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Is Netflix Headed for a Slowdown?

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Shares of Netflix (NASDAQ: NFLX  ) are up more than 160% year to date. However, the video-streaming stock could be headed for a slowdown if the company's big bet on children's programming doesn't play out the way Netflix previously anticipated.

A snail of a tale
Earlier this year, Netflix closed its largest original first-run content deal with DreamWorks Animation (NASDAQ: DWA  ) . Part of this multiyear contract was for a Netflix original kids series based on DreamWorks' animated flick Turbo, which at the time had not yet been released. Unfortunately, the deal doesn't look so hot anymore given the movie has been a major disappointment at the box office.

For its opening weekend, Turbo's sales were anything but turbo-charged. In fact, the movie brought in a meager $21.5 million. That's even more upsetting when compared to Comcast's (NASDAQ: CMCSA  ) Universal Studios' Despicable Me 2, which brought in more than $183 million in its first five days.

Shares of DreamWorks nose-dived on worries that it may be faced with a $50 million writedown on Turbo, according to Bloomberg. Not surprising since DreamWorks spent around $135 million producing the feature.

What now?
This could cause serious problems for Netflix as it tries to entice kids to watch its animated series based on the movie. Not to mention, there's added pressure since it didn't renew its contract with Viacom earlier this year. Without Viacom, Netflix no longer has exclusive rights to popular children's shows including Dora the Explorer and Blue's Clues.

Nevertheless, the streaming giant is playing it cool. In an interview with CNBC, Netflix's Chief Content Officer Ted Sarandos explained, "[T]hey translate to very high viewing on Netflix, even in movies that don't perform as well at the box office." And there's another reason for Netflix optimism. A rate card sets the fees that Netflix pays for those films relative to their performance in theaters. Therefore, a slow start for Turbo could mean a sweeter deal for Netflix down the line.

In the end, Netflix has a lot riding on children's content. Fortunately, the Netflix-DreamWorks content deal includes 300 hours of original kids programming. This means that even if the latest DreamWorks flick is a flop, Netflix will have plenty of other content on hand to attract younger viewers.

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Read/Post Comments (3) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 30, 2013, at 9:32 PM, DanCooper76 wrote:

    My kids liked Turbo. They don't care about box office numbers. The series will do fine when Netflix offers it. If DreamWorks gets the series right, maybe Turbo 2 will do better with a built in following - another plus for Netflix.

  • Report this Comment On July 30, 2013, at 9:51 PM, AceInMySleeve wrote:

    Netflix would probably rather pay more and have Turbo be frikken awesome, but their downside risk seems pretty limited.

  • Report this Comment On July 31, 2013, at 1:06 AM, TinkererJim wrote:

    As long as there's an unlimited streaming market, Netflix will be OK.

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Tamara Rutter
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I've been an analytical writer for The Motley Fool since 2011. I cover the sectors of Consumer Goods, Technology, and Industrials. Connect with me on Twitter using the handle, @TamaraRutter -- I'd love to hear from you!

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