Netflix’s DreamWorks Deal Highlights Kids Programming And Helps Fend Off Amazon

by Trefis Team
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Quick Take

  • Netflix’s stock jumped 7% as the company announced a multi-year deal with DreamWorks Animation.
  • Under the deal, Netflix will get access to original programming that DreamWorks will produce based on its successful movie franchises.
  • Netflix has maintained its focus on offering original content and is not shying away from spending more to do so.
  • Additionally, bringing in more kids-focused programs is important as a lot of subscription-based web viewing tends to cater to this segment.

Netflix‘s (NASDAQ:NFLX) shares jumped close to 7% on the company’s announcement of a multi-year deal with DreamWorks Animation, which will give it distribution rights to DreamWorks’ original TV series. This is the largest original content deal in Netflix’s history and showcases the importance of kids-focused programming and the company’s continued commitment in bringing in original content to its subscribers. [1]

This is also Netflix’s reply to Amazon (NASDAQ:AMZN), which recently struck a deal with Viacom (NASDAQ:VIAB) that will allow it to bolster kids-focused programming on the Amazon Prime streaming service. [2] Netflix is not shying away from spending more, and it appears that the content owners are increasingly recognizing it as a must-have distribution partner.

See our complete analysis for Netflix


Netflix’s Focus On Original Content

In its last earnings announcement, Netflix stated that its content advantage was the biggest driver of its U.S. streaming subscriber growth. The company has been adding some original and exclusive programming to its streaming library, which seems to be paying off. Exclusive TV series such as House of Cards, Lilyhammer and Arrested development are drawing a lot of audience and attracting customers to sign up. In fact, Netflix has effectively marketed these exclusive shows to maintain its subscriber momentum. Given this success, it appears that Netflix is rather pay a large sum for exclusive, original and popular series rather than buying a big programming package (older content) for the same amount.

Besides some of the shows mentioned above, Netflix also signed a deal with Disney (NYSE:DIS) last year to gain exclusive access to some of its content once the contract between Starz and Disney expires in 2015 (see What Are The Implications Of Netflix’s Deal With Disney?). During the first quarter of 2013, Netflix continued to expand its streaming content through deals with Turner Broadcasting, Warner Brothers Television Group, DreamWorks Animation and Hasbro Studios.

DreamWorks’ Kids-Focused Programming Will Be Important

DreamWorks Animation has some well-known franchises such as Kung Fu Panda, Shrek, How To Train Your Dragon and Madagascar.  According to Box Office Mojo, the combined U.S. box office earnings of these franchises stand close to $2.5 billion. [3] The movie studio is now looking to leverage the popularity of these brands and their characters to invest more in TV programming. Netflix will benefit from this move being the first run distributor of this new content.

The increasing usage of connected devices such as smartphones, tablets and notebooks has accelerated the consumer shift towards Internet. Every industry wants to be part of this shift and in the process benefit from it. The addition of several kids-focused programs will add to Netflix’s appeal. Amazon had previously mentioned that such programs are one of the most watched TV genres on its Prime video service. [4] In recent months, several analysts have attributed the decline in TV ratings of Nickelodeon to more kids watching programs on alternative platforms such as Netflix. This again reinforces the popularity of kids-focused content on the Internet. 

Our price estimate for Netflix stands at $131, implying a discount of more than 40% to the market.

Understand How a Company’s Products Impact its Stock Price at Trefis

2009

2010

2011

2012

Streaming Content Costs as % of Revenue

3%

7%

22%

44%

Total Content Costs as % of Revenue

13%

14%

25%

46%

Streaming Content Obligations as % of Revenue

60%

122%

156%

Total Streaming Content Obligations ($ Million)

1,299

3,907

5,634

Notes:
  1. Netflix To Premiere DreamWorks Animation’s Branded Slate Of New Original TV Series, Netflix Investor Relations []
  2. Amazon and Viacom Announce Multi-Year Video Licensing Agreement; Adds a Selection of TV Shows Available Exclusively on Prime Instant Video, Amazon Press Release, June 4 2012 []
  3. Box Office Mojo []
  4. Amazon’s Press Release []
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