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Netflix Inc. and Disney are About to Take Their Relationship to the Next Level

By Demitri Kalogeropoulos – May 25, 2016 at 5:32PM

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The nation's most popular streaming service and one of its biggest movie studios are finally joining forces.

Three years ago Netflix (NFLX 1.53%) and Disney (DIS 2.97%) made a big, risky bet on each other -- and now investors finally get to watch it play out.

The streaming video giant just announced that, beginning in September, Netflix will be the exclusive home of movie releases from across Disney's powerhouse collection of studios: Pixar, Marvel, Disney Pictures, Disney Animation, and Lucasfilm. The movies will be hitting Netflix services in the "pay 1" window, too, which means subscribers can view them directly after they've completed their runs at theaters.

Image source: Netflix.

A lot has changed since the two companies inked this agreement way back in 2013. Netflix's base has soared to 46 million subscribers in the U.S. from 25 million at the time. Disney's movie studios have enjoyed awesome growth too, beginning with Frozen's trouncing of its prior box office record holder, 1994's The Lion King.

In fact, thanks to recent hits from Disney Animation (Zootopia), Marvel (Captain America: Civil War), and Disney Pictures (The Jungle Book), the House of Mouse just set a new record by reaching $1 billion in ticket sales through the first 128 days of 2016. With more potential hits on the way, including Finding Dory and Rogue One, Disney has a solid chance of finishing the year as the nation's top studio for the first time since 2003.

Netflix streamers have already enjoyed exclusive access to a few choice pieces of Disney content, but this partnership started small with just a canceled animated TV series called The Clone Wars in 2014. Since then the deal has gained some momentum to include making Netflix the launching pad for major new Marvel properties like Daredevil and Jessica Jones.

In announcing the agreement years ago, Disney CEO Bob Iger called Netflix "a perfect place for our product to be distributed." While the strength and popularity of the streaming platform played big parts in that decision, it also came down to dollars and cents. "They stepped up and paid the right price," Iger told investors in early 2013, which helped Netflix win the content deal over traditional pay cable channels like Starz (NYSE: STZ).

The Jungle Book. Image source: Disney.

For his part, Netflix CEO Reed Hastings called the deal "particularly significant" due to its pay 1 window setup and "because of the strength of the Disney, Pixar, Marvel, and Lucasfilm titles." He couldn't have known it then, but each of those studios has significantly raised the bar by churning out huge hits over the last few years.

"2016 is a long way off," Hastings told investors at the time, and that was true enough in early 2013 when the company was half its current size and had just 5 million international members. But now that we're just a few months away from the first Disney film hitting Netflix servers the deal looks like a significant win for both companies.

Netflix gets a huge content infusion to help boost engagement while convincing members to stick around as their monthly subscription prices rise. Disney, meanwhile, gets a massively popular platform to use as a showcase for its content while collecting cash from one of just a few entertainment distributors that can actually afford exclusive access to its properties. If anything, the two companies seem more suited for each other now than they did back when they first decided to join forces.  

Demitrios Kalogeropoulos owns shares of Netflix and Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney. 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. The Motley Fool has a disclosure policy.

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Netflix, Inc. Stock Quote
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