
The most logical answer: Netflix needs exclusive content a lot more now than it did a year ago. Amazon startled investors in September when it struck a multi-year agreement to license content from EPIX. Redbox Instant — the kiosk company’s JV with Verizon — is about to introduce a subscription VOD service. (Although possibly a few weeks later than expected, based on a comment that Verizon CEO Lowell McAdam made today.) And who knows when Apple, Google, Walmart, or who knows who else will try to launch their own alternatives?
Despite all of these questions, there’s one thing I feel I can say with confidence: We’ll see a big turnout tomorrow at the UBS Global Media and Communications Conference where Netflix Chief Content Officer Ted Sarandos and Disney CFO Jay Rasulo are scheduled to appear in separate sessions.