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Netflix (Nasdaq: NFLX ) is on a roll. The streaming movie catalog is going from deep-but-aging to a more crowd-pleasing mix of old and new movies as film distributors line up at the door, contracts in hand.
The biggest knock on the instant streaming model has always been a lack of new, big-name releases. For that, you typically have to settle for a red envelope in the mail -- and even that solution now suffers from a 28-day delay when compared to your friendly neighborhood Blockbuster store or Coinstar (Nasdaq: CSTR ) Redbox vending machine.
That's old news now
That's changing in a hurry. A partnership with pay TV veteran Liberty Media Starz (Nasdaq: LSTZA ) has been feeding a modest selection of fresh material to Netflix for a couple of years now, and smaller rival Epix joined the party a few weeks ago. Signing up Time Warner (NYSE: TWX ) subsidiaries HBO and Cinemax plus CBS (NYSE: CBS ) service Showtime would improve the library dramatically, but then you might as well go straight to the studios behind the TV outlets. Cut out the middle man, you know.
And that's what Netflix is doing now. The ink is still drying on a contract with action movie specialist Nu Media, led by industry legend Avi Lerner. Starting with next year's The Son of No One, starring Al Pacino and Ray Liotta, Netflix will get streaming rights to movies that would otherwise go to those pay TV channels at that time. This follows a similar arrangement with Relativity Media in early July and clearly shows where Netflix is going: right to the movie producers.
The company is not afraid to spend money to secure these streaming licenses, and the increasing profitability of the whole operation provides plenty of fertile capital for doing exactly that. If anything, I'm disappointed to see that Netflix is buying back historically expensive shares rather than pumping even more cash into growing its streaming library.
The tipping point
The magic moment will come when the really big studios jump aboard the Netflix bandwagon with both feet. I'm talking about Time Warner, Walt Disney (NYSE: DIS ) , and Sony here, folks. For now, they are all watching from the sidelines to see how much havoc these agreements will play with the business models of Relativity and Nu Media. But licensing movie rights is a very cost-effective model, and anything that's good for margins should work out well for the studios.
Ergo, that day will come eventually. The only questions in my mind are, "When?" and "Which studio jumps first?" Whenever one of the big Hollywood names opens the door to serious licensing discussions, Netflix will gladly sign on the dotted line even if it's ludicrously expensive. Nobody else is doing anything even close to the Netflix streaming business, as the rest of the movie rental industry seems intent on making pay per rental work. So far, they've had minimal luck with that. I don't see that changing anytime soon.
Polish up that crystal ball!
So here's how I see the market for movie rentals working out in the coming years:
- Nu Media, Relativity, and perhaps a couple of other small fry prove decisively that there's good money to be made in selling streaming licenses to Netflix, and they aren't shy about shouting it from the rooftops.
- Netflix leverages the hard evidence to sign the first really big digital distribution deal, probably with a studio like Warner or Disney because they have shown some signs of waking up to smell the coffee already.
- One year later, that pesky 28-day disc rental delay will be forgotten as every studio that matters has signed with the proven leader in digital movie subscription services.
- The rest of the industry struggles to catch the crumbs falling from Netflix's overflowing banquet table, but nobody has taken the time, effort, and expense necessary to build the technology and industry relationship you'd need to make an impact. No, not even Apple (Nasdaq: AAPL ) , despite Steve Jobs being the largest shareholder of Disney with a board seat to show for it.
That's why this is the beginning of a beautiful investment opportunity. If you think Netflix looks expensive today, you're just not looking far enough into the future.