Netflix Inc.’s (NFLX) subscribers in the U.S., U.K. and Canada will be able to stream Morgan Spurlock’s MANSOME, a comedy documentary, from September 21, 2012. Netflix was given the exclusive streaming rights by Electus International, a business arm of IAC/InterActiveCorp. (IACI). In addition to the exclusive streaming rights in the aforementioned countries, Netflix was awarded a global non-exclusive subscription video on demand (“SVOD”) right for the film.
MANSOME is being co-produced by Morgan Spurlock and Electus founder, Ben Silverman. The story of MANSOME revolves around actors Will Arnett and Jason Bateman as they explore the many facets of male grooming habits. The film has interviews of some famous persons such as John Waters, ZZ Top band members Dusty Hill and Billy Gibbons, Anthrax musician Scott Ian and author Brett McKay to name a few.
Netflix has been expanding its video on demand (“VOD”) offerings with exclusive deals from various production and distribution houses. Very recently, Netflix added exclusive rights to stream season 1 of ABC’s popular shows Revenge, Once Upon a Time and Scandal. The exclusive availability of the season 1 episodes is expected to create significant buzz around the upcoming season 2 episodes. The addition of these ABC hits is expected to expand Netflix’s customer base going forward.
We believe that the improved content makes its streaming services distinguishable from other service providers such as HBO and Amazon.com Inc. (AMZN), which has entered into a three-year agreement with Epix, expanding the archive of films available on its streaming video site, Amazon Prime Instant Video. Other competitors include Hulu and other cable and media companies such as Comcast Corp. (CMCSA), Dish Network Corp. (DISH) and Verizon Communications Inc. (VZ).
Moreover, when compared with some of its cable and communications peers that have diversified revenue and cash flow streams, Netflix relies solely on streaming for future growth, as its DVD rental business continues to lose subscribers.
We believe that Netflix’s improving content portfolio and international expansion are noteworthy. Despite higher license renewal costs, subscriber additions are driving Netflix’s sales. This would ultimately enable the company to strengthen its position over the long term. In the recently concluded second quarter of 2012, the total number of subscribers (Domestic and International) jumped 18% year over year to 30.1 million.
However, higher capital expenditures due to international expansion will hurt earnings growth in the near term, in our view. Moreover, we believe that the streaming market is becoming overcrowded and this will hurt Netflix’s margins going forward.
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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