Why CBS Pulled Content from Netflix

March 29th, 2011 by Trefis Team
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CBS’ (NYSE:CBS) recent decision to pull back some of its streaming content from Netflix’s (NASDAQ:NFLX) library comes at a surprise to the rental company. Although Netflix has moved into offering its own content, CBS still competes more directly with companies like Disney (NYSE:DIS), News Corp. (NASDAQ:NWS), Time Warner (NYSE:TWX) and Viacom (NYSE:VIA). So what value does CBS see in pulling its content?

Our price estimate for CBS’ stock stands at $26.34, a premium of roughly 10% to the stock’s market price.

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CBS Pulls Showtime Content

The company will be removing the older episodes of the TV shows that are currently running on Showtime Networks as soon as the present distribution deal expires this year. This means that Netflix will retain the content from older series that have finished their runs on Showtime, but will lose the present ones. Interestingly, Netflix seemed to be caught off guard by the move. [1] This implies that the decision is probably something that CBS hadn’t planned for a long time, and is more of an abrupt move.

But Why?

We estimate that cable networks constitute about 24% of CBS’ stock value. Almost all of this is attributed to Showtime Networks with only a little coming from the CSTV network. Naturally, CBS would like to make the most of a segment that brings almost one-fourth of its value. Interestingly, this move comes after Netflix successfully bid for exclusive rights to new TV show House of Cards. Looks like CBS is worried that Netflix might be threatening its turf.

While Netflix is a good platform to squeeze extra value out of old shows that have concluded their run on cable networks, CBS thinks that it might be better to pull out older seasons of currently running shows. One way to look at this is that CBS wants to remind Netflix that it still has a steep climb ahead if it wants to catch the big name content providers. Beyond this, it makes sense for CBS to offer older seasons of currently popular shows behind its own pay-wall in order to generate higher profit.

See our full analysis and $26.34 price estimate for CBS stock

Notes:
  1. CBS to Remove Some Showtime Content From Netflix, The Wall Street journal, Mar 24 2011 [↩]