Walt Disney Co (NYSE:DIS) dropped an anvil on Netflix, Inc. (NASDAQ:NFLX) in its earnings report on Tuesday. Beginning in 2019, Disney will pull its exclusive film licensing deal from Netflix because — to the surprise of nobody — Disney will start its own streaming service.
Shares of Disney didn’t move much on the news as the market was more concerned with hitting DIS stock for its ongoing lousy ESPN situation.
Pulling content from Netflix was bound to happen. I never understood why Disney would forego the lucrative potential to stream its own content. The technology is nothing special any longer. That’s why Netflix moved big-time into original programming.
Specifically, Disney will permit Netflix to stream movies through the end of 2019, so Reed Hastings & Co. still will have that content for another two-and-a-half years, including the next “Star Wars” film and all the Marvel Studios content to come. And, of course, there is a solid deal in place for Netflix to air Marvel TV content.
It also means that the money NFLX was spending on Disney content will stay inside Netflix, which has been burning cash faster than the Joker in The Dark Knight (which was, by the way, a lot of cash). So that means Netflix can burn that cash producing original programming, and then go back into the debt markets time and time again.
What’s more interesting is the additional $1.58 billion that DIS stock is dropping into BAMTech, the streaming service that was started by Major League Baseball. Now the House of Mouse will own a 75% stake in the platform. For whatever reason, media outlets are reporting that this would be “subject to regulatory approval,” which is ridiculous. Anybody can start a streaming platform, so anti-trust issues shouldn’t apply.
This move is critical for numerous reasons. DIS stock has been struggling because of ESPN’s issues, which I’ve written about before. Besides the Netflix announcement, and the BAMTech investment, came the news about ESPN being streamed as well. I said awhile back that this might be one way that ESPN might more effectively monetize its offerings.
Specifically, Disney said:
“The ESPN-branded multi-sport service will offer a robust array of sports programming, featuring approximately 10,000 live regional, national, and international games and events a year, including Major League Baseball, National Hockey League, Major League Soccer, Grand Slam tennis, and college sports. Individual sport packages will also be available for purchase, including MLB.TV, NHL.TV and MLS Live.”
The trick is not to cannibalize cable TV programming on ESPN, so Disney will have to divvy up programming carefully. Keeping the flagship “SportsCenter” program on TV, for example, might keep subscribers from cancelling the cable TV service. Meanwhile, they can pick and choose from among these 10,000 games and packages. By owning 75% of BAMTech, and eventually probably 100%, Disney will control the distribution of many MLB, NHL and MLS games.
Disney also said the streaming service will not have its own app, but will live inside the current ESPN app. As it is with many services, if consumers have a cable subscription, they’ll be able to access content on the app as well as get additional content.
Bottom Line on DIS Stock
But what I see happening is some form of bundle of Disney movies with ESPN. Some kind of value-added bundling will occur designed to attract parents who watch Disney movies to add ESPN for a small additional price, or more likely, encourage sports enthusiasts with kids who no longer have Disney movie access on Netflix, to add the Disney streaming service.
One thing is for certain, Disney must do something about ESPN. Hearing Bob Iger tell us that everything is fine at ESPN is not encouraging.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
