The value of Netflix stock soared by around 14 percent Tuesday, after the company announced it had clinched an exclusive deal to show first-run Disney movies.
Starting in 2016, Netflix subcribers will be able to watch Disney movies, including features from Pixar Animation Studios and Marvel Studios, about eight months after they hit theaters. Disney classics, including "Pocahontas" and "Dumbo," are expected to be available to Netflix viewers within the next few months.
The deal helps Netflix position itself as an HBO or Showtime of the Internet, says analyst Steve Frankel of Dougherty Markets. Frankel is quick to add, however, that it's a distinction that doesn't really matter -- Netflix, he says, is now a major pay-TV player, period.
"It's really not about the web today," says Frankel. "So much of the consumption of Netflix happens on your television, which you can stream through your Blu-Ray player, through a game machine, or (it) happens on a tablet the same place where people are consuming HBO over the web."
The terms haven't been made public, but analysts estimate the Netflix deal could be worth $300 million a year to Disney. Says Frankel: "Netflix has shown that it's willing to spend a lot of money to build and keep happy its subscriber base."
In the process, the company is jumping ahead of its video streaming competitors, like Hulu and Amazon Instant Video. With 32 million subscribers, Netflix has the scale to outspend its rivals, says analyst Daniel Ernst at Hudson Square Research. By comparison, he says, Hulu has only about two million users.
"The cost of coming to the table with Hollywood is high," says Ernst. "There aren't a lot of people outside of the cable companies and TV broadcasters that... have that kind of scale."
Ernst says although the deal is costing Netflix a huge amount upfront, it promises to help the video streaming service become even bigger. The first-run Disney movies will help Netflix attract even more subscribers, he says, which will bring in more money to buy more programming.
Ernst says it's ironic that a little more than a year ago, some analysts were questioning the company's future. Its decision to separate its streaming and DVD rental businesses angered many customers, and 800,000 subscribers bolted from the service.
"They moved pretty quickly to fix that; they recognized it," Ernst says. Since then, the company has added far more customers than it lost, says Ernst, although its stock value is yet to fully rebound.