Will Netflix Still be Around When Disney Comes to Town?
Shares of Netflix (NASDAQ: NFLX) rose more than nine percent Tuesday afternoon after the company announced that it will offer new content from Disney (NYSE: DIS) in 2016. Starting next year, Disney will also provide a number of direct-to-video releases to Netflix.
The news sent shockwaves through the streaming video industry. Coinstar (NASDAQ: CSTR), which owns the Redbox rental kiosks, dropped more than four percent shortly after the announcement. The stock recovered in time for the market close, but not before some investors questioned the future of video rentals and the delivery format that will reign supreme.
Coinstar, which has lost more than 20 percent of its value over the last six months, was expected to be a powerful player in the streaming video business. The company signed an agreement with Verizon (NYSE: VZ) to build a new on-demand service that could cost as little as $6 per month, undercutting Netflix by $2. That service, which combines streaming with DVD rentals, was expected to launch before the end of the year. It is currently unknown when subscriptions will be offered.
While investors may have been concerned about Coinstar's future (if only for a fleeting moment), they did not seem too worried about Amazon (NASDAQ: AMZN) or Dish Network (NASDAQ: DISH), which owns Blockbuster Video. Neither firm experienced a decline after the Disney/Netflix deal was announced.
Despite the many problems that Netflix encountered last year, the video rental giant has managed to rise substantially in 2012. The company is up nearly 20 percent year-to-date. In the last month alone Netflix rose more than 10 percent. Those gains were nearly diminished after the stock took a dive on December 3. Netflix recovered -- and rose even higher -- after the Disney alliance was made public.
Richard Tullo, Director of Research at Albert Fried and Co., was unimpressed by the news. "In our view the NFLX deal with Disney takes the craft of PR to a high level as the company has a habit of issuing pressers and then lowering estimates over the last two years," Tullo wrote in a note to investors. He added that his firm believes that shareholders are exposed to $500 million to $1 billion in "incremental off balance sheet risk."
The deal provides Netflix with exclusive (first-run) pay-TV distribution rights for all of Disney's existing properties, including movies from Walt Disney Animation Studios, Pixar Animation Studios, Marvel Studios and Disneynature. Lucasfilm, which has not yet been acquired by Disney (the deal is still pending), was not mentioned in the agreement.
In 2016, Netflix will again have access to movies from Disney (which it lost), as well as DreamWorks Animation (NYSE: DWA). The company is also rumored to be ironing out the final details of an agreement with Sony (NYSE: SNE).
This is all well and good, but it is too forward-looking to provide Netflix with any value today. A lot can happen in three years. Hulu or Amazon Prime could become the dominant player in streaming video, or Coinstar and Verizon might diminish Netflix's growth. Comcast (NASDAQ: CMCSA), which offers a streaming video service for $5 per month, could prove to be powerful contender as well.
Disney may eventually become one of Netflix's most valuable partners, but that deal is more than three years away from materializing. While Netflix appears to be stable with more than 30 million subscribers worldwide, the company is still vulnerable. Its future is anything but rock-solid. If Netflix crumbles before 2016, yesterday's market move will have been for nothing.
Some investors seem to agree. As of Wednesday morning, Netflix is down more than two percent.
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