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Published: Monday, 9/26/2011 - Updated: 3 years ago

Netflix gives disillusioned customers something to like: Internet video rights to DreamWorks

Carleen Ho poses with a Netflix movie she is picking up from her mail box in Palo Alto, Calif. Carleen Ho poses with a Netflix movie she is picking up from her mail box in Palo Alto, Calif.

SAN FRANCISCO—Netflix unveiled a coming attraction its disillusioned subscribers might like: the Internet video rights to films and television specials from DreamWorks Animation.

The multiyear deal announced Monday will give Netflix Inc.'s streaming service the exclusive rights to show the latest content from DreamWorks, the studio behind a list of popular franchises that includes "Shrek," ''Kung Fu Panda" and "Madagascar." It comes after weeks of disruptive changes that irked Netflix's 24.6 million U.S. customers and spooked its shareholders.

But even this bit of good news had a downside. The DreamWorks rights don't kick in until 2013, so the studio's material won't immediately placate Netflix customers who are clamoring for Netflix's streaming library to widen its selection of box office hits.

The complaints could escalate early next year when Netflix loses the streaming rights to Walt Disney Co. movies and other films that it got through a licensing deal it had with Starz Entertainment.

Still, the DreamWorks deal represents a badly needed coup for Netflix, which has been reeling from a customer backlash triggered by sharp price increases and an upcoming spin-off of its DVD-by-mail service into a website called "Qwikster."

Netflix snatched the DreamWorks Animation SKG Inc. rights from pay-TV rival HBO, providing the latest sign that Internet video has emerged as a compelling — and lucrative — alternative for Hollywood movie and TV studios.

Although the financial terms weren't spelled out, DreamWorks CEO Jeffrey Katzenberg left no doubt that Netflix is paying his studio more than Time Warner Inc.'s HBO currently is. "This arrangement allows us to get more value for our content while giving us a greater degree of flexibility in how we distribute it across multiple platforms in today's evolving digital world," Katzenberg said.

The rising cost for streaming rights is the main reason that Netflix recently increased its prices by as much as 60 percent for U.S. customers who want both DVDs and Internet video.

Netflix, which is based in Los Gatos, Calif., is counting on the higher prices, which kicked in earlier this month, to bring in the additional revenue it needs to keep adding more titles to its streaming library. The strategy could backfire if too many subscribers upset by the higher prices cancel their service; Netflix already has said it expects to end this month with 600,000 fewer U.S. subscribers than it had in June when the total stood at 24.6 million.

Locking in DreamWorks as an exclusive deal also was important to Netflix, too, because it's facing tougher competition in Internet streaming.

Amazon.com Inc. one of Netflix's most formidable rivals, expanded its streaming service Monday with the addition of TV shows and movies from News Corp.'s 20th Century Fox studio. Most of the TV shows that Amazon is picking up from Fox already are can be streamed through Netflix. In a notable exception, Amazon will have "The Wonder Years," a coming-of-age TV series from the 1980s and 1990s that is only available on DVD through Netflix.

Amazon says its streaming service now has more than 11,000 titles, doubling the total it had when it started seven months ago. Netflix's hasn't specified how many titles are in its streaming library, but an analysis done last month by another rival, Dish Network Corp., found nearly 32,000 selections.

Amazon includes unlimited video streaming as part of another service, called "Prime," that provides free and discounted shipping to the Internet merchant's customers. Prime costs $79 per year, slightly below the $96 annual subscription for Netflix streaming.

The next logical step for Amazon would be to buy Netflix's streaming service, according to Wedbush Securities analyst Michael Pachter. He thinks Netflix is spinning off its DVD-by-mail service primarily to make its streaming service more attractive to Amazon.com. Netflix's plummeting stock price has made a takeover bid more affordable too. Since the company announced its higher prices in mid-July, Netflix's stock price has lost more than half its value.

In a Sept. 22 research note, Pachter predicted Amazon would pay up to $7.2 billion for Netflix's streaming business. That would translate into about $130 per share.

Both Netflix and Amazon declined to comment on the speculation.

Netflix shares gained $2.86, or about 2 percent, to close Monday at $132.22 while Amazon shares added $6.24, or nearly 3 percent to finish at $229.85.

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