Hollywood sees licensing cash cow in Disney-Netflix deal

Sat Dec 8, 2012 12:59am IST

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(Reuters) - Cha-ching!

That's the sound ringing in the ears of Hollywood studio executives after Walt Disney Co (DIS.N) landed a rich deal with Netflix (NFLX.O) to stream its movies to television.

Netflix's arrival as a bidder for the television rights to Hollywood movies means that the studios can now play the company off of traditional pay-TV networks like Time Warner's (TWX.N) HBO to extract higher fees in contract renewal talks.

And Netflix couldn't have come along at a better time for the studios, which were being threatened with having their fees slashed by the pay-TV networks who have argued for years that they are better served by investing in original programming than licensing movies.

Netflix isn't the only company to emerge on the scene, either. The streaming video ambitions of Amazon.com Inc (AMZN.O), Google Inc (GOOG.O) and Apple Inc (AAPL.O) set the stage for fierce bidding between these technology giants and the pay-TV networks for the rights to bring Hollywood movies into the living room.

Those technology brethren, however, don't have the liquidity concerns that, some analysts say, could affect Netflix's ability to shoulder the costs.

Under the deal's terms, Disney stands to collect an estimated $350 million a year from Netflix for its movies beginning in 2016, according to Janney Montgomery Scott analyst Tony Wible. Disney only earned around $250 million a year under its previous deal with Starz, the cable network in the process of being spun off from Liberty Media (LMCA.O), Wible said.

Licensing movies for streaming access, whether online or on TV, is an important part of the business model for Hollywood studios given the migration of viewers to tablets and mobiles devices and the secular decline in DVD sales.

That Netflix signed the Disney deal this year but isn't getting access to its films until 2016 underscores its aggressiveness and the importance it places on usurping streaming rights to Hollywood films from pay-TV networks.

"Every other studio is going to want to get in on the action when these kinds of dollars are being offered," said former Universal Studios CEO Frank Biondi.

Netflix even has set its sights on Warner Bros, the studio owned by Time Warner. Warner's deal with HBO is up in 2014.

"This gives Warner the opportunity to do other things, to look at this," Netflix chief content officer Ted Sarandos told the New York Post.

According to a Reuters source with knowledge of the situation, Netflix is talking to Sony, another studio whose films are distributed by Starz, about a deal similar to the One struck with Disney.

Representatives for Sony and Netflix declined comment.

Comcast-owned (CMCSA.O) Universal Studios' deal to license some of its movies to HBO expires in 2016, Biondi noted. Universal already licenses some of its movies to Netflix, including this year's surprise hit "The Lorax," to Netflix.

Signs are already emerging of the pressure Netflix can exert. In August, HBO extended its deal with News Corp's (NWSA.O) 20th Century Fox even though it wasn't due to expire for three years, Wible said. The new deal gives HBO TV rights to 20th Century Fox movies until 2022, a long-term deal Wible said was designed to keep the studio's movies away from Netflix.

PAY UP OR GET OUT

The choice pay-TV networks now face is this: pay up for movie rights or invest that money instead in their own original programming. Some have already slashed licensing budgets, believing movies aren't as popular with subscribers as original shows like HBO's "Boardwalk Empire" or Showtime's "Homeland."

Showtime, for instance, tried to cut the prices it was paying Paramount, Universal and MGM for movies by half in 2009, prompting those studios to join forces to launch their own network, EPIX, instead of accept a reduced fee.

"We changed our strategy a few years back, spent a lot less on motion pictures and more on original production," said Les Moonves, CEO of Showtime's parent company CBS Corp (CBS.N), at a media conference in New York on December 4. "Out of that came 'Dexter,' came 'Weeds,' came 'Shameless,' came 'Californication' and now came 'Homeland.'"

Starz essentially said in a statement that it let Disney's movies go - rather then have them stolen away by Netflix - to pursue an original programming strategy.

"Our decision not to extend the agreement for Disney output ... allows us the opportunity to implement our plan to dramatically ramp up our investment in exclusive, premium-quality original series, which will best meet the needs of our distributors and subscribers," Starz said.

That strategy allows pay-TV networks to not only lure subscribers with high-quality shows, but also syndicate to TV stations domestically and overseas: collecting licensing fees for their own content rather than paying for others'.

LIQUIDITY CONCERNS

The Disney deal follows exclusive deals Netflix struck to stream first-run movies from smaller studios like Relativity Media and DreamWorks Animation (DWA.O), the latter deal costing an estimated $30 million for the rights to films like "Shrek" and "Kung Fu Panda," according to Wible.

The deals Netflix has signed have saddled it with nearly $5 billion in commitments to studios over the next three years, according to its filings, prompting some analysts, such as Wedbush Securities' Michael Pachter, to worry about liquidity.

Netflix needs to spend heavily for newer movies and TV shows to grow its base of 25 million U.S. subscribers, Pachter said.

"They have Amazon, Google, and Apple breathing down their necks and <those companies> won't let them pay less," he said. "Netflix has shown this is a business and they have a lot of potential competitors."

Pachter, however, viewed the Disney deal as a positive sign that the studio is confident Netflix will still be operating in 2016, when the deal starts, since some of the money owed under the Disney contract comes due before then.

Still in its early years, Netflix continues to tinker with a business model that started by mailing DVDs. Besides paying hefty amounts for new films, Netflix itself has gotten into original programming, producing such shows as "Lilyhammer," which stars former "Sopranos" actor Steven Van Zandt as a former mobster who goes into the witness protection program in Norway. (Additional reporting by Lisa Richwine and Liana Baker; Editing by Nick Zieminski)

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