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Netflix’ Investment in Mad Men Will Pay Off

As it signs more streaming deals for TV shows, Netflix will leave rivals even further behind


Last year, Netflix (NASDAQ:NFLX) shelled out as much as $100 million for streaming rights to the hit AMC drama Mad Men. It will turn out to be one of the smartest investments the company has ever made.

About 3.5 million viewers tuned in last month to the premier episode of Season 5 of the critically acclaimed show, a 20% increase from the debut of Season Four. That figure is astounding considering that the series was on hiatus for 17 months. Stifel Nicholas analyst Benjamin Mogil attributed the huge ratings gain to the Netflix streaming deal. Hollywood surely took note.

The Los Gatos (Calif.) company, whose shares have surged nearly 49% this year, is now in a position to leverage its success with Mad Men to sign other streaming deals with content providers such as Comcast (NASDAQ:CMCSA), which controls NBC Universal.

Last year there were media reports that the Philadelphia-based company was in talks with Netflix regarding a streaming deal. The status of the discussions wasn’t clear, though it seems likely that they’re continuing.  A Comcast spokeswoman had no comment for this story.  Netflix couldn’t immediately be reached.

Wall Street doesn’t seem to appreciate the potential for Netflix to grow its streaming business. The average 52-week price target for the stock is $95.65, ahead of the $104.3 level where it recently traded. Netflix, though, appears to be cheap. It’s trading at a price-to-earnings ratio of 23.93, well under its five-year high of 53.92, according to Reuters.

Earlier this year, Comcast launched Xfinity Streampix, a service that lets users stream past seasons of TV shows and movies across multiple screens, such as TVs, mobile devices and computers. Marcien Jenckes, Comcast’s general manager of video services, told the Los Angeles Times that Comcast will not offer Xfinity Streampix outside its service area and that “it is not at all our intention to compete with Netflix.”

Indeed, it would make far more sense for Comcast and Netflix to work together than to be at each other’s throats. For one thing, Xfinity Streampix will not be cheap to operate given the amount of bandwidth needed to support video streaming. There’s also the streaming rights. Netflix paid about $4 billion for streaming costs in 2011, up from $1.1 billion in 2010. The cable giant would certainly want to avoid these costs if it can.

Comcast’s NBCUniversal, CBS (NYSE:CBS), Viacom (NYSE:VIA.B) and News Corp’s (NASDAQ:NWS.A) Fox are among the media companies that have struck deals with (NASDAQ:AMZN) to allow their content to stream over Amazon’s Prime Instant Video service.

Hulu, which is backed by a slate of media companies, has been aggressively flogging its Hulu Plus service, which offers unlimited instant streaming for $7.99 a month. Neither comes close to Netflix in terms of popularity.

With more than 20 million customers, Netflix continues to dominate rivals despite the bungling of its price increase and the end of its deal with Starz. Data released earlier this year from NPD Group showed the company with a 55% share of the paid digital movie market. Odds are strong that if the figure has changed, it’s not by much. And Netflix continues to expand overseas.

If Lionsgate Entertainment (NYSE:LGF) had done a streaming deal for Mad Men with a Netflix rival, fewer viewers would have caught up with the show. This is a golden opportunity that Netflix can’t afford to blow.

Jonathan Berr does not own shares of the companies listed here.

Article printed from InvestorPlace Media,

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