Earlier this month, Netflix (NASDAQ: NFLX) announced yet another marquee hire, recruiting television creator Ryan Murphy to a $300 million, five-year deal. That news, announced Feb. 13, sent Netflix shares skyrocketing to new all-time highs, but it's also significant for the broader media landscape. The move offers evidence of Netflix's deep and growing competitive advantages in worldwide streaming.
Image source: Netflix.
Who's Ryan Murphy?
While it's hard to imagine one person alone can make such a large difference, it should be noted that Ryan Murphy is one of the more coveted creators in Hollywood. During his time at Twenty-First Century Fox (NASDAQ: FOX) (NASDAQ: FOXA), much of which is expected to soon be part of Disney (NYSE: DIS), Murphy created hit shows for Fox and FX: Glee, Nip/Tuck, American Crime Story (the O.J. Simpson story), American Horror Story, Scream Queens, Feud, 9-1-1, and The Assassination of Gianni Versace.
"Ryan Murphy's series have influenced the global cultural zeitgeist, reinvented genres, and changed the course of television history," Netflix's chief content officer, Ted Sarandos, said in a statement. "His unfaltering dedication to excellence and to give voice to the underrepresented, to showcase a unique perspective or just to shock the hell out of us, permeates his genre-shattering work."
Netflix wins... again
Murphy's contract with Fox expires this summer and apparently he was heavily courted by both Fox and Amazon.com. But it was Netflix that emerged victorious, in a repeat of what happened last summer, when Netflix signed a $100 million deal with ABC hitmaker Shonda Rimes. Winning Murphy, who would likely be absorbed by Disney has he remained at Fox, and Rimes from ABC, which is already owned by Disney, has certainly sent a message.
Disney CEO Bob Iger can't be happy about this news. On the recent Disney conference call, Iger said, "We're pleased with the level of interest among the creative community in creating not just Star Wars but other series for this Disney app, and I think you'll find that the level of talent that will be on that whole, if you call it a television front, will be rather significant as well." The loss of Murphy and Rimes seems to go against that very point.
Although Disney has still been able to attract big-name writers D.B. Weiss and David Benioff to pen a new Star Wars series, its ability to attract talent seems to rely on creators' desire to work within established Disney brands like Star Wars. Whether Fox, ABC, and Hulu (which Disney would control upon closing) can combine to make a worthy competitor to Netflix with non-branded talent is still debatable. According to The New York Times, when meeting with Iger, Murphy asked, "Am I going to have to put Mickey Mouse in American Horror Story?"
A worthy investment?
It should be noted that while the Murphy deal looks obscenely expensive -- $300 million is not the cost of an upcoming series; it's just for one person -- Netflix's market capitalization increased roughly $10 billion following the announcement. Not a bad return.
The reason lies in the curious phenomenon that the more Netflix spends, the more its stock seems to get rewarded. That trend is because the company has spent so wisely in the past that investors anticipate more fine returns in the future.
The spending is not haphazard, either. Netflix seems to be solidifying itself as the destination for top-shelf creative talent. By shelling out huge salaries, giving creators more freedom than a typical network, and boasting an industry-leading 118 million subscribers, more big names -- from Dave Chapelle to Jerry Seinfeld, the Coen Brothers, and Rimes and Murphy -- are flocking to Netflix.
Future price increases?
It may seem curious that Netflix is boosting its content spend to $8 billion this year, even as the domestic market is becoming increasingly saturated. But premier American-made content has been able to travel around the world, and international growth accelerated by 6.36 million to 62.3 million subscribers last quarter, a 41.6% year-over-year increase.
The more "must-see" content Netflix gains, the more pricing power it holds, and the future value of the company is dependent on the combination of both total subscribers as well as the ultimate subscription price. Murphy's hire, as expensive as it is, is yet another building block toward a potential future price increase, and therefore represents much more value for Netflix shareholders down the road.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Billy Duberstein owns shares of Amazon, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Netflix, and Walt Disney. The Motley Fool has a disclosure policy.