Netflix Inc. (NFLX) has been entering into licensing agreements with large Hollywood production houses in a bid to strengthen its portfolio in the U.K. and Ireland. In a recent development, the company entered into an agreement with Miramax studios, bringing on board a large number of Miramax movies for its English and Irish subscribers.
This agreement with Miramax is not the first. Netflix already has an agreement with Miramax to serve its U.S. and Latin American customers.
Targeting the U.K. and Ireland
Netflix has targeted an early 2012 entry into the U.K. and Ireland, though no specific dates are being disclosed.
The company has been focused on new deals in the recent past to attract subscribers with a variety of offerings from its network. Some of the most recent agreements, excluding the one with Miramax, are Lionsgate U.K., a subsidiary of Lions Gate Entertainment Corp. (LGF) and Metro-Goldwyn-Mayer Studios Inc.
We think this is the way to go because if the offerings are attractive enough, Netflix would not only sign up a large number of customers, but would also be in a position to minimize churn.
Our Take
The domestic market is getting increasingly competitive, given technology behemoths, such as Amazon.com Inc. (AMZN), Apple Inc. (AAPL) and Google Inc. (GOOG) entering the online streaming business. These companies already have many loyal customers for other products, which makes them more difficult to snatch. Additionally, since they are much bigger companies, they have the financial muscle to drive up content acquisition costs, thus making life more difficult for smaller companies like Netflix.
Therefore, Netflix’s strategy of expanding internationally and becoming a first mover in as many markets as possible while securing long term agreements with content providers seems wise. Additionally, the agreements would reduce its dependence on cable TV operators.
The downside in the near term would be cost escalation in the form of license and renewal fees, as well as necessary technology investments that would be a headwind going forward. This would put margins under pressure and in turn reduce profits.
Additionally, management provided a dismal outlook for the fourth quarter on the expectation of a shrinking subscriber base, due to weak DVD shipments (due to price hikes) and declines in net streaming subscribers during the quarter. DVD shipments are also expected to decline due to the price increase in the last quarter.
Netflix expects to remain profitable on a global basis for the fourth quarter, primarily due to new content additions, which will have a positive impact on the existing subscribers domestically and add more new subscribers to its international ventures.
We have an Underperform rating on Netflix shares over the long term. We currently have a Zacks #3 Rank for Netflix Inc., which translates into a ‘Hold’ rating in the short term.
