When most investors think of a company that’s mastered the art of movie and television-based merchandise, Disney (NYSE:DIS) comes to mind. And well it should. It’s difficult to avoid the overwhelming presence of Frozen-themed goods, and Star Wars toys and T-shirts are everywhere. Both movie franchises are part of the Disney family.
Netflix (NASDAQ:NFLX), on the other hand, isn’t a name known as a tie-up and licensing powerhouse. That’s not a dig at the company. It’s just an acknowledgment that the bulk of the streaming giant’s focus has been on building the best, most cost-effective streaming service it can.
Current and prospective owners of Netflix stock, however, may want to put the idea of licensed merchandise and consumer goods on their radar. It’s a business that’s increasingly important to the company, and holds more potential than many investors may realize.
More Merchandise Coming
It’s possible — even likely — you’ve come across them without realizing they were actually spawned by a program or movie created by Netflix. Nevertheless, Stranger Things action figures are a reality. Posters inspired by several of Netflix’s originals are widely available. The company is already in the licensing business.
It may be on the verge of stepping up that effort, though, given its most recent hire. Christie Fleischer, former merchandising and consumer product executive for Disney, has been named Netflix’s head of consumer products.
Fleischer clearly won’t be starting from scratch, though Netflix stock owners should note that the company’s merchandising arm has only scratched the surface. It could be several quarters before the company, which doesn’t break out merchandise-related or licensing revenue in its financial reports, could start to see measurable, meaningful results from the division.
There’s certainly potential, though.
How much potential? For perspective, Disney’s Consumer Products & Interactive Media arm generated roughly $1 billion worth of revenue last quarter. That’s only about 6.5% of the organization’s total revenue, although it’s certainly not a scant contribution to the top and bottom lines.
Netflix hasn’t yet cited any specific numbers, and the organization’s chiefs likely understand that they don’t really know how big the company’s licensing business might get. They likely do know, however, its merchandise-based revenue is entirely a function of its time and financial commitment to the idea.
To the extent a number can be suggested, when Netflix was first wading into merchandise and licensing waters early last year, RBC analyst Mark Mahaney offered one. He said in April of 2017 that consumer products could add $1 billion to the top line, annually. For perspective, Netflix has driven about $13.9 billion in revenue over the course of the past four quarters.
It’s not game-changing money. But, it’s relatively easy high-margin money. The burden and risk of creating physical merchandise largely falls on the shoulders of the licensee.
It was also just a guess made a year and a half ago, when there was little to no context for Mahaney to use as a frame of reference. Whereas Disney has been in the consumer products business for decades, it’s still relatively unclear what Netflix is willing and able to do on this front.
Bottom Line for Netflix Stock
It’s exciting to be sure, but owners of Netflix stock may want to temper their near-term expectations for a couple of different reasons.
First but not foremost, internal support for Netflix’s consumer products division may only be lukewarm. Last year, when the streaming video company was only dabbling with the idea, Chief Content Officer Ted Sarandos commented:
“We don’t want to make any shows to sell toys. What’s really important is there’s a marketing component that comes with [selling toys]… Kids carrying the backpack sells the show.”
Practicing some degree of restraint is insightful, and in the end, the content officer isn’t likely to have a great deal of say outside of the company’s creation and curation effort. If his observation is a reflection of how other executives still feel, though, Fleischer may be somewhat handcuffed.
There’s a second and arguably bigger headwind that owners of NFLX stock may want to get comfortable with. While Disney’s movies lend themselves to toys and other kid-centric consumer goods, there’s not a great deal of play value with Stranger Things toys.
That’s okay. The bulk of Netflix’s merchandise licensing was likely to target a slightly older (and maybe significantly older) demographic anyway. Children are the big driver of Disney’s consumer goods and merchandising revenue, though.
Still, it’s something to put on your radar on the off chance the company decides it wants to develop shows from the ground up with the explicit purpose of selling merchandise.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.