Netflix: A Tale of Two Tinseltowns

Forget the winter of our discontent -- Netflix (Nasdaq: NFLX  ) has suffered through a springtime of dissed content.

Hollywood's gatekeepers have increasingly barred their doors to the video rental giant's digital catalog. CBS' (NYSE: CBS  ) Showtime will soon pull its shows from the site. Liberty Starz (Nasdaq: LSTZA  ) -- one of Netflix's earliest content providers -- is reportedly introducing a 90-day delay on new Starz content, even as it gears up to negotiate an important deal extension.

Thankfully, title departures and window installations aren't the only news regarding the company's streaming offerings. Reports indicate that Netflix is now in talks with Miramax for a five-year deal that would bring the studio's critically acclaimed portfolio of more than 700 movies to Netflix-loving couch potatoes.

Those movies won't come cheap. The Wall Street Journal initially valued the deal at $50 million, but Bloomberg later upped the ante to more than $100 million. If Netflix paid the same per-movie sum of roughly $150,000 for five years of streaming on each of the more than 20,000 digital titles it now offers, its total tab would quickly swell to a whopping $3 billion.

However, this is Miramax, home of modern classics such as Pulp Fiction, Good Will Hunting, and Shakespeare in Love -- big draws that will help Netflix attract and retain digital subscribers.

Director's cut
The battle lines for entertainment's digital future have begun to clarify themselves. Movie studios see Netflix as an incremental revenue stream, while premium cable channels regard the service as a growing competitor.

Disney (NYSE: DIS  ) sold Miramax for $663 million just three months ago. A five-year streaming deal for $100 million makes this a sweet return for the group of private investors who gobbled up Miramax. This is, after all, just one deal.

Will Netflix buy exclusive streaming rights? Rumors surfaced in November that Google (Nasdaq: GOOG  ) wanted a deal deal with Miramax to give YouTube some theatrical streaming muscle, but nothing materialized. Amazon.com's (Nasdaq: AMZN  ) recent move to include video streaming as a perk for Prime members might also be a big draw for Miramax and its library. And if Coinstar (Nasdaq: CSTR  ) Redbox ever comes through with its own promise of a digital strategy, having Miramax's Chicago, The English Patient, and the Scream series in its arsenal surely won't hurt.

However, it's unlikely that another player -- or potential player -- could approach Miramax with $20 million a year. That's why studios need Netflix and its deep pockets.

Big numbers don't frighten Netflix. It still reaps serious savings when pitting cheap bandwidth costs against the round-trip fulfillment costs of shipping physical discs. More titles available for streaming also means that Netflix doesn't have to manage and maintain quite so large an inventory of those titles on DVD, though that Netflix benefit works against the studios.

Studios do need to consider the impact that streaming availability has on their ability to move their movies and television shows elsewhere. Turner Broadcasting bowed out of the bidding battle for Modern Family recently, arguing that the show is overexposed in cyberspace through Hulu and Disney's ABC.com.

In short, there are a lot of positive and negative adjustments in the decision to stream, but studios are likely to pay a bigger price by ignoring Netflix than they would be cashing in and playing along.

Channel surfing
Premium cable channels with movie rights and proprietary shows see Netflix from a different perspective.

An HD antenna for local channels and a Netflix subscription combine for a home theater solution that's dramatically cheaper than conventional cable and satellite television plans. If TV buffs continue to back out of costly traditional plans, they can't access Showtime or Starz. Those high-end offerings seem equally doomed if a cable subscriber sees Netflix as a cheaper alternative to any single premium movie channel.

It's not a coincidence that all of these developments have followed Netflix's purchase of original release rights for David Fincher's House of Cards series. Netflix is acting more like a premium cable channel, even as cable channels become more like Netflix through services such as HBOGo and Showtime Anytime.

Denying content to Netflix is all about survival instincts. It doesn't matter that the cable networks are leaving money on the table, or that Netflix can still eventually offer all of those movies and most of those shows through optical discs. The premium channels are defending their shrinking moats. Unfortunately, they're fighting with rudimentary weapons.

Do you think Netflix will have a smaller or larger digital library in five years? Share your thoughts in the comment box below.

Google is a Motley Fool Inside Value pick and a Motley Fool Rule Breakers choice. Amazon.com, Walt Disney, and Netflix are Motley Fool Stock Advisor selections. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. He's owned Disney even longer. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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