Dreamworks Animation Skg Inc (NASDAQ:DWA) is making a smart move and adapting to the new opportunities that online video provides. The company behind blockbusters like Shrek, Madagascar and Kung Fu Panda has the opportunity to capitalize its valuable properties and bring more stability in its business model.
Theatrical releases can be enormously profitable, but they can also lead to huge losses like Dreamworks Animation Skg Inc (NASDAQ:DWA) painfully learned with Rise of the Guardians last year. Deals like the one recently announced with Netflix will likely provide a much more predictable cash flow stream for Dreamworks Animation Skg Inc (NASDAQ:DWA), and it shows that content producers stand to gain from the new paradigm.
Netflix was in need of this content after it lost key children programming to Amazon when its deal with Viacom, Inc. (NASDAQ:VIAB) expired in late May. Children are crucial when it comes to streaming subscription, according to Amazon, kids’ shows are one of the most watched TV genres on Prime Instant Video, and parents usually give a lot of consideration to children’s content when choosing a subscription service.
Viacom owns tremendously popular characters like Dora the Explorer and Sponge Bob, and many Netflix subscribers complained when they learned that their kids were not going to be able to continue watching those shows via the service. The financial terms of the Amazon-Viacom, Inc. (NASDAQ:VIAB) deal were not disclosed, but Huffington Post reported that it was the biggest amount of money Amazon has spent on a deal for Prime content.
It must have been a very convenient deal for Viacom, Inc. (NASDAQ:VIAB), the company was in a comfortable position to negotiate knowing that both Netflix and Amazon were competing for its valuable content and thinking beyond short-term profits to consolidate their competitive position in streaming. When streaming companies fight each other for content, content producers win.
I´m not saying that streaming companies like Netflix and Amazon won´t be winning bets in the long term, but the competition for content means that their profitability will most likely suffer in the middle and short term, it could take a very long time until they build a large enough audience to justify those investments. Investors in these companies need to be fully aware of the risks.
When it comes to content producers, on the other hand, they stand to win from rising prices for their products as the competition between streaming companies becomes more intense. At the end of the day, streaming is a more efficient and convenient way to distribute content, and this makes this content more valuable.
Andrés Cardenal owns shares of Amazon.com. The Motley Fool recommends Amazon.com, DreamWorks Animation, and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Andrés is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Making the Right Bet in Online Video originally appeared on Fool.com is written by Andrés Cardenal.
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