Netflix's (NFLX) content acquisition costs could increase as a result of negotiations between Disney (DIS) and Starz, the premium movie provider. Starz offers premium channels to cable companies (Time Warner Cable (TWC), Comcast (CMCSA)) and also distributes films that it has licensed from Disney to Netflix. Below we discuss how negotiations between Disney and Starz could lead to higher costs for Netflix and how that could impact Netflix’s stock.
Disney Wants to Benefit from Netflix Viewers
Netflix currently accesses Disney films by paying Starz for licenses. Though Disney earns a license fee from Starz, it does not earn additional royalties or licensing fees associated with Disney films viewed online by Netflix subscribers.
Disney is concerned that they will miss out on significant licensing revenue as the number of Netflix subscribers that watch movies online through Netflix’s streaming service increases. By negotiating with Starz, Disney wants to prevent Starz from licensing Disney films to Netflix without additional payment. One outcome of the negotiation may be that Starz stops licensing Disney films to Netflix and Disney negotiates directly with Netflix.
Disney Raises Content Acquisition Costs for Netflix
There are two scenarios in which the Disney-Starz discussions lead to higher content acquisition costs for Netflix:
1. Disney blocks Starz-distributed Disney content on Netflix
This could reduce the amount of streaming content available on Netflix, and may force Netflix to negotiate terms directly with Disney, which is likely to increase its content acquisition costs.
The increase in costs may be significant if other content providers adopt a similar approach and demand more payment from their viewers.
2. Starz agrees to share a portion of its revenue from Netflix with Disney
If Starz shares some of its Netflix revenue with Disney, it is likely that Starz will increase the amount it charges Netflix. The higher charges will increase Netflix’s content acquisition costs.
Higher Content Costs Translate to $1 Impact on Netflix Stock
With competition from other rental services and Video-on-Demand services by cable operators (Time Warner, Comcast), it is unlikely that Netflix will pass on any increase in content acquisition costs to its customers.
We estimate that an incremental 1% in content acquisition costs (as % of revenues) will lead to loss of more than $1 per share for Netflix (about 2% downside). If Disney is able to earn more money for films that are available online through Netflix, it could lead to other studios negotiating for more from Netflix as well, which could have even more negative consequences for the company’s stock.
Disclosure: No positions