NEW YORK ( TheStreet) -- It is only fitting that in a year when the formula for generic summer blockbusters failed and led to losses at studios like Sony Entertainment ( SNE), industry insurgents Netflix ( NFLX) and The Weinstein Company are joining forces in a deal that cements both firms as having a new vision of Hollywood. After striking an exclusive licensing deal on Tuesday, Netflix and The Weinstein Company are building businesses and alliances that champion hand-selected content and tailored experiences for a sophisticated media audience. The deal comes as large motion picture studios and near-monopolistic cable companies work to defend a status quo where formulaic movies are shoved down consumers' throats and resold to rent-seeking cable channels that profit from inefficient and expensive pay-TV packages. It has been a surefire investment, as cable companies like Time Warner Cable ( TWC) and Comcast ( CMCSA), and studios such as News Corp ( NWSA), Time Warner ( TWX) and Disney ( DIS) continue to post strong earnings and stock market performance. Netflix, as it builds new movie industry habits and relationships, has left the old guard in the dust this year. Harvey Weinstein, co-founder of The Weinstein Company (TWC), predicted such an outcome. It is no surprise that his independent and Oscar-winning studio, burned many times in the past by Hollywood's old guard, is now allying its fortunes with a media industry insurgent like Reed Hastings of Netflix. Investors should take notice. The ground may quietly be shifting in Hollywood. On Tuesday, TWC said it will make Netflix the exclusive carrier of its first-run films in the U.S. beginning in 2016. New films will be made available for Netflix members to watch instantly on the streaming service. For Netflix, the deal may bolster its offering of high-quality movie content for adults, after the company's recent deals with Disney and DreamWorks Animation ( DWA) targeted family-oriented audiences. Terms of the deal were undisclosed, however, it is also safe to assume that having Netflix as a revenue stream will help to stabilize the volatility of TWC's bottom line, given its notoriety as a rare studio in Hollywood willing to take intellectual risks. Netflix shares currently stand at $271.68, a gain of nearly 200% in 2013, and within reach of the company's record highs hit in mid-2011. What Happened? Around December of 2012, Netflix, one of the most loved and hated stocks in the S&P 500, may have finally proved skeptics of the company's business model wrong. Shares in the company were toiling near multi-year lows even after billionaire activist investor Carl C. Icahn took a 10% stake in the company. Netflix's stock had sold off sharply after it ended a content agreement with Starz ( STRZA) in September of 2011 and continued to lag after the streaming service also didn't renew a deal with Epix in November of 2012. Some analysts and Wall Street commentators took both failed deals as an indication that Netflix was getting outbid on content and couldn't afford to maintain its streaming library. Would Netflix lose subscribers and fall into a death spiral, many wondered, even after Icahn took his stake in October of 2012? Then on Dec. 4, Netflix reached an exclusive deal with Disney to stream the company's first-run movie offerings, which now contain traditional Disney movies, along with Pixar, Marvell and Lucasfilms movies. In came Harvey Weinstein. At a media conference put on by Swiss banking conglomerate UBS at the Grand Hyatt in Manhattan on Dec. 5, Weinstein hosted a panel with Ted Sarandos , Netflix's Chief Content Officer, where he pressed for an explanation on Netflix's content strategy. "Host" may actually be the wrong word. Weinstein spent much of the panel sounding off to an audience of Wall Street analysts and investors, telling them they had completely misunderstood Netflix. Investors who sold the company's shares when it terminated relationships with content intermediaries like Starz and Epix were now sitting in a hotel ballroom listening to Sarandos explain a new path forward for Netflix in its relationship with motion picture and TV studios. Netflix had bagged the biggest streaming content deal in the history of over-the-top media and its shares were rising more than double digits. "That Starz deal, when you didn't renew
it, you paid a price," said Weinstein to Sarandos."With Disney, does Wall Street realize you became Starz plus Netflix?" he added.
Starz was, in essence, a reseller of Sony Pictures movie library, and the pitfalls of using the company were seen when Netflix viewers over-watched Sony content and breached a viewing cap. Many popular Sony films inexplicably fell off the streaming service in 2011. Why pay up for that lack of control? In the panel with Weinstein, Sarandos articulated Netflix's new party line when it came to paying for movies and TV shows for the streaming service. The company would no longer negotiate deals with resellers and non-exclusive intermediaries and would instead go directly to the source for exclusive content. Disney, DreamWorks and now carriage of first-run TWC movies are indicative of Netflix new strategy. Clearly, Weinstein liked what he was hearing. Netflix will now replace Showtime, another intermediary, in streaming first-run TWC films. Sarandos explained that Netflix would also invest in its own content, a move that appears effective at channeling the company's proprietary insight into subscriber viewing habits into targeted content that grows overall subscriptions. Consider Netflix's stable of original programming such as House of Cards, Hemlock Grove, Arrested Development and Orange Is the New Black. Those shows could easily be stereotyped as appeasing to very specific audiences who would consider the service: media-savvy nerds, hipsters, and college-educated young women. In Netflix most recent earnings, the company said it would also begin looking at adding its own original documentaries to the service -- so to continue the stereotype -- add over-educated elitists to the list of possible interested new subscribers. Original content may also be increasing the company's bargaining power, giving it the ability to walk away from expensive deals. Where Does Netflix Now Stand? Netflix clearly won over Weinstein with its vision for tailored content, a move that appears to be adding new stability to independent and documentary filmmakers who produce movies beyond the serialized money-makers that drive Hollywood profits. Of course, the question is will it work? It appears Weinstein's promotion of independent film and Netflix's focus on selectivity are a strong marriage. Netflix has posted two strong quarters of earnings that show its subscriber base growing along with its bottom line. The company's strengthening financial position makes it a true media industry power broker, where other services like Hulu and even Amazon Prime seem more speculative. Some investor concerns, such as accounting for the costs of original content appear to be less of a risk than many -- including myself -- had feared. As Netflix scales its user base, the amortization expense of original programming isn't yet drowning out the company's profitability. Netflix did say it is continuing to hammer out exactly how quickly it will amortize costs and investors should continue to study the strategy in coming quarters. Even though some like to treat Netflix's streaming content obligations, which presently sit at nearly $6 billion as a bogeyman for the company, recent earnings show that those commitments and their amortization are scaling nicely with revenue from a rising subscriber base. Gross margins have risen in recent quarters even as Netflix various content commitments hit the company's bottom line.
All told, Weinstein and Hastings may be proving to media industry moguls that discretion is the greater part of valor, especially when it comes to targeting your audience. The days of all you can eat cable packages may be numbered, especially as the likes of Google and Apple try and move into the pay TV market. Studio and cable executives continue to blow out their budgets on generic blockbuster movies and overly large pay-TV bundles that they believe can be passed onto ignorant consumers. Weinstein and Hastings have a more enlightened approach that champions the individual. Every new content deal or original Netflix show added in the past year appears targeted at a specific audience. The result may eventually force Hollywood to change. Netflix and Weinstein may quietly be forming new Hollywood alliances and business models that reshape the industry in coming years. -- Written by Antoine Gara in New York Follow @antoinegara