The Herald Bulletin

Evening Update

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June 17, 2013

Netflix cuts original TV deal with DreamWorks

LOS ANGELES — Netflix announced a deal on Monday to air television programming from Dreamworks Animation in what the company described as its biggest transaction ever for original first-run content.

Though financial details were not disclosed, Netflix Inc. said the agreement includes more than 300 hours of new TV episodes in a multi-year deal starting in 2014.

The transaction is a major coup for both companies. It helps Netflix compete with pay TV channels such as HBO and Showtime, and it gives Dreamworks a potentially lucrative outlet for its shows as it tries to shed its reliance on two or three big-budget movies each year.

"This is arguably a groundbreaking deal," said Tuna Amobi, a Standard & Poor's equity analyst who covers both Netflix and DreamWorks Animation.

While concerns remain about how much the deal will cost Netflix in the end, the company said it is a global deal that will allow it to debut the original series in the 40 countries where Netflix operates. That could help spread the costs over more territories and more subscribers if Netflix continues to grow overseas.

"The big question is if this is going to be an international catalyst in terms of subscriber growth," Amobi said.

Investors hailed the deal as a win-win. Netflix shares rose $15.70, or 7.3 percent, to close at $229.69 on Monday, while DreamWorks shares rose 92 cents, or 4 percent, to close at $23.73.

As part of the arrangement, Netflix Inc. doubled down on original children's programming, hoping to strengthen its push to become a family entertainment brand. The new content should ease some of the pain of losing a range of kids shows from Viacom Inc.'s Nickelodeon network, including future episodes of "Dora the Explorer," which Amazon.com Inc. snapped up for its streaming service in early June.

The deal suggests DreamWorks will significantly ramp up its production of TV shows. Currently, it only produces "Dragons: Riders of Berk" for Cartoon Network, which completed a run of 20 episodes at 23 minutes each — less than 8 hours of content in all — in March.

A second season of "Dragons" is set for release in the fall, and Netflix had already contracted with DreamWorks for a series based on its upcoming film, "Turbo." But the deal suggests that several new series will have to debut each year to fulfill the industry standard deal length of five to seven years.

New series will be based on characters either from future film hits, past franchises like "Shrek," or even older hits, including the hundreds of characters like "Casper the Friendly Ghost," which DreamWorks acquired when it bought Classic Media last July for $155 million.

The new DreamWorks shows aren't likely to tread on ground already covered under its existing TV shows, according to DreamWorks spokeswoman Allison Rawlings.

DreamWorks already licenses characters from "Kung Fu Panda," ''Madagascar" and "Monsters vs. Aliens" to Viacom's Nickelodeon, which has been producing original animated TV shows based on those movies since 2008.

The multi-year agreement tops the undisclosed amount Netflix spent on "House of Cards," the political drama starring Kevin Spacey that debuted to rave reviews on Netflix in February.

Netflix has been adding original programming to its roster of older movies and TV show reruns, and is set to launch the Jenji Kohan-created "Orange Is the New Black" next month. The company has said that for the next several years, it will contain original content spending to within 10 percent of its $2 billion in annual content costs.

Netflix's increased focus on children's programming is seen as a departure from the tactics of traditional premium pay TV channels such as HBO, Starz and Showtime, whose original shows tend to be tailored to adults. It also ramps up the competition for children viewers with Amazon, which said last month it will produce three new original kids shows for members of its Amazon Prime subscription plan.

Netflix has said it has 29.2 million streaming video subscribers in the U.S. and 7.1 million internationally as of the end of March. Those figures are up 5.8 million and 4.1 million respectively from a year ago.

In December, Netflix announced it will offer Disney movies, starting with films released in 2016. It declined to make a similar deal for the rights to Sony movies starting in 2016, which was kept by Starz.

Investor reaction wasn't uniformly positive. Analyst Rich Tullo of brokerage Albert Fried & Co. said he doubts that DreamWorks has the capacity to produce more than one or two new series a year.

"It's physically impossible without this content being spread out over 10 years," he said.

Hit TV shows aren't guaranteed, and it's not clear that this will make up for Netflix's loss of Nickelodeon content, he said.

"Are they going to lose 2 million subscribers off losing Nickelodeon content? That's possible too," he said.

 

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