Netflix fans could be forgiven for being a little nervous, given the recent headlines: The company’s deal with Epix—the Hollywood movie distributor jointly owned by MGM, Lion’s Gate and Paramount—just ended, which means Netflix has lost the right to stream films like “The Hunger Games” and “Transformers.” Given that those movies tend to be blockbusters, it’s easy to see why Netflix’s share price (NFLX) tumbled a bit on Monday. But the streaming service still has some aces up its sleeve.
The deal with Epix was signed five years ago, which is a lifetime in the digital-content business, and a lot has changed since then. At the time, Netflix was looking for more hits to add to its streaming queue so that it could boost its subscriber base—and the deal became even more important just a few years later, when Netflix ended a similar arrangement with Starz.
The loss of Starz hit Netflix’s share price hard, since investors were concerned not just about losing access to the company’s library of movies and TV shows, but about whether the move signaled that distributors and traditional networks were going to start playing hardball with the streaming service.
Netflix is a classic double-edged sword for traditional TV studios and networks: Most of them would much rather not sell their content to the company, but in some ways they are forced to do so, in order to reach a growing audience of millennial cord-cutters. So they are constantly in a tug-of-war with the service, and that makes negotiations like the ones with Starz and Epix all the more contentious. Netflix wants to keep its costs down, but the networks and studios don’t want to low ball the value of their content.
When Netflix signed with Epix, the market cheered what was then a billion-dollar deal, because it got access to a library of hit movies. But just a couple of years later, Netflix lost its exclusivity with Epix when the distributor signed a similar deal with Amazon (AMZN)—news that also hit the company’s share price hard, taking Netflix stock down by as much as 11 percent in a day.
So in one sense, losing Epix now isn’t as big a deal for Netflix as it would have been before the Amazon deal, because that content is now in multiple places (the rights that Netflix relinquished have been picked up by Hulu, which is owned by a consortium of TV networks). And Netflix has made a point of sticking with exclusive content if it can, because that allows it to charge more and builds more long-term value for the brand. As it pointed out in its press release:
Netflix has also been trying to rely less and less on the cheap back-catalogue content from TV networks and movie studios, and more on its own in-house content, including TV shows like House of Cards and Orange Is The New Black. The downside risk for the company is that these kinds of shows are much more expensive, and they are also time-consuming, in the sense that they take a long time to get from concept to production. But if they do become hits, they can generate a lot of upside.
That’s not the only reason Netflix probably isn’t as worried about losing Epix as it might have been in the past: Another big reason (as it pointed out in its release) is that it signed another deal some time ago that is going to start bearing fruit very soon—namely, a deal with Disney (DIS).
Most importantly, the Disney deal isn’t just for the company’s back catalogue of past hits, but also includes the right to show first-run movies eight months after they hit the theaters. That part of the arrangement goes into action next year. Netflix outbid Starz for those rights, and when it was announced in 2012 the company’s share price jumped by more than 14%.
The Disney arrangement gives Netflix access to movies from Pixar, Marvel (i.e., the Avengers franchise) and Lucasfilm — including the hotly awaited Star Wars films, which are likely to be box-office gold. So between having exclusive rights to stream those movies and Netflix’s focus on its own in-house content, the company’s strategy is well under way. It is more expensive to execute, but in the long term it should provide more value, and differentiate Netflix from a growing group of competitors such as Amazon and Hulu.