SAN FRANCISCO — Netflix's Internet video service has landed the U.S. rights to show Disney movies shortly after they leave theaters, a coup that could turn into a costly mistake if the deal doesn't bring in more customers.

The multiyear licensing agreement announced Tuesday represents a breakthrough for Netflix as it tries to secure more exclusive programming for a popular service that streams video over high-speed Internet connections. The approach is making Netflix more like traditional pay-TV channels such as HBO, Starz and Showtime.

Financial terms weren't disclosed, but analysts estimate that Netflix will pay Disney more than $350 million annually. That's a hefty bill that will require Netflix to accelerate its subscriber growth or consider raising its prices – something that management has vowed not to do after rankling customers with rate hikes last year.

Netflix is snatching the rights to the Disney movies from Starz, which had failed to reach terms on renewing a separate licensing agreement with Netflix. Until February, Netflix's streaming service had access to Disney movies through that Starz deal. The loss had been interpreted as a blow that diminished Netflix's market value.

Investors applauded Netflix Inc. for trumping Starz to get the Disney rights directly from The Walt Disney Co. – and for winning an exclusive provision that shuts out Starz and other rivals.

Netflix shares surged $10.65, or 14 percent, to close Tuesday at $86.65, its highest closing price since April. That's still far below its peak of nearly $305, reached around the time that Netflix announced it price increase in July 2011. Rates went up as much as 60 percent for those who wanted to stream Internet video and keep receiving DVDs through the mail, too.

The stock of Starz's owner, Liberty Media Corp., sank $5.49, or nearly 5 percent, to $105.56. Disney shares added a penny to $49.30.

It's the first time that one of Hollywood's major studios has sold the coveted first-run rights to Netflix Inc. instead of a premium TV network.

DreamWorks Animation SKG Inc. licensed the pay-TV rights to its movies to Netflix last year under a deal that begins in 2013, but those movies don't wield the same box-office appeal as Disney.

"It's a bold leap forward for Internet television and we are incredibly pleased and proud this iconic family brand is teaming with Netflix to make it happen," said Ted Sarandos, Netflix's chief content officer.

Netflix CEO Reed Hasting is counting on more compelling movies and TV shows to attract more customers. The company is hoping they will become loyal subscribers once they see how much video is available for just $8 per month – a price that undercuts the rates of most pay-TV channels. Furthermore, Netflix is available as a stand-alone service, while premium channels such as Starz require cable or satellite TV packages that average about $80 a month.

Netflix had 25.1 million Internet video subscribers in the U.S. through September, up from 21.5 million at the same time last year. Starz's premium channel had 20.8 million subscribers at the end of September, up from 19 million a year ago.

Janney Capital Markets analyst Tony Wible said the licensing agreement was a sign of Disney's long-term faith in Netflix, despite intensifying competition in streaming services from Inc., Comcast Corp. and Verizon Communications Inc.

The Disney agreement gives Netflix's streaming service the exclusive U.S. rights to offer Disney's live-action and animation movies during the period normally reserved for pay-TV channels. That period typically starts about seven months after movies leave theaters. The subscription service can then usually show the movies for an 18-month stretch. The Disney exclusivity does not extend to DVDs, a service Netflix is trying to phase out.

Starz retains the rights to all Disney movies released in theaters through 2015, with Netflix picking them up on films released in 2016 and beyond. Disney's direct-to-video movies will come to Netflix next year, while classic films such as "Dumbo" and "Alice in Wonderland" will be released to Netflix immediately.

Disney's stable includes Pixar Animation and Marvel and soon will boast Lucasfilm's "Star Wars" franchise, too. Its $4.05 billion acquisition of Lucasfilm will spawn at least three additional installments of the "Star Wars" saga. However, the next installment won't likely be included in Netflix's package because Disney intends to release the next "Star Wars' movie in theaters in 2015, giving Starz the rights. Netflix will be in line for subsequent "Star Wars" chapters.

Wedbush Securities Michael Pachter said he doubts the Disney films will attract enough subscribers to offset the expense.

"These costs are going to sink Netflix," he said.

Pachter has been urging investors to sell their Netflix stock because he believes the company will either lose money or post puny profits for the years to come.

Netflix's rising costs for Internet video rights have emerged as a major source of concern as the company's earnings have dwindled during the past year. The company, which is based in Los Gatos, Calif., already has warned that it may record a loss for the last three months of 2012, which would be its second quarterly loss of the year. Depending on the size of the potential fourth-quarter setback, Netflix could finish this year with its first annual loss in a decade.

Even before signing the Disney deal, Netflix owed $5 billion in Internet video licensing fees during the next five years, including $4.5 billion due before the end of 2015. Netflix's annual revenue this year is expected to total about $3.6 billion.

Wible, the Janney analyst, said Netflix may have wanted to strike a deal with Disney several years before the movies can be shown on its service to bolster investors' confidence in the company. That, he said, could give Netflix a better chance to sell bonds or stock to raise more money to pay Disney and other studios for Internet video rights.

"The biggest uncertainty is whether Netflix will use this as an excuse to raise capital," Wible said.

Starz played down the loss of the Disney rights. In a statement, Starz said it would now have more money to invest in developing original TV series. Netflix also has been financing exclusive episodic programming and had similar played down its loss of Starz when that deal expired in February.

After Disney defects to Netflix, Starz will still hold the first-run rights to films released by Sony's stable of movie studios That deal applies theatrical releases through 2016 from Columbia, TriStar, Screen Gems and several other Sony-owned studio.

Liberty Media plans to spin off Starz into a separate, publicly traded company early next year.


AP Business Writer Ryan Nakashima in Los Angeles contributed to this story.

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    When you finish a show or movie on Netflix, the site requests that you give it between one and five stars, based on how much you enjoyed it. You're not being asked to rate that content for kicks, or so that you can later reminisce about how much you liked a certain film: Rather, Netflix has spent many years improving its recommendation engine, even offering a $1 million prize for anyone who could up the accuracy of Netflix recommendations by 10 percent. At this point, the Netflix recommendation engine is pretty darn accurate -- it takes into account your own ratings as well as the viewing habits of those similar to you. Basically, the more films you rate, the more you're likely to enjoy a Netflix recommendation. If you constantly find yourself frustrated that there's nothing on Netflix, take a half hour or so and knock out a few hundred ratings on the "Taste Profile" section of the site, and make sure you've filled in your genre preferences, too. Finally, if Netflix persists in recommending a title that you're just never going to watch -- for me, that would be "The Lincoln Lawyer" -- remember that you can click on the "Not Interested" button on any film's homepage and it will disappear from your recommendations page while simultaneously smartening up your future recs. (For an in-depth look at the Netflix recommendation engine, and how it works, I recommend this post on Netflix's official blog.)

  • Don't Fly Blind

    Leaning on Netflix's recommendations alone ensures that you'll discover some good flicks; if you're really committed to shaking all the leaves from the tree, however, you're going to need some backup artillery. There are several excellent extensions that you can add to your favorite browser to augment your Netflix experience and increase your chances of sniffing out a great new film. An extension like "Rotten Netflix," for example, inserts little Rotten Tomatoes scores beneath every movie poster on the website, so that you can instantly know how a movie fared with critics. Similarly, the "IMFlixDB" extension displays a movie's IMDB ranking on a white bar above the Netflix homepage and gives you quick access to that film's information page. The ever-prodigious members at Reddit use the wisdom of crowds, meanwhile, to constantly vote up streaming movies that you might otherwise miss. It's a super-active community with consistently high-quality recommendations: Check it out here.

  • Don't Let A Film Disappear

    Another Netflix specialty website is InstantWatcher, a clean website that allows for easier movie search than you'll find on the Netflix homepage. And while many outlets toast InstantWatcher for its quick and robust search functionality, we like it because it also lists the notable films that will disappear from Netflix Instant soon. There's even a Twitter feed that does nothing but tweet out the names of soon-to-be-expired Netflix movies. There is no worse feeling, in the whole entire world, than sitting down to watch a movie you've had in your Netflix queue only to discover that the movie has disappeared. Don't let it happen to you again.

  • Don't Be Afraid To Quit

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