Netflix Teams TWC to Enhance Content

A leading provider of online movie rental services, Netflix Inc. (NFLX - Analyst Report) recently entered into a multi-year exclusive licensing deal with The Weinstein Company (TWC). Under the terms of the agreement, Netflix will stream TWC produced movies online within one year of their theatrical release. However, the financial terms of the transaction were not disclosed.

TWC is the producer of the 2012 Oscar nominated movie “The Artist”. The recent deal will also allow Netflix to stream this critically acclaimed movie before its cable or pay television release. Further, Netflix will also stream some of TWC’s best productions including Oscar nominated documentary “Undefeated," French language movies “Sarah’s key”, “The Intouchables”, famed singer Madonna’s directorial venture “W.E”, Shakespearean adaptation “Coriolanus” and another documentary “Bully”.

Amid increasing competition from streaming providers such as HBO, Amazon.com Inc. (AMZN - Analyst Report), Hulu as well as newly launched services from  cable and media companies such as Comcast Corp. (CMCSA - Analyst Report), Dish Network Corp. (DISH - Analyst Report) and Verizon Communications (VZ - Analyst Report), Netflix remains focused on boosting its streaming portfolio with varied content. We believe that TWC’s fresh and diverse content will enhance Netflix’s streaming portfolio going forward.

Over the years, Netflix has made a name for itself by offering new and exclusive content to its subscribers compared to the traditional content provided by some of its closest peers. Apart from recent movies and documentaries, Netflix is also boosting its original content portfolio. Over the last few months, the company has acquired the rights to a number of original series such as the comedy series “Orange Is the New Black”, and the political drama “House of Cards” in 2011. Netflix is expected to stream five original series within the first half of 2013.

Netflix is also picking up exclusive distribution rights to third party productions, such as “Lilyhammer” (premiered on February 6). The company is also reviving Fox’s canceled series “Arrested Development”, which is expected to be streamed in the first half of 2013. According to Bloomberg, Netflix is also in talks to secure the rights to the horror drama “Hemlock Grove”, a series produced by Gaumont International Television.

In comparison, the recently launched Xfinity Streampix service from Comcast will provide old movies and shows to its existing subscribers. Although the service comes at a lower price compared to Netflix ($5.00 versus $8.00), we believe that Netflix’s evolving product portfolio will provide it a significant competitive edge over Comcast’s service going forward. We believe that the new content additions will also boost Netflix’s dwindling subscriber growth going forward.

Earlier in 2011, Netflix had raised $400 million in cash through stock offerings at $70 per share and convertible bonds, in order to develop its streaming library and to fund its international expansion. We believe that Netflix’s improving content portfolio and international expansion are noteworthy. Despite the higher license renewing costs, we think Netflix will probably see sales strengthening, as subscribers take note of the improving portfolio. This would ultimately enable the company to strengthen its position over the long term.

However, higher capital expenditure due to international expansion will hurt earnings growth in the near term, in our view. Moreover, when compared to some of its cable and communications peers who have diversified revenue and cash flow streams, Netflix relies solely on streaming for future growth, as its DVD rental business continues to lose subscribers. We believe that the streaming market is getting overcrowded and this will hurt Netflix’s margins going forward. We provide a word of caution to investors in this respect.

We have a Neutral recommendation on Netflix over the long term. Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating over the short term.

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