Disney’s announcement that it plans to launch its own direct-to-consumer streaming service for its Disney and Pixar films in 2019 stands to hurt Netflix, although to what degree remains to be seen, according to analysts.
In launching the Disney-branded service, Disney will end its distribution deal with Netflix for the subscription streaming of new releases starting with the studio’s slate of titles that will be released theatrically in 2019, including “Toy Story 4,” a live action version of “The Lion King” and its “Frozen” sequel, Disney CEO Robert Iger told analysts in an earnings call Aug. 8.
The Disney-branded over-the-top (OTT) service, as well as the expanded ESPN-branded direct-to-consumer streaming service also announced by Disney, appear to “mostly target customers who are already paying” for that content – from Netflix in the case of Disney studio content, Pivotal Research Group analyst Brian Wieser said in a research note Aug. 9. He added that, on that basis, the Disney services “appear … to be cannibalistic.” Wieser didn’t immediately respond to a request for comment on how much he expected Netflix specifically to be impacted.
But Wedbush Securities analyst Michael Pachter projected that it could be a significant amount. “I think that the exposure is probably around 10% of domestic subscribers” to Netflix, he told the Media & Entertainment Services Alliance (MESA) by email Aug. 9, adding Disney content overall represented about 25-30% of domestic Netflix consumption, and if Disney decides to pull all of its content, that “will have a more material impact on Netflix.”
It remains to be seen if Disney will pull its other content from Netflix also. “Let’s see how this progresses, but my best guess is that Netflix loses 5 million subscribers over time,” Pachter said.
On Disney’s earnings call, Iger said the “disposition” of Disney’s Marvel and “Star Wars” films was “not determined yet.” He told analysts there was “a discussion internally about how best to bring them to the consumer.” While it was “possible we’ll continue to license them” to Netflix, it was “premature to say exactly what we will do,” he said. One possibility includes separate proprietary Marvel and “Star Wars” services, but he said, “we’re mindful of the volume of product that would go into those services, and we want to be careful about that.”
Iger went on to say: “We’ve also thought about including Marvel and ‘Star Wars’ as part of the Disney-branded service,” but “we want to be mindful of the ‘Star Wars’ fan and the Marvel fan and to what extent those fans are either overlapped with Disney fans or they’re completely basically separate or incremental to Disney fans.” For now, the other Disney and Pixar movies will “definitely” be part of Disney’s coming streaming service and “not be part of any other pay window distributor” in the U.S., he said, adding its plans for Marvel and “Star Wars” movies will be announced later.
Netflix currently streams several original series based on Marvel comic properties (“Daredevil,” “Jessica Jones,” “Luke Cage” and “Iron Fist,” with “The Defenders” and “The Punisher” in the pipeline). “Those are most likely under contract and Netflix can renew until they have run their course,” Pachter said, adding “other shows based in the Marvel universe that have yet to be produced will likely end up on the new Disney service.”
What also remains to be seen is whether other Hollywood studios will follow Disney and pull their own movies and shows from Netflix to launch their own similar streaming services. “It’s hard to know what others will do, but I think that CBS, with its own standalone service, is the most likely to consider pulling its content and favoring its proprietary service,” Pachter said.
Netflix shares were down 2.42% at $174.04 in afternoon trading Aug. 9. After Disney’s announcement, Netflix issued a statement saying U.S. Netflix members “will have access to Disney films on the service through the end of 2019, including all new films that are shown theatrically through the end of 2018.” It added: “We continue to do business with the Walt Disney Company on many fronts, including our ongoing relationship with Marvel TV.”
“Strategically, establishing a direct to consumer relationship is a good thing for Disney in particular and media owners in general,” Pivotal’s Wieser said in his research note. But Disney shares were down 4.82% at $101.82 in afternoon trading Aug. 9.
Revenue for Disney’s third quarter (ended July 1) dipped to $14.24 billion from $14.28 billion a year ago, while profit slipped to $2.4 billion ($1.51 a share) from $2.6 billion ($1.59 a share). Studio Entertainment revenue fell to $2.4 billion from $2.8 billion because of the tough comparison Disney faced this time with its slate of movies compared to last year, while Media Networks revenue dipped to $5.87 billion from $5.91 billion.
Once again, the latter division was hurt by Cable Networks, where sales fell 3% to $4.1 billion and operating income dropped 23% to $1.5 billion behind what Disney said included higher programming costs and lower ad revenue at ESPN. Broadcasting revenue grew 4% to $1.8 billion, but operating income fell 22% to $253 million due to factors including weaker ad sales.
In reaction to the challenges being faced by Disney as consumers continue to increasingly shift away from linear TV viewing, the company’s latest streaming service moves are part of what Iger said on the call was a “major strategic shift in the way we distribute our content.” He called its efforts an “important logical way for us to take advantage of the combination of our strong brands with the technological evolution the entire media business is undergoing,” telling analysts: “It’s been clear to us for a while with the future of this industry will be forged by direct relationships between content creators and consumers.”
Disney last year acquired a major stake in streaming technology company BAMTech and it’s now “investing an additional $1.6 billion to increase our stake from 33% to 75% and acquire control of the company,” Iger said. The move “gives us immediate access to the team and the technology we need to deliver the highest quality direct-to-consumer experience, which ultimately gives us much greater control of our own destiny in a rapidly changing market,” he said.
BAMTech’s direct-to-consumer streaming technology will be used for both the ESPN and Disney streaming services, with the former expected to launch in early 2018 with access to approximately 10,000 live events each year. The Disney service, launching in 2019, expects to have feature films and content from Disney Channel, Disney Junior and Disney XD.