Netflix is Disney’s dilemma, not the other way around

The general attitude towards Disney’s divorce from Netflix last week has been that Netflix will find itself on shaky ground without the supporting foundations provided by Disney’s content portfolio. At Faultline Online Reporter, our opinion couldn’t be further apart, as we believe Disney’s solo streaming plans will fall by the wayside as they have all done so in the past, meanwhile Disney will have to sit back and watch as Netflix’s original content clout will continue to drive it from strength to strength – albeit it at a narrow margin given its $16 billion pledge over the next five years.

Today some two thirds of Netflix’s content comes from third party licensing deals but this balance is gradually shifting. Netflix was fundamentally built on Disney content, something Disney has regretted ever since around 2011 when the business really started to pick up pace. Disney isn’t alone, there are many content distributors that rue the day they helped Netflix become a global success story, and we expect Disney’s decision to accelerate this process by encouraging more studios to jump ship. In a few years’ time, the balance of original content to third party will be 50/50.

Like Disney, other studios will have grand ambitions of launching their own successful streaming services to mirror Netflix, but crucially, without the check books to invest in the original content required in order to make it. Netflix and Amazon are perhaps the only two companies in the world currently capable of going it alone globally in original content, although the emergence of rival services will give rise to a more fragmented ecosystem that aligns with the trend of consumers signing up for multiple streaming subscriptions to cater for different needs.

The end of the Disney-Netflix dream is the most significant reminder in the entertainment industry that the era of settling for a single source of content is coming to an end.

Disney will be pulling its content from Netflix at the end of next year and plans to roll out its own entertainment offering in 2019, as well as an ESPN OTT service around the end of 2018 or early 2019. It coupled its announcement of independence with a $1.58 billion investment in streaming technology company BAMTech, increasing its stake from 33% to 75%. Major League Baseball will hold the remaining 15%.

While the news triggered shock waves across the media landscape, Netflix chief of content Ted Sarandos calmly stated in an interview with Variety that the company has been planning for this inevitability for years. “I would say that the relationship between studios and networks has always been that of a frenemy. Everyone is doing some version of it already. They just have to make a decision for their companies, their brands and their shareholders on how to best optimize the content. We started making original content five years ago, betting this would happen,” said Sarandos.

However, Sarandos could not hide his pessimism that the trend of studios slashing their ties with Netflix is destined to continue.

Netflix is battling hard to negotiate a deal to retain licensing deals for the Star Wars franchise – probably the crown jewels of Disney’s entire portfolio. Disney would certainly get a pretty penny if a deal is struck with Netflix, but if it were to do so, we can’t help feeling it would be a show of weakness from Disney.

The long awaited ESPN streaming service has a better chance of success than Disney’s own answer to Netflix, but ESPN’s digital transformation has come at the cost of 100 jobs and 5 million subscribers in the past two years.

As capable as BAMTech’s technology may be, Disney has a history of failed projects, including revealing Uplynk, now part of Verizon, as an OTT service in 2013, plus a handful of online gaming projects which crashed and burned, and not to mention its stubborn efforts to enter the hardware game, which also failed.

This is why Disney should continue focusing on signing more distribution deals with the established online platforms to open up as many routes to market as possible, both on home turf and overseas, before throwing ESPN in at the deep end. Perhaps the two most forward thinking business moves Disney has ever made have been to partner directly with Netflix and work with Alibaba in China.

In a surprise move, Netflix hit back at Disney by luring TV writer and producer Shonda Rhimes away from Disney’s ABC, who has produced hits including ABC’s most successful show to date, Grey’s Anatomy. Rhimes has signed a multi-year contract with Netflix to end her 15 year stint at ABC, reportedly valued at $10 million a year. Sarandos is a big fan, describing Rhimes as “one of the greatest storytellers in the history of television.”

Once the initial dust storm settled, analysts seem to come around to the idea that the news doesn’t spell doom and gloom for Netflix after all. A survey from investment bank Piper Jaffray found that just 20% of Netflix subscribers in the US spend over 10% of their streaming time watching Disney content, according to 500 respondents.

“We expect almost none of the remaining 80% of subscribers would consider canceling due to the loss of Disney, and even for the 20% heavier Disney viewers, most are unlikely to cancel unless Disney accounts for a large portion (more than 40%) of their Netflix viewing time (which another survey we ran showed was less than 5% of subs,” said Piper Jaffray analysts.

Disney should have tried to acquire Netflix a long time ago, instead it has made a huge error of judgment by fueling the service from a little known DVD rental firm to becoming an ever more viable competitor, with a market cap exceeding $75 billion.