The breakup of the alliance between Netflix and Epix underscores larger changes in the video business.
When the deal was first made five years ago, both companies were still upstarts. According to a new report by Morgan Stanley analyst Benjamin Swinburne, the deal helped Epix become profitable and add distribution, while it made Netflix a powerhouse that can afford to take thousands of movies from its millions of subscribers.
Who got the better of the deal?
“It is tempting to look at Viacom's share price [Viacom owns 50% of Epix, a joint venture with MGM and Lionsgate] on August 10th 2010 of $34 vs. $41 today (up 20% while Netflix has grown from $18 to $118, adjusted for the stock split, and the S&P 500 is up nearly 80%) and argue that selling to Netflix was a fatal decision. However, that is oversimplifying the situation,” Swinburne said.
At the time the deal was made Netflix had 15 million subscribers and had little impact on Viacom’s cable business. Now it has 40 million subs and has evolved into a two-hour a day cable replacement for some customers, Swinburne acknowledges.
“We argue that much of the pressure on the bundle and TV ad dollars and ratings would be taking place irrespective of Netflix, and YouTube is arguably a larger threat to Viacom and its peers,” he says. “Nonetheless Netflix's evolution from its Epix signing to today has certainly created value leakage for TV networks that will be challenging to reverse.”