"There's no one piece of content that is essential for us," Netflix CEO Reed Hastings said two years ago, discussing his attempts to negotiate a renewal with Starz.
After Starz wouldn't budge and that deal expired in February 2012, Netflix downplayed the value of the Starz content, which included many Disney titles, claiming it accounted for only 8% of U.S. viewing at its peak. "There was no discernible change in churn or viewing levels" after the Starz content rolled off, Hastings and CFO David Wells told shareholders in April.
But apparently that was then.
Now Hastings & Co. have committed to paying the Mouse House hundreds of millions per year to lock up Disney movies on-demand into the back half of the decade (see Netflix Secures Exclusive Disney Film Deal).
Two sources told me Netflix's deal with Disney was definitely for more than $300 million per year. Janney Montgomery Scott analyst Tony Wible estimated the deal at more than $350 million annually and ISI Media analyst Vijay Jayant suggested it could be in the ballpark of $400 million per year. Netflix outbid Starz for the Disney output deal (while HBO was not in the running).
Remember last month when Disney said it would shut down its online movie service by the end of the year? The Netflix deal is one indication why.
So what are the key takeaways?
For one thing, Netflix's increasing content spend could mean it will have to eventually change its retail pricing strategy away from a flat $7.99 per month for everyone to tiered plans -- or it will need to raise rates for everyone.
Netflix has insisted it has no plans to do this, preferring the simplicity and value proposition of a single low price. But then again: It used to argue that paying top dollar for exclusive content was not part of its strategy either.
Meanwhile, for Disney, the deal raises the prospect of Netflix siphoning more viewers away from its kids-oriented cable networks, including Disney Channel, according to Sanford Bernstein analyst Todd Juenger. He's previously written on his thesis that Netflix has already hurt ratings at Disney Channel and Nickelodeon (see Netflix Eating Into Ratings Of Viacom, Disney Nets: Analyst).
"This deal increases the already formidable threat Netflix poses to Disney (and Viacom, and Time Warner) linear kids' TV networks, by increasing Netflix's appeal to families with kids," Juenger wrote. "Attracting more subscribers who want kids' content will increase the cannibalization of traditional kids' TV ratings. By making Netflix less desperate to secure kids' TV content, the pricing leverage for Disney and Viacom has been somewhat reduced."
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