Disney this week announced that as of 2019 it will remove all of its content from Netflix and instead roll out its own streaming platform across the US. The company will also launch its own ESPN video streaming service in early 2018. The platform, which will feature about 10,000 sporting events each year, will have content from the MLB, NHL, MLS, collegiate sports, and tennis' Grand Slam events.
Currently, this excludes Disney-owned Star Wars and Marvel franchises, though discussions are ongoing as to whether they will share a similar fate – it might continue traditional third-party deals, or it might add them to the Disney service. A statement from Netflix said that, ‘U.S. Netflix members will have access to Disney films on the service through the end of 2019, including all new films that are shown theatrically through the end of 2018. We continue to do business with the Walt Disney Company on many fronts, including our ongoing relationship with Marvel TV.’
Even still, this news has potentially serious ramifications for Netflix. There was an initial 5% drop in stocks, and the loss of quality content - while a relatively small percentage of Netflix’s offerings - will likely see some abandon them. More worrying, however, is the precedence it sets, with other Hollywood Studios likely to follow suit. Disney’s aim here is essentially to move away from selling its most valuable content to middlemen, and instead sell them directly to customers. Many argue that this move has been a long time coming, that it doesn’t just ‘make sense’ from a business perspective, in the internet age, it is necessary for their survival. CEO Bob Iger notes, ‘We believe that ultimately — I can’t give you an idea of when or how long — the profitability, the revenue-generating capability of this initiative is substantially greater than the business models that we’re currently being served by.’ Why would others such as Universal not feel similarly and choose also to remove their content from Netflix?
However, to put things into context, Netflix first won the rights to put Disney content on its platform back in 2012, but the deal only came into effect last year. Ultimately Netflix has barely reaped the benefit of the partnership yet. It was a giant before and it will be a giant after. Jefferies analyst John Janedis notes that ‘Disney's decision to end its distribution deal with Netflix (beginning in 2019) supports our long-held view that content owners will increasingly look to retain content for owned platforms.’ But it wasn’t just Jefferies who saw this trend coming. Netflix has spent the past two years repositioning itself in the market, pumping vast sums into its original content that has seen it win numerous awards - committing to spending $16 billion on the production and licensing of films and TV shows over the next five years. They also recently acquired comics publisher Millarworld, whose properties Kick-Ass and Kingsman have already been turned into films that have been shown on the network. By owning its own franchises, Netflix will further diversify the content it owns itself without further inflating its already substantial content budget.
Regardless of whether other studios follow Disney in leaving the platform, Netflix is now extremely well positioned. They have essentially done what the studios are doing in reverse, starting off by developing excellent technology and then building out a major studio. What will be interesting to see is how well this strategy works. If they do go it alone, will people subscribe to each individual studio’s platform based on the content they provide, or will they simply stick with Netflix because they are used to subscribing to them? HBO Now is a good test case, offering extremely high quality content - a far better ratio of hits to filler than Netflix - yet it still only has around 2 million subscribers compared to Netflix’s 100 million odd.
There is also a big ‘If’ hanging over whether other studios decide to adopt a direct-to-consumer strategy. While it makes sense for Disney, other studios lack the same loyal brand following and iconic status, and other studios have show little appetite to sacrifice licensing fees and gamble on building their own platform. Disney has actually already made a foray into streaming its content direct to consumer, with its subscription service for Disney movies in the UK, ‘DisneyLife, available for 9.99 a month. They are well positioned to learn from the mistakes made in developing this platform. Disney has also already spent $1.58 billion increasing its stake in BAM Tech, a video-streaming company started by Major League Baseball, from 33% to 75%, which gives it the capability to launch the new streaming service.
Netflix has lost content before, including movies from Sony, Paramount, MGM and Lions Gate, and its subscription numbers have continued to grow. In the unlikely eventuality that all the studios pull their content from Netflix and set up their own platforms, it has reinvented itself so successful over the past several years as a home for original shows and movies, that it could very well not really matter.