Equity Research Analyst
While Disney reported its fourth quarter earnings on Tuesday evening, the real focus for investors is its upcoming battle with Netflix. Having seen the decline of traditional television, Disney is launching its own ‘over-the-top’ internet television service labelled Disney+, on which it will host its own content on an exclusive basis.
Any company competing with Netflix needs three things:
Disney certainly has a strong brand, and has been thinking about how to compete with Netflix on the latter two categories. Its acquisition of 21st Century Fox helped to buttress its content library, giving it an increased range of content – both to offer to potential subscribers and to remove from Netflix.
Disney also bought a minority stake in BAMTech (a specialist technology streaming company) in 2016, giving it the ability to offer a service like Netflix. It recently increased that stake to 75%, and has the option to acquire the remainder of the company before 2020.
It seems unlikely that Netflix will be immediately concerned however. Disney’s strategy has been clear for some time, and 2019 marks a long-awaited contest between the two companies, rather than a sudden ambush.
Netflix also has a large head start. It has more than 130m subscribers worldwide, with this figure growing by around 25% a year. In contrast, Disney’s new service is predicted to have only 5m subscribers by the end of its first year. Initial estimates are for that to stand at around 50m after five years, though such a figure is by no means guaranteed.
The immediate problem for Netflix will be the content it loses. Disney owns the rights to iconic films like Star Wars, as well as the output from studios such as Marvel and Pixar which will be removed in 2019. But Disney will undoubtedly suffer in the short term from not offering its content to Netflix. It’s estimated to earn several hundred millions dollars from licensing content to the streaming site, and it is pulling content from other platforms too.
Whether Netflix will miss Disney’s content is far from certain. It spent $12bn on content in 2018, and has budgeted £15bn for 2019. While that is the total global production budget, it still represents more than the combined BBC Licence Fee and total UK television advertising spend.
In the short term, Disney will focus on getting its Disney + service up and running. Management will also need to navigate carefully with investors around its new strategy, with the first demonstration of Disney+ taking place on April 11. Disney is likely to see a short-term dip in earnings over the next two to three years, as it continues to invest in and market its new service, and licensing revenues are impact by the strategic decision to pull content from rivals like Netflix. While the company currently has stable earnings, the share price could suffer if downgrades come through.
To counter this, management will need to persuade investors why they should look through an earnings depression and value the potential of Disney+. Any missteps, either on the communication front or the execution of its new strategy, could see the share price punished. Over the next year, expect investors to remain focused on subscriber growth for Disney+, and how much Disney can charge for the service.
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