No Disney (DIS) Movies, No Problem for Netflix (NFLX)

I can’t say that I was a hugely surprised by Walt Disney Co’s (NYSE:DIS) move to tackle the online streaming route on its own. The news took Netflix, Inc. (NASDAQ:NFLX) 6% off its 52-week highs, but the sell-off stabilized quickly.

All in all, neither the market nor yours truly is particularly rattled by Disney’s announcement to end its contract with Netflix in 2019.

The media has been presenting this in a negative light, showing further evidence of a space that is increasingly competitive with major players throwing billions at original content. There is also the concern that this opens the floodgates for other major Hollywood studios to pull content from Netflix’s platform. DIS

Despite these purported challenges, NFLX still trades at 219 times trailing earnings. The market clearly still believes the growth prospects remain intact, even without Disney content.

The Deal Affects NFLX Less Than You Think

In 2019, Disney will move all but Marvel TV content off Netflix. Two years is a long time, especially in the video streaming world. It’s not an immediate action with an immediate effect. People who sign up today, sign up because they are interested in the accessible content at the moment, and it seems suspect to assume that potential subscribers will be deterred because of an action so far out.

What this means is that NFLX has two years time to really hit the gas on bolstering its original programming and deepening its relationship with customers via its arguably unrivaled proprietary personalization algorithms. During this time, if live stream also gains traction, Netflix will further entrench its dominance in video streaming.

There is no doubt that Disney and Pixar have truly classic and amazing movies with widespread appeal. But given that all these blockbuster films come out in theaters first and have a lag time before they surface on Netflix’s homepage, it’s not likely that people are making a subscription decision solely based on whether Pirates of the Caribbean is available or not.

A quick note on Marvel content: Given Disney’s angle on family and kid-friendly, they still need a separate platform to make their content accessible to a wider audience. Clearly, the ending of this deal doesn’t fully sever the ties between Disney and Netflix for good. My guess is that Disney still sees a lot of value in having Netflix as a partner for a particular segment of content (that also happens to be very popular). The target audience for that type of content happens to be right down Netflix’s alley.

NFLX’s Growth is International

According to Berstein research, “Disney’s movies are shown on Netflix in the U.S. and Canada, but only in two other countries.” 


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And it’s universally understood that practically all of NFLX’s growth moving forward is going to come from the international arena — the third quarter forecast for total membership growth internationally was 7%, compared to 1% for the domestic market. So in fact, the lack of renewal by Disney isn’t going to have a significant impact on subscription trends there.

DIS Hurts More

Ultimately, it seems to me that Disney is the one with the mounting pressure rather that Netflix, with the latter having shown strong subscriber growth numbers and a resilience to competition in the space.

Disney is going outside of its comfort zone to pursue what could have decent economics when it has historically been getting a lucrative licensing income stream form Netflix. They are trading a potentially good business with costs and complexity for something that is close to pure profit.

Meanwhile, Netflix will just keep doing what it’s doing: growing rapidly internationally and investing in original content that sells well across multiple geographies. Subscribers may no longer be able to stream Lion King on the app, but they won’t mind, because they’ll have plenty of edgier content to choose from.

As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.

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