Netflix is spending hundreds of millions of dollars to offer more than just flicks.
The video subscription company on Wednesday unveiled a deal to stream reruns from Walt Disney Co.'s ABC network and cable channels Disney Channel and ABC Family through its online service. The agreement, which lasts one year with an option to extend it, is valued at $150 million to $200 million, according to a person with knowledge of the matter.
Netflix, which built its business by delivering DVDs through the mail in red envelopes, is fast transitioning into an Internet streaming provider that is an increasingly formidable competitor to cable and satellite television systems and pay TV channels such as HBO.
Two-thirds of the company's nearly 17 million subscribers have watched video on Netflix's online service, which can be delivered through computers or directly to television sets with Web connections.
The company has in the last few months made several big deals to add TV content to its Internet offerings from such companies as Warner Bros., NBC Universal, and now Disney-ABC Television.
"Television content is continuing to grow for us and is now just as popular as movies in terms of hours watched," said Ted Sarandos, Netflix's chief content officer.
The Disney agreement for the first time allows Netflix subscribers to watch episodes from previous seasons of various ABC shows, including "Grey's Anatomy," "Brothers & Sisters" and "Ugly Betty." In addition, Netflix will add the final season of "Lost," for which it previously streamed the first six seasons. Shows from the latest season will continue to be available only on Hulu, the online video service co-owned by Disney.
Netflix will also offer programs from ABC Family and Disney Channel, such as "Phineas and Ferb" and "Greek," that initially aired on the cable networks as recently as 15 days prior.
In the last year, Netflix has added 4.6 million subscribers and seen its stock price skyrocket 228%. At the same time it has been paying large sums to add content to its online service as it tries to transition customers away from receiving DVDs through the mail. In August, for instance, it agreed to pay nearly $1 billion over five years to three studios through a deal with pay cable channel Epix.
That open-wallet policy is welcome news to entertainment companies like Disney, which are looking for new ways to make money on older TV shows as sales of DVDs decline and local TV stations and cable networks pay less for rerun rights.
"As Hollywood looks for new ways to monetize content, there's one guy standing around in a red shirt handing out checks,'' said Richard Greenfield, media analyst for BTIG, referring to Netflix Chief Executive Reed Hastings.
Despite the large checks it is cutting, some Hollywood executives have been publicly complaining that they will need a bigger share of Netflix's revenues, as they believe its popularity could be undercutting DVD sales as well as viewership of cable channels like HBO.
Some television industry executives worry that enhancing Netflix's video offerings might encourage "cord-cutting," in which consumers dump their monthly cable or satellite TV service for the less expensive Internet alternative, siphoning off valuable revenue.
Netflix has countered that the huge amounts of money it is spending to acquire content make it a net positive for the entertainment industry.
"Consumers are already shifting to on-demand viewing, which devalues older reruns, but at the end of the day we're paying specific license fees and helping studios and networks to monetize that trend," Sarandos said.
The deal calls for Netflix to pay Disney-ABC $50,000 to $150,000 per episode, the person familiar with the situation said. That's significantly less than what local TV stations and cable channels typically pay to show reruns. For example, 20th Century Fox Television sold its hit "Modern Family" to NBC Universal's USA Network for about $1.4 million per-episode.
Some within the industry worry television licensing agreements like the one with Disney-ABC put Netflix into competition with the syndication business, potentially driving down what cable networks will be willing to pay to air reruns of broadcast shows that are available online.
Netflix recently announced a new $7.99-per-month subscription plan for Internet video. It charges more for plans that also include DVDs by mail but wants to get consumers to switch from DVDs to Web video over the next decade.