Disney Could Gain $2B Plus From Netflix Deal

 |  Includes: DIS, NFLX
by: Trefis

Netflix (NASDAQ:NFLX), an online movie rental company recently announced a deal with Disney to stream re-runs of episodes from Disney’s (NYSE:DIS) ABC network and cable channels like Disney Channel and ABC Family. While it strengthens Netflix’s streaming offering, it opens up another way to monetize older content for Disney.

Disney traditionally competes with media conglomerates like CBS (NYSE:CBS), News Corp (NASDAQ:NWS) and Time Warner (NYSE:TWX) in the broadcasting and cable networks businesses.

Our price estimate for Disney stands at $38.38, roughly in line with market value. We estimate that Disney generates roughly 22% of its stock value from ABC broadcasting, ABC Family, and the Disney Channel.

With the rise in popularity of digital platforms like Netflix, studios are seeking additional ways to monetize their content. Netflix has shown that there is great consumer interest in older TV content and is now extending deals with studios to capture this demand. Prior to this, Netflix signed one of its biggest deals ever to stream content from Epix, a TV channel jointly owned by Viacom (NYSE:VIA), MGM and Lionsgate. Below we discuss how much incremental value such deals can add to Disney, as well as potential limiting factors.

$2+ Billion Value Added if Deal Extends Perpetually

The deal is expected to earn Disney anywhere between $150 million and $200 million during its 1-year period. [1] If we assume that Disney is able to renew its deal with Netflix each year, we are looking at revenues of close to $175 million annually (taking a mid-point of estimated revenues). Disney’s licensing deal with Netflix will bring incremental revenues without significant associated costs since the company is going to monetize the content it already owns. Thus, annual cash profits of close to $175 million can add close to $2.3 billion of value to Disney, which amounts to a little over 3% of our current estimate.

How might this impact Disney’s stock value? The deal can potentially increase ABC network licensing revenue growth as well as implied fee per subscriber for Disney Channel and ABC Family.

Modify the chart below to see how faster growth in ABC network licensing revenues might impact Disney’s stock value.

Disney’s deal with Netflix values re-runs well below the price range that TV networks typically pay for such content licensing. The deal also increases competition for the TV networks. Despite the upside from the Netflix deal, we note that TV networks could reduce the amount that they are willing to pay for re-runs of broadcast shows, creating a potential headwind to Disney’s licensing revenue growth.


  1. See: LA Times: Netflix Reaches Deal to Stream Disney and ABC Reruns Online

Disclosure: No position