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Taking a Bite Out of Netflix

28 Aug, 2017 By: Stephanie Prange, Erik Gruenwedel

It was an abrupt change of tune that sent a shockwave through the home entertainment industry in August.

After helping grow the subscription video-on-demand market — notably inking a lucrative, exclusive pay-TV-window streaming deal with Netflix in 2012 — The Walt Disney Co. announced it would redirect theatrical releases from Netflix to its own subscription streaming service by 2019.

The move would affect venerable Disney box office brands such as “The Lion King,” “Frozen” and “Toy Story,” among others. Chairman and CEO Bob Iger said Disney movies would remain on Netflix through 2018. Ditto for Marvel-branded movies, TV shows and Lucasfilm content such as “Star Wars.” Unaffected is the 2013 co-production deal between Netflix and Marvel Television that includes original series “Daredevil,” “Jessica Jones,” “Luke Cage,” “Iron Fist,“ “The Defenders” and “The Punisher.” Iger also announced plans for a new ESPN service.

“The media landscape is increasingly defined by direct relationships between content creators and consumers, and our control … of innovative technology will give us the power to forge those connections, along with the flexibility to quickly adapt to shifts in the market,” Iger said in a statement. “The launch of our direct-to-consumer services marks an entirely new growth strategy … one that takes advantage of the incredible opportunity that changing technology provides us to leverage the strength of our great brands.”

While Netflix executives did not comment directly on the move, Forbes reported the streaming video pioneer is in discussions with Disney to continue Lucasfilm movies and Marvel Studios fare beyond 2019. Rogue One: A Star Wars Story is currently streaming exclusively on Netflix.

Regardless, Disney’s decision undoubtedly affects Netflix, according to Wedbush Securities analyst Michael Pachter.

“I'm sure Netflix cares, as Disney content was offered exclusively and couldn't be obtained in the same window anywhere else,” he said.

Iger unveiled global aspirations for the new service. 

"We'll roll out the [SVOD] service in multiple markets outside the United States, but it will vary from market to market based on existing distribution agreements and different market dynamics,” Iger said.
“I think you have to think about a Disney-branded, direct-to-consumer subscription service as a global product, even though we are being more specific today about launching a domestic product in the latter part of 2019.”

While the executive in recent fiscal calls hasn’t been shy about Disney’s over-the-top video aspirations — notably with ESPN — some analysts think yanking original movies from Netflix in two years could be a little too late, as the SVOD pioneer (and Amazon Prime Video) command a global footprint today. BTIG Research analyst Rich Greenfield contends Disney management was shortsighted in 2012 when it decided to boost near-term profits selling content to Netflix and Hulu (which it co-owns) rather than building a proprietary direct-to-consumer business. The exclusive 2012 Disney-Netflix SVOD deal for theatrical movies injected hundreds of millions of dollars into studio coffers and ended Starz’s exclusive digital rights to Disney movies.

“Management simply did not foresee cord-cutting getting this bad, this fast and yet, their very decisions in terms of … selling more and more content to SVOD platforms has accelerated [their appeal],” Greenfield wrote in an Aug. 9 post.

Disney has attempted to jumpstart OTT video aspirations by acquiring majority interest in backend infrastructure BAM Tech — a subsidiary of MLB Advanced Media — for $1.58 billion after buying a minority stake last year.

"This represents a big strategic shift for the company," Iger told CNBC. "We felt that having control of a platform we've been very impressed with … would give us control of our destiny."

Greenfield said Disney paid too much for BAM Tech when it could have created proprietary technology more cheaply. In addition, when Disney does roll out SVOD services, the analyst estimates Netflix will have 64 million subscribers domestically and 158 million subs globally. More importantly, Disney would be turning its back on what he estimates is more than $350 million a year in licensing revenue from Netflix.

“Disney simply waited too long to make this critical decision,” he wrote.

Others see a possible upside for Disney. If content is still king, then Disney has a firm grasp on the crown as it has some of the best content out there.

“If anyone can do it from a content perspective, it’s probably them, because of their unique brand awareness,” Piper Jaffray analyst Michael Olson told The New York Times.

Wall Street, too, saw the move as a blow to the SVOD status quo. The Aug. 8 news resulted in an overnight 5% valuation drop in Netflix shares.

“If the content is available on a standalone Disney channel, some Netflix customers will defect,” said analyst Pachter. “It may be a small number, but it's likely to sting a bit.”

The analyst wonders whether Disney's OTT video ventures will be able to effectively compete with Netflix (too little overall content), believing they would more likely become additional placeholders on a burgeoning menu of SVOD options available to consumers. 

“People who value Disney content will add the Disney service and some won't continue with Netflix,” Pachter said. “Others will add Disney and cut the cord; still others will add Disney and cut nothing. It really depends on pricing and the other content available at the time.”

Meanwhile, at least some consumers took notice. A social media petition generated close to 11,000 signatures protesting Disney’s announcement. The petition at Care2 (www.Care2.com) argued the decision represents “a huge blow to Netflix users and Disney lovers who don't want to have to pay double to access the content we love.”

The petition lamented the growing number of digital outlets carving up access to content.

“Disney's move represents the exclusivity trend that’s been driving subscription services,” the petition read. “Historically, we could buy a movie or TV show from any number of sources. But now, we're being forced to buy subscriptions to multiple sources just to get the content we love.”

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