Netflix Inc.(NFLX) inked a deal with DreamWorks Animation SKG Inc. (DWA) through which the former can stream DreamWorks films and TV shows. Netflix will be paying DreamWorks $30 million per picture for an unspecified number of years as per the agreement between the parties, The New York Times reported.
Currently, Netflix is in an agreement with HBO, a Time Warner Inc. (TWX)-owned cable channel provider, until 2013, following which Netflix will become the company’s output partner for its future releases. With titles like “Madagascar” and “Sherk” in DreamWorks Animation’s kitty, this move from Netflix could counteract the challenges faced by the company recently.
The Recent Hurdles
Netflix recently lost out on the Starz deal after talks between both the parties fell through due to disagreements on licensing fees. Since then, Netflix had been searching for alternative content providers, who can match the ranks of Disney and Sony. DreamWorks has the reputation of making films and animated TV shows that are immensely popular and critically acclaimed. Apart from the Shrek and Madagascar series, the company also has a variety of releases such as The Prince of Egypt, Joseph: King of Dreams, The Road to El Dorado, Spirit: Stallion of the Cimarron, and Sinbad: Legend of the Seven Seas.
Netflix, after its subscription pricing debacle and splitting of the company in two, has left investors confused and flustered. Over the last two months, the company has lost about $8 billion worth of market cap and about a million subscribers due to its recent initiatives.
However, there are some positives to the aggressive measures taken by Netflix. The company expects this to ultimately increase its present content providers and integrate its services with FaceBook. The strategic integration will enable Netflix to achieve its recently-set target of gaining popularity overseas. Netflix seems to have boarded the social networking bandwagon to create brand recognition through the rapidly increasing popularity of Facebook.
Our Take
We believe that the increasing focus on the digital video service will be the key growth driver for Netflix over the long term. Higher adoption of mobile and tablet devices coupled with increasing broadband penetration will be the primary reason for this, in our view.
Content additions will enable Netflix to reduce its dependence on cable TV operators and provide it with the necessary competitive edge over its peers in the emerging market of online video streaming. Moreover, strategic partnerships will also be incrementally beneficial to expand its geographical foot print.
However, intensifying competition from large players such as Amazon.com Inc. (AMZN), Apple Inc. (AAPL) and Google Inc. (GOOG) in the online streaming market is a headwind, because it will further push up license fees and also affect subscriber additions.
We maintain our Neutral recommendation on Netflix over the long term (6-12 months). Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.
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