Is Netflix taking over the world? One movie studio makes a multiyear deal to stream videos for dirt cheap back when no one was getting better than 3mb downsteam from their internet connection, and lives to regret it. Netflix now offers first run movies at $8 with an unlimited subscription. This current deal cuts out DVD sales and other revenue streams for the studios. There is little motivation for the studios to continue the deal in it's current form.
"The relationship between Netflix and the media companies will most likely change drastically, beginning next year when a deal between the company and Starz, the pay-TV channel, to stream movies from Sony and Disney expires.
The original deal from 2008, in which Netflix paid an estimated $25 million annually — a paltry sum, executives say, compared with the hundreds of millions of dollars cable and satellite companies pay Starz for the same movies — is now seen as a major coup for Netflix, and a major mistake by Starz. "(1)
Any major increase cost of content will hit NFLX bottom line hard. The current margins of streaming content is huge, but may not continue to be after the next deal. More importantly, it is diffuclt to see the company sustaining a P/E ratio of 69 with massive increases in costs.
The author will sell NFLX $280 strike Jan 12 calls at $12 and buy NFLX $280 strike Jun 11 calls $4.65
(1) "Time Warner Views Netflix as a Fading Star", Dec 13, 2010, New York Times