Winners and Losers in Disney and Netflix Deal

By Josh Wolonick  DEC 05, 2012 4:58 PM

Here's who stands to gain -- and who's facing potential losses -- in the major Disney-Netflix deal.


MINYANVILLE ORIGINAL Tuedsay's unprecedented deal between Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) to stream Disney’s films, and those of all its subsidiaries, doesn’t take full effect until 2016. Despite the subsequent big jump in Netflix stock and the loss in Liberty Media Corp (NASDAQ:LMCA), parent company of Disney’s current partner Starz, the real benefits of this deal will come with the setting of new precedent, as Disney has become the first major studio to bypass major cable providers like Starz and HBO in favor of an Internet content provider with its home releases. Strong Internet content providers and film studios will benefit, while the premium cable channels, and by extension, satellite radio providers, will have to learn to adapt to an industry that will begin changing more rapidly than ever now that the entertainment giant Disney is behind the change.
The Walt Disney Company
The deal makes Disney the first major studio to bypass the traditional cable TV outlet to push out films after their theatrical release. The deal is expected to earn Disney between $150 and $200 million annually. Without significant associated costs, an annual cash profit of $175 million can add as much as $2.3 billion of value to Disney, a nice bit of recoup after the $4.05 billion purchase of LucasFilm. The move will likely increase ABC network licensing revenue growth and thus the company’s value even more. Overall, it is a move that demonstrates Disney’s commitment to being the world’s most powerful and cutting-edge entertainment company.
Netflix Inc.
Netflix will gain access to the films of Disney and its subsidiaries, including Marvel and most recently Lucasfilm, immediately, as well as straight-to-video releases next year. However, the biggest element of the deal begins in 2016: the right to release new films seven to 10 months after their theatrical run, which has always been reserved for premium cable providers, in the case of Disney, Starz. The move lends serious credibility to Netflix’s claim that it is an actual competitor with major cable providers, and also pushes Netflix further ahead of its online competitors, including Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL), who have nowhere near as much content and cannot offer such a competitive customer fee as Netflix does. Of course, this deal is expensive. With $4.5 billion of streaming content obligations, Netflix will need to up its subscription fee or increase its subscriber base. On Tuesday, December 4, the day the deal was made, Netflix share increased 14% to 86.65, its biggest gain since Jan. 26. As of yesterday, the company had a year to date gain of 25%.
Netflix Chief Content Officer Ted Sarandos
The principle player behind the move. He was crucial in Netflix beating out Starz for the Disney deal. Word is Netflix CEO Reed Hastings has been compensating him very well. He had a 68% increase in compensation to $9.3 million in 2011 followed by a cut in 2012 to his stock options. He will certainly see another increase for 2013. The executives at the media companies he often deals with, including Les Moonves at CBS (NYSE:CBS) and Bob Iger at Disney, made $70 million and $31.4 million, respectively, in 2011. Given the potential big changes in film distribution, will compensation for executives at internet providers like Netflix begin to grow to the levels of their media company partners'?
Sony Corporation
Last month, Sony (NYSE:SNE) films suddenly disappeared from Netflix. Sony currently has a deal with Starz, which puts a cap on the number of subscribers who can watch Sony films online. When this contract goes up in 2016, Netflix is expected to pursue a deal with Sony which could see benefits for the studio that are as strong as or even stronger than Disney’s. However, this being three years away, and this business being so volatile, we’ll have to wait and see what happens with Sony.
Other Internet Content Providers (Pandora, Slacker, Hulu, Apple)
This move is symbolic and could change the culture of Internet content providers. With Disney making such a deal, a precedent may be being set. Slacker has grown substantially, having expanded beyond radio with on-demand music streaming, and troubled Pandora (NYSE:P) would be wise to do the same. Just as XM and Sirius swept over to the terrestrial radio market, so might Internet radio providers over the satellite market, if they can make exclusive deals the way Netflix has. The potential for a big shift is here, but other online providers certainly have some catching up with Netflix to do. LOSERS
Liberty Media Corp
The company’s Starz network is currently Disney's first outlet for cable release of its films and will lose that exclusivity. Moreover, if this move establishes a precedent, it and its fellow premium cable channels could lose exclusivity with several studios. For Starz, next to leave would be Sony. The move from cable to Internet is finally becoming mainstream (it was beginning years ago with the advent of illegally downloading films and television shows) and cable providers that specialize in home release of new films could suffer. It would be smart for Starz to continue focusing more on their original programming which has increased in quality (though it still lags behind hit maker HBO) with shows like Spartacus and Boss.
Carl Icahn
The billionaire who controls 10% of Netflix through stocks and options may have lost his opportunity to buy out Netflix. The so called Netflix “poison pill” will no longer be necessary to stave off Icahn if this deal benefits the company as they hope it will.
Sirius XM Radio Inc
With its strong ties to Liberty Media Corp, which holds 49.8% of Sirius XM (NASDAQ:SIRI), the satellite radio provider could see some negative effects from the deal, but its main concern should be the precedent set by this deal and how it may affect XM's share of the radio content market. If Pandora and Slacker follow suit and attract big time companies or names (remember when Sirius stole Howard Stern away from terrestrial radio with a $500 million deal?), they could become much more competitive with Sirius XM. From terrestrial radio to satellite radio to Internet radio. Earth to space to the cloud. What could be next?
Verizon Communications Inc. (NYSE:VZ) and Coinstar Inc. (NASDAQ:CSTR)
Their deal to team up and bring Coinstar’s Redbox online may come too late and has already been delayed at least until the second quarter of 2013, perhaps because of this year's revenue slump after a surprisingly strong fourth quarter in 2011. (Editor's note: This story was edited to include a correction; it previously stated that revenue had risen.) They’ll have to see if their revenues can rebound in the fourth quarter, and if DVD rental sales will be able to translate next year into a competitive online streaming business. Redbox could either be one of Netflix’s major competitors, or it could be entering the market too late and be trounced.
No positions in stocks mentioned.