In the past 12 months, shares of Netflix, Inc. (NASDAQ: NFLX) have shot up nearly 300%, from around $70/share to around $220/share, after peaking at near $250/share. The trailing P/E is more than 72, and even former naysayers have had to admit that the company appears to be able to defy gravity. Now, Netflix wants to get into original programming, and some of the bears are starting to lick their lips expecting a fall. But it could work out differently.

A report on Hollywood insider news site Deadline.com broke the story that Netflix is interested in a first-showing distribution deal for up to 26 episodes of a TV series directed by David Fincher (“The Social Network”) and starring Kevin Spacey.  At an estimated $4 million-$6 million per episode, the deal would cost Netflix more than $100 million, although The Wall Street Journal cites a source who believes Netflix “is likely to pay much less than that.”

Netflix has previously shied away from producing original content, but new competition from Amazon.com (NASDAQ: AMZN), which now offers free streaming to customers of its Amazon Prime program, and Facebook, which has struck a deal with Time Warner Inc. (NYSE: TWX) to stream “The Dark Knight” from the Warner Bros. studio, could be driving Netflix to look beyond just renting DVDs and video streams. Netflix is also facing higher fees from movie makers like Lions Gate Entertainment Corp. (NYSE: LGF) and MGM.

When Netflix began its mail-order service, the movie studios saw this as just another wrinkle to its already successful DVD rental business with bricks-and-mortar stores like Movie Gallery and Blockbuster. Those days are gone, and the studios are demanding higher fees and offering stricter terms to Netflix because they fear that the company will crush their own hopes for streaming content to viewers.

Netflix claims more than 20 million subscribers, more than the Showtime cable network owned by CBS Corp. (NYSE: CBS) or Starz, owned by Liberty Media Corp. (NASDAQ: LINTA). Time Warner’s HBO has 28 million subscribers, but Netflix should surpass that total before the end of the year.

The company is trying to improve the quality of its offerings, which includes older movies and TV shows, and is short of new and original content that commands a higher price and draws larger audiences. If the studios won’t sell the rights to Netflix at a reasonable cost and with less restrictive viewing schedules, then the company will produce its own content.

Or at least it will threaten to produce its own content. For example, if the deal for this series is a success, then Netflix can turn to the studios and networks and threaten to make more original content unless the company can get better deals on rental fees and rights to show current, popular TV series. The mavens will have to listen, and in fact, may have to yield to Netflix’s demands.

The studios and networks like being able to call the shots with respect to fees and schedules. They won’t give up that power without a fight.

Netflix has a lot riding on this deal, though. If it is successful, a lot of good things can happen. If it is not, the company will have spent a truckload of money for nothing and that won’t make shareholders very happy.

But Netflix has to try something, and this is not a huge risk. The company added 3 million new subscribers in the quarter ended December 2010. For every million subscribers, Netflix takes in about $100 million in revenue. Provided the company can keep growing and that its business is not seriously undermined by Amazon or Facebook, Netflix can afford to make this kind of bet.

Paul Ausick

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