Netflix Inc. has acquired exclusive U.S. rights to movies from Walt Disney Studios in a deal that catapults the Internet video-on-demand service into direct competition with pay TV giants such as HBO and Showtime.
The three-year agreement takes effect in 2016 and is a blow to the pay channel Starz, which currently has the rights to broadcast Disney movies, including its Pixar animated films and Marvel superhero pictures, about eight months after they are released in theaters.
Starz's sole remaining movie provider is now Sony Pictures. That partnership ends in 2016.
Disney has also agreed to give Netflix nonexclusive streaming rights to more of its older titles — including "Dumbo," "Pocahontas" and "Alice in Wonderland" — starting immediately.
Netflix's chief content officer, Ted Sarandos, called the deal "a bold leap forward for Internet television."
"We are incredibly pleased and proud this iconic family brand is teaming with Netflix to make it happen," he said.
Netflix stock soared on the news, rising $10.65, or 14%, to $85.65.
Shares in Starz's parent company, Liberty Media Corp., fell $5.49, or 5%, to $105.56.
Currently, Netflix has nonexclusive rights to movies from Paramount Pictures, Lionsgate and Metro-Goldwyn-Mayer via a deal with pay channel Epix, as well as an array of library titles from other studios. Its only exclusive movie rights come from independent studios such as Relativity Media and DreamWorks Animation. It also has a wide variety of television reruns.
Sarandos and Netflix Chief Executive Reed Hastings have long said the company wanted to get exclusive pay TV rights to films from one of Hollywood's six major studios to boost its online entertainment service.
However, Hastings has also at times downplayed the importance of new movies. Netflix previously had streaming rights to Disney and Sony movies via a deal with Starz. In January, investors expressed their concerns that the pending disappearance of those movies would hurt the service. Hastings said in a letter to investors that Disney films accounted for only 2% of domestic streaming and the loss would not be felt.
Since then, though, the Disney movie slate has become more attractive. At that time, Netflix did not have access to movies from Disney's Marvel superhero unit or the "Star Wars" titles from its pending acquisition of Lucasfilm Ltd.
The end of the Starz agreement accelerated a trend that has seen Netflix evolve into a television company, with reruns of shows such as "Mad Men" accounting for about two-thirds of the content streamed by users.
With several original programs launching next year, including the Kevin Spacey political drama "House of Cards," and a direct connection to a growing number of Internet-enabled televisions, Netflix is on the verge of standing on par with many TV networks.
Netflix charges $8 a month for its streaming service, while premium cable networks such as HBO cost $13 to $18 a month, and that's on top of a monthly bill for other channels that typically exceeds $50. It remains to be seen whether the addition of Disney products and more original programming could lead Netflix to increase its price.
The Netflix spending spree could continue, with Sarandos telling Bloomberg News on Monday that his company would bid for rights to Sony movies when its Starz deal expires.
Netflix might have a tougher time wresting away the rights to Warner Bros., 20th Century Fox or Universal Pictures releases from their current deals with HBO, which like Warner is part of Time Warner Inc. Paramount, Lionsgate and MGM are almost certain to stick with Epix, of which the trio are co-owners.
Disney's family-friendly films are particularly valuable to Netflix, however, because young viewers are active users of the service. Last year it launched a separate Just for Kids section of its website and apps.
Although terms were not disclosed, a person close to the matter said Netflix could ultimately pay more than $300 million annually for Disney movies.
This year, HBO cut a deal with 20th Century Fox for its movies, at an estimated price of more than $200 million annually.
In so-called output deals, pay TV providers typically pay 10% to 12% of the U.S. box office of each film, up to $200 million.
For Starz, losing the Disney movies means the channel will have to create more original content to fill the void, just as rival cable network Showtime did when it lost most of its movie content over the last several years. Showtime, a unit of CBS Corp., has managed to make this work by launching several successful shows, including "Homeland," "Dexter" and "Nurse Jackie."
Starz's track record with original programming has been more mixed. Its show "Spartacus" has performed well, but its ambitious political drama "Boss," starring Kelsey Grammer, was recently canceled.
"Our decision not to extend the agreement for Disney output ... allows us the opportunity to implement our plan to dramatically ramp up our investment in exclusive, premium-quality original series which will best meet the needs of our distributors and subscribers," Starz said in a statement.
Janney Capital Markets analyst Tony Wible called the deal a positive for Netflix, writing in a research note, "This exclusivity should help them defend against competitors and may reinvigorate [subscriber] growth at a substantial cost."
Stern Agee analyst Arvind Bhatia had a more mixed reaction.
"From a content perspective, this appears to be a major coup for Netflix," he said. "However, without knowledge of the financial terms, we think it would be premature to assume this is a net positive."
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