Netflix Goes Good Will Hunting

Netflix (Nasdaq: NFLX) continues to bolster its digital library. This week, the company signed a multiyear contract with Miramax that adds a touch of class to the service.

One of the chief complaints against Netflix's streaming service is that the movies you really want to see just aren't there. If not for the deal with Liberty Media Starz (Nasdaq: LSTZA), which keeps a healthy stream of recent hits and established classics flowing, the digital shelves might look threadbare.

The Miramax agreement goes a long way toward fixing that problem. The studio has a long history of award-winning quality fare, including Best Picture Academy Awards for Shakespeare in Love and The English Patient. Popular hits and cult classics from Bridget Jones's Diary and the Scream series to Pulp Fiction and Trainspotting also spring to mind.

While the Miramax catalog of 700 films is small compared to those of Time Warner's (NYSE: TWX) Warner Bros., Sony's (NYSE: SNE) Columbia Pictures, or its former parent company Walt Disney (NYSE: DIS), this batch of movies remains unusually popular and well-reviewed. The studio's Netflix pact is also the first digital licensing deal Miramax has ever signed, though Google (Nasdaq: GOOG) showed interest last fall.

Getting licenses secondhand through middlemen like Starz, Showtime, and EPIX always looked like an interim solution. In the long run, Netflix needs direct distribution deals with the studios themselves. Miramax is a fine place to start, and success here should help Netflix negotiate similar deals with the really big boys.

Financial details of the deal were not disclosed, though estimates have ranged from $50 million to $100 million. Netflix skeptics usually crawl out of the woodwork to lambast these deals, arguing that they add to the company's operating costs and keep profits down.

That argument never seems to hold water, unless you'd also tell your favorite eatery to stop buying expensive meats. These films are just the raw materials that Netflix turns into satisfied customers, who then come back for more. The costs just show up as a capital expense over the life of the deals, rather than a simple "cost of goods sold" line item.

Miramax films will show up on your Roku box or connected Blu-ray player in June. Subscribers shouldn't expect a firehose of all 700 movies at once, but a staggered schedule designed not to interfere with Miramax's Blu-ray and DVD re-releases. While that's not perfect from a consumer's point of view, it's still a very marketable move.

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