Netflix Bags “House of Cards”

Netflix Inc. (NFLX) has obtained the exclusive Internet streaming rights for the upcoming 26-episode drama called “House of Cards”. The deal demonstrates the growing influence of Netflix in Hollywood for delivering a unique home entertainment experience to its 20 million subscribers.

The exact figure paid by Netflix to Media Rights Capital, the producer of the show, has not yet been disclosed. However, the payment made by Netflix is believed to be roughly $100 million. Netfilx has reportedly brushed aside the likes of HBO and AMC to gain the rights to the series. Netflix expects production for the series to start from early 2012 and would be available for the subscribers in late 2012. Netflix plans to broadcast the episodes in a cluster as opposed to the regular format of one episode per week, thereby showcasing a unique broadcasting format.

“House of Cards” has several high-profile names associated with it, such as Kevin Spacey, in his first TV series as a regular character. The director of the show is David Fincher, who was nominated for the Best Director in the Academy Awards for his recent film “The Social Network”. The political drama derives its title from a novel bearing the same name and is about a British Politician, who desires to succeed Margaret Thatcher as the British prime minister.

Netflix’s deal marks the company’s first foray into original series, and the analysts from Wedbush and Goldman Sachs welcomed the move by the company based on Netflix’s wide consumer base and impetus to provide a healthy competition to its rivals in the video streaming space.

The deal also provides Netflix the option to release “House of Cards” in DVD packs and mail to its subscribers. The deal is a first step toward establishment of Netflix as a heavy-weight player in the pay-TV segment comprising the likes of Time Warner Inc.’s HBO and CBS Inc.’s Showtime. It also showcases its growing financial prowess.

Netflix currently has more than 20,000 titles in its streaming library, but most of them are previously-aired TV series and older movies. Last year, Netflix spent approximately $400 million to obtain streaming rights of various shows in a bid to expand its video library. The Internet streaming business is more lucrative for Netflix, as it does not require handling and mailing charges.

While in the nascent stage, we believe the online movie and television market is gaining popularity and Netflix, in a bid to capture this increase in demand, has planned an offer that would cost $8 per month for subscribers, who won’t rent DVDs and $10 to $20 for subscribers who would rent a DVD. The rental to be paid by the latter group would depend on the number of DVDs rented.

Netflix continues to face tough competition from Inc. (AMZN), Apple Inc. (AAPL) and Google Inc. (GOOG), as well as cable operators.

Netflix also continues to face stiff competition from Movie gallery Inc. and Red Box, the kiosk company owned by Coinstar Inc. (CSTR) that rents DVDs for $1.00 per night.

We maintain a Neutral rating on a long-term basis (6-12 months) due to this increasingly competitive market and lack of visibility regarding Netflix’s international expansion strategy. Currently, Netflix has a Zacks #2 Rank, which implies a Buy rating on a short-term basis.

NETFLIX INC (NFLX): Free Stock Analysis Report

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