Shares of both Netflix, Inc. (NASDAQ:NFLX) and Dreamworks Animation Skg Inc (NASDAQ:DWA) spiked higher on Monday on news that the companies had expanded their partnership. DreamWorks will develop original TV series based on some of its hit movies (Shrek, How to Train Your Dragon, etc.) and sell them to Netflix on an exclusive basis.
While the deal seems like a clear winner for Dreamworks Animation Skg Inc (NASDAQ:DWA) (it lets the company further monetize its intellectual property) it isn’t so clear how it will affect Netflix, Inc. (NASDAQ:NFLX).
Netflix’s original content strategy
In recent months, Netflix, Inc. (NASDAQ:NFLX) management has clearly signalled that the company is embracing a new strategy. Going forward, Netflix will shift its focus to exclusive content (its deal with The Walt Disney Company (NYSE:DIS), for example) or original programming (House of Cards, season 4 of Arrested Development).
In the past, the company had utilized a bulk-content strategy, grabbing everything it could get its hands on at a reasonable price. This gave it an enormous library of content, but a tiny moat.
Rivals like Amazon.com, Inc. (NASDAQ:AMZN) were able to strike similar deals with Netflix, Inc. (NASDAQ:NFLX)’s content providers, and in doing so, create a service that was more or less indistinguishable.
Netflix’s original series solves this dilemma. Want to watch Hemlock Grove or Orange is the New Black? Netflix, Inc. (NASDAQ:NFLX) is your only choice. In the coming years, kids that want to watch the Shrek TV show will have to get their parents to subscribe to Netflix.
Drawbacks to original content
But investing in original content isn’t without its problems. For starters, it’s incredibly expensive — House of Cards cost Netflix about $100 million for two seasons — and difficult to do right.
Moreover, it can take years to catch on. HBO seems to have found a clear winner with Game of Thrones, but it has taken until now (the third season) to draw Sopranos comparisons.
Netflix allowed its deal with Viacom to expire, and in the process, lost its Nickelodeon content. The Dreamworks Animation Skg Inc (NASDAQ:DWA) deal may have been brokered as a way to replace that Viacom content, but it will take several years for the series to appear on Netflix.
Obviously, the biggest dilemma for Netflix investors is the price — it didn’t disclose what it was paying Dreamworks Animation Skg Inc (NASDAQ:DWA) for the deal. It might have been less than what Viacom was asking, but it’s difficult to judge Netflix’s true investment potential without having a sense of the service’s content costs.
Some Netflix bears have questioned the company’s off-balance sheet liabilities in the past, and not disclosing the finer details of the Dreamworks Animation Skg Inc (NASDAQ:DWA) (NASDAQ:DWA) deal seems to only strengthen that argument.
The streaming two-horse race
For now, Amazon seems to be getting the better end of the deal. The Internet retailer is getting exclusive content today — not years in the future — and content that’s guaranteed to be of a high caliber. In the long-run, however, Netflix may have made the wiser decision.
After all, Amazon is more or less picking up Viacom’s leftovers, programming that’s available to most paid-TV subscribers. But, with many parents using tablets to distract their children, streaming apps like Netflix and Amazon Prime could be the favored method of distribution.
At any rate, Netflix’s deal with DreamWorks and Amazon’s deal with Viacom show that when it comes to streaming content, it’s increasingly a two-horse race.
Despite the pre-release buzz around services like RedBox Instant, only Netflix and Amazon have been able to generate significant traction. Hulu has been building a base of subscribers, but has yet to step into the realm of exclusive content. Persistent takeover rumors leave the service’s future in doubt.