Starz? We ain't got no Starz. We don't need no Starz! I don't have to show you any stinkin' Starz!
Netflix (NASDAQ:NFLX) doesn't currently have the Bogart classic The Treasure of the Sierra Madre on streaming tap. But that immortal line about stinkin' badges feels just right today, because Netflix just showed us why it didn't care to renew that old Starz contract last year.
It had something far better on tap.
The big news
This week, Netflix announced a streaming deal with Walt Disney (NYSE:DIS), which undermines the value of a new Starz deal something fierce. It's an exclusive multiyear agreement that takes effect when Starz' exclusive rights to the same pay-TV publishing window expire in 2016.
Netflix was probably hammering this one out while the streaming contract with Starz expired, and must have been a painful sticking point for those negotiations. It's like asking Starz for a good short-term deal while digging the cable network's long-term grave.
Okay, Starz also holds first-run rights to films from Sony (NYSE: SNE) Pictures and a smattering of smaller studios, but Disney is the network's obvious crown jewel. Netflix is cutting out the middle man.
The Disney pact includes new titles from Disney itself, Pixar, Marvel, and Disneynature. Theatrical releases show up in 2016 while direct-to-video titles start appearing in 2013. In a separate agreement, Netflix also gets access to many of Disney's back-catalog titles much sooner. Pocahontas and Tim Burton's Nightmare Before Christmas became available on Tuesday, for example.
The big picture
This is exactly the kind of direct studio deal I've seen Netflix striving for since time immemorial. Content brokers like Starz and Epix always looked like temporary solutions while the business model matured. Allow me to remind you how I saw this transition playing out, way back in 2010 when tiny Relativity Media had just signed a direct streaming license: "I fully expect Netflix to go after bigger fish. First the mid-level producers, Lionsgate (NYSE:LGF-A) and maybe DreamWorks Animation (NASDAQ:DWA) . After that, the doors should open at Sony and Walt Disney -- all of the big boys will come running once Netflix proves the economic validity of this newfangled streaming gizmo."
So far, Netflix has direct deals with DreamWorks and Disney. Lionsgate still flows through the Epix funnel and Sony is missing in action since the Starz thing expired. Baby steps, amigo. I'm sure these stragglers will come around now that the Mouse is leading the way.
Isn't it cool to see a long-term plan coming together?
The big problem?
Now, critics will point out that 2016 is an awfully long way away, so the big payoff is massively delayed. There's no way around this, since Disney's output deal with Starz doesn't expire until then.
Also, look for naysayers to raise a ruckus over the long-term content costs when they show up in next quarter's 10-K filing. The current obligations for streaming content more than three years in the future add up to roughly $500,000. Terms of the deal were not disclosed, but increases here will give us a good idea of the Disney deal's long-term price tag. Patience, young grasshopper.
But there's honestly no reason to fear Netflix's private fiscal cliff. Here's why.
The delay should let the international operations get up to speed and profitability before the big Disney payments get started. Also, having all this premium content in a release window typically reserved for the likes of Starz and HBO should bring a new class of subscribers to the door. And by 2016, it'll be four and a half years since the last price adjustment (better known as the Qwikster disaster). Who'd begrudge the company a small price hike after a long period of stable pricing, and with this huge quality boost right around the corner?
The big payoff
Netflix shares rightly jumped 14% on the news, continuing the intimate relationship between Netflix news and nationwide antacid sales. This time, it's holders of the 28% short-sale positions who are reaching for the Tums. On Monday, we longs were glancing at our medicine cabinets as Coinstar (NASDAQ:OUTR) and Verizon (NYSE: VZ) seemed to have a proper Netflix rival on tap. Then there's this whole Carl Icahn drama.
Netflix is many things, but never boring.