Netflix (NFLX -0.51%) shares soared 14% yesterday, hitting levels last seen in April.
The video service's head-turning deal with Disney (DIS -0.45%) triggered the rally, but now is when the buyer's remorse kicks in. Did Netflix overpay, given the reported $300-million-a-year figure? Will the new Disney films -- that won't begin streaming on Netflix until late 2016 -- come too late to matter? How come Lucasfilm wasn't named in the agreement?
However, this deal is important for Netflix on many different levels. Let's explore the many reasons why Netflix bulls have a right to get excited even if all we really know at this point is that it merely outbid everybody else for this exclusive stateside streaming window.
1. Revenge is sweet
What was the turning point for investor sentiment after Netflix shares peaked above $300 during the summer of last year?
The initial reaction may be that Netflix's decision to stop offering unlimited streams to its DVD-based subscribers -- a move that effectively raised prices by as much as 60% for those wanting movies by mail and online -- was its "jump the shark" moment. It wasn't. The stock rallied to hit an all-time high after the move was announced.
The Qwikster fiasco? Sure, Netflix lost a little credibility with that, but it reversed itself within weeks.
The incident that triggered a healthy wave of selling was Liberty Media's (STRZA) Starz announcing in early September of last year that it wouldn't be renewing its streaming deal with Netflix. The move sent shock waves, exposing Netflix's content vulnerabilities. The stock went on to shed more than half of its value for the month.
Starz may not be a big name, but it had the licensing rights for Disney and Sony films. Well, starting with Disney's theatrical releases, Starz hands those rights over to Netflix. Justice is served.
2. Good luck canceling Netflix, young families
Marvel will be the brand making the more magnetic Disney flicks involved in this deal, but let's talk about Pixar, Disney animation, and Disneynature.
Locking up the undisputed top dog in theatrical animation is huge, and families aren't going to have to wait four years for this to start paying off. Disney will begin offering many of its older classics starting next year.
Let's also not forget about Disney's deal with DreamWorks Animation (DWA). That streaming license for some of the animation studio's computer-rendered films kicks in next year. At $7.99 a month, Netflix is going to be a bargain for young families, and that doesn't have to wait until your 9-year-old has outgrown the stuff come late 2016.
3. Early is better for Netflix
The original deal for Starz was cheap because Netflix was just getting started. It knew that it would have to pay up to keep Starz last year, but the price was just too much.
How big will Netflix be by 2016 when this multiyear exclusive deal kicks in with Disney? The company is already up to more than 25 million domestic streaming accounts, and that's nearly a third of the 80 million broadband-enabled homes in the country. Sure, the number of connected homes will continue to inch higher, but so will the competition.
However, if Netflix's streaming subs have grown nicely over the past year -- even after last year's effective rate hike -- we're probably not at the peak yet. Netflix's goal of 60 million to 90 million domestic accounts is ludicrous, but it wouldn't be a surprise to see Netflix at 30 million or more by the time the Disney deal kicks in. Negotiating rates now makes the math kinder if the licensing costs will be divided by more accounts later.
4. Exclusivity is the ultimate game of keep away
As the exclusive U.S. subscription pay service for Disney's magnetic collection of namesake, Pixar, and Marvel films, it means that you won't be able to stream these movies through Amazon.com's (AMZN -1.14%) Amazon Prime, the upcoming Redbox Instant, or any other rival services that may launch between now and then.
This is big, especially at a time when the competition is so far away. Amazon Prime is perceived by many as Netflix's biggest threat at the moment, yet a third-party report finds that Netflix streams are being consumed 20 times as much.
That's a healthy lead for Netflix, and exclusivity will keep it that way. Amazon was able to wrestle rights for EPIX films after Netflix's exclusivity ran out in September. Netflix shares took a hit that day, and rightfully so. There was less to differentiate Netflix from the cheaper Amazon on the content front after that deal.
Well, this creates a new differentiator.
Netflix is in a better place because of this deal, and now the onus is on the company to justify the hefty price tag.
Don't worry about working the math just yet. We don't know how many subscribers Netflix will have -- or if will still be charging only $7.99 a month -- come 2016. Grabbing Mickey wasn't a Goofy move at all.
