Netflix Commitment to Disney Makes Sense

 | Dec 10, 2012 | 4:30 PM EST
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Last week's announcement that Netflix (NFLX) was ponying up $3 billion over three years for access to Disney (DIS) content for streaming starting in 2016 surprised many.

I think it was smart.

In three years, we don't exactly know what the streaming landscape will look like, but we do know that people will want to watch Disney movies.

Yes, this is a big outlay of cash. But it is over three years and it starts in three years.  Netflix will have to pay up, but not in one slug. It has time to prepare for it.

The stock immediately jumped on the news because people had worried Netflix was going to get boxed out on important content in the future. Without good content, investors know that you are not an attractive service for users.

When the stock of a company goes up, it's easier (and cheaper) to raise debt or equity to finance future projects. You can never run a company operationally to juice the stock price, but neither can you ignore a stock's price in the running of your business. The fact that Netflix has made a commitment to great content increases its viability and that gives lenders more confidence to give it money.

Who will be the big streamers of the next five years?  Apple (AAPL) certainly has an existing relationship with many customers and content providers. It has the delivery mechanisms. It has the scale. It will be a player. Although (AMZN), Microsoft (MSFT) and Google (GOOG) seem to have ambitions in this space, they haven't yet translated that into a lot of users or great content relationships. They are far behind Netflix. Hulu certainly isn't at the same scale.  Netflix's big competitors will be the pay channels and not the big tech companies.  The big tech companies might become natural buyers for Netflix.

Did it raise the prices for all streaming content that will make their lives more difficult in the future? It already has a lot of adult content locked up. Kids' content is important. Most parents will choose to either subscribe to Netflix or Apple TV in the future. Why are they going to opt for Netflix if their kids hate it because there are no movies that they like? Netflix needed this. Let's see how Starz does after it loses Disney content. I imagine that will prompt a lot of parents to cancel that extra subscription.

Netflix still has all the problems to deal with. Streaming content costs a lot of money from a content acquisition and streaming infrastructure perspective. Netflix is trying to expand everywhere internationally all at once and hasn't been making much money while doing it. It seems woefully small to seriously compete with the other big players with deeper pockets. But is continues to keep and grow a big chunk of customers. It's not easy to get that many customers to subscribe to your service. Ask anyone.

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