Reportedly, Netflix Inc. (NFLX) has decided against adding sci-fi series “Terra Nova” to its streaming portfolio as negotiations with the show’s producer 20th Century Fox fell apart.
Initially, Fox had spent approximately $10 million-$20 million on the first series’ two-hour premiere, which got delayed twice before it was finally aired. Thereafter in March, Fox had cancelled the subsequent “Terra Nova” series. Following which, Netflix had shown interest to revive the series.
Netflix has been consistently updating its video library with content additions and has acquired the exclusive rights to stream original series. The improved content makes its streaming services distinguishable from other service providers.
The possible factors for not taking up “Terra Nova” can be traced to the whopping cost, which is $4 million per episode. Most likely, Netflix is in no mood to shell out this huge amount of money right now, as it has prior commitments. Netflix said in a regulatory filing that it has impending payments of more than $3.5 billion over the next few years for the contents under contract.
Over the last few months, the company has acquired the rights to a number of original series, such as the comedy series “Orange Is the New Black,” and the political drama “House of Cards.” Netflix is expected to stream five original series by the end of 2013.
Netflix is also picking up exclusive distribution rights to third-party productions, such as “Lilyhammer” (premiered on February 6). The company is also reviving Fox’s canceled series, “Arrested Development,” which is expected to be streamed in the first half of 2013.
Recently, the company acquired the exclusive rights to stream “Hemlock Grove”, the first season, comprising of 13 episodes, and it would be Netflix’s maiden venture into the original horror series.
We believe that the new content will not only improve Netflix’s competitive edge but will also boost subscriber growth going forward. Apart from refreshed content, Netflix continues to sign a number of licensing deals with big Hollywood production houses to provide varied content, which is expected to further attract new customers going forward.
We believe that Netflix’s improving content portfolio and international expansion are noteworthy. Despite the higher license renewal costs, we believe Netflix will probably see sales strengthening, as subscribers take note of the improving portfolio. This would ultimately enable the company to strengthen its position over the long term.
However, we believe that higher capital expenditure due to international expansion will hurt earnings growth in the near term. Moreover, increasing competition from Amazon.com Inc. (AMZN) and HBO, and the entry of Verizon Communications (VZ) into the streaming market will limit the company’s growth potential going forward.
Thus, we have a Neutral recommendation on Netflix over the long term. Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating over the short term.
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