DreamWorks producing Netflix kids show

The streaming service pads its lead among children, but adds to its multibillion-dollar content costs and debt.

By Jason Notte Feb 12, 2013 5:28PM
Image: Watching television ( Frare/Davis Photography/Brand X/Corbis)Netflix (NFLX) has been slowly turning its streaming service into a children's television playground with help from Nickelodeon, Disney and even PBS. Now DreamWorks Animation (DWA) is giving Netflix a shiny new toy that none of its streaming competitors get to play with.

Netflix and DreamWorks are partnering on an original animated series called "Turbo F.A.S.T." based on the character in DreamWorks' upcoming July movie "Turbo."

The character in question is a snail gifted with super speed after a freak accident who dreams of competing in the Indianapolis 500. The "F.A.S.T." will be the "Fast Action Stunt Team" that accompanies the supersonic snail on his missions.

This is just Netflix's latest foray into original programming after recently launching the Kevin Spacey series "House of Cards" and preparing to restart the former Fox series "Arrested Development." This newest series, which starts in December, would be Netflix's first foray into children's programming and would solidify its kiddie TV dominance after a series of high profile deals.

Back in 2011, Netflix acquired the exclusive streaming rights to DreamWorks films and animated specials including "Shrek," "Kung-Fu Panda" and "Madagascar." Back in December, Netflix made a high-profile deal with Disney to run its shows and movies for $200 million to $300 million a year and gain exclusive streaming access to its Disney, Pixar, Marvel and Lucasfilm content starting in 2016.

During its "Turbo F.A.S.T." announcement on Tuesday, Netflix claimed its users streamed more than 2 billion hours of children's programming in the last year. It has placed all of its children's shows on its "Just For Kids" portal to make programming easier for kids to find. It also beat Amazon (AMZN) Prime Instant Video to original children's programming shortly after Amazon revealed it had five series in development and was going to allow its members to pick their favorite pilot.

Netflix is bolstering its dominant position in children's programming, but it's also preparing for the worst. Netflix commanded 33% of prime-time web viewing based on Internet traffic in September, according to Sandvine's "Global Internet Phenomena Report" released Wednesday. That's up from 32.7% at the same time in 2011 and 20.6% in the second half of 2010. More importantly, it's more than 18 times the the share of Amazon, Hulu and Time Warner's (TWX) HBO Go.

Unfortunately, even as Netflix streaming subscriber numbers rise and earnings and share prices rebound, the company is still confronted with crushing debt. Netflix has vowed not to raise its $8 streaming subscription price in the near future, but is carrying more than $5 billion in debt from content costs alone, with $2 billion of that due immediately. Activist investor Carl Icahn knows this is a precarious position and purchased a 10% stake in Netflix to try to prod it into consolidating it into a bigger entity like Amazon (AMZN) or Apple (AAPL). In response, Netflix adopted a "poison pill" anti-takeover share strategy, vowing to flood the market with shares if any shareholder's stake exceeds 10%.

Some of its children's programming partners aren't so happy, either. Viacom (VIA) chief executive Philippe Dauman was forced to defend his company's deal with Netflix to The Hollywood Reporter after ratings for Nickelodeon and its shows like “iCarly” and “SpongeBob SquarePants” took a dive last year. Meanwhile, using TiVo (TIVO) data, Sanford C. Bernstein discovered last year that ratings for the kids' cable genre were up 8.5% year-over-year in the first quarter among those who didn't stream content and only 0.4% among those who did. Disney ratings grew 11% for nonstreaming users and 6% for streaming users, while Nickelodeon ratings were up 11% among nonstreamers, compared with only 3% among streamers.

With Netflix's competitors cornering it on price by adopting the $8 model, costs continuing to mount and disgruntled investors and partners pouting, Netflix has to hope that speedy snail takes off at the box office this summer.

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