• Disney announced it will pull all its movies from Netflix and launch its own direct to consumer streaming service in 2019.
• Netflix shares fell 5% in aftermarket trading on the news.
• This battle for content will determine how we watch movies and TV shows over the next decade. Find out what it means for you, Disney, Netflix and Amazon

 

This information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.

 

We wrote some months back about how owners and creators of content were going to be the winners in the new age of video on demand, live streaming and binge watching (Read it here). It appears that Disney (DIS US) believe the same thing as it announced during its latest earnings that it plans to take back more control of its own content.

Disney’s power move

Disney intends to pull all its movies (as well as its Pixar’s titles) from Netflix (NFLX US) and launch a branded Disney direct to consumer streaming service in 2019. The new streaming service will have exclusive rights to all Disney movies going forward, starting with the 2019 theatrical launches of Toy Story 4, Frozen 2 and the new Lion King as well as content from the Disney Channel library. Disney will also invest further in exclusive content (both movies and television series) for its new platform.

It will also launch a new ESPN video streaming service in early 2018, which will include live content from major league baseball, hockey and soccer as well as U.S. college sports and the Grand Slam events in tennis. The new ESPN video streaming service will cover about 10,000 live sporting events each year.

Disney will also acquire a 75% majority share in BAM Tech (the streaming service of Major League Baseball) for US$1.58 billion, in which it already owns 33%, to build out its streaming platform.

Why is Disney doing this?

Disney is attempting to address declining revenue and profitability in its core businesses, from weaker ESPN subscriptions and ad sales to a film business that still produces great content but is sharing some of those profits with streaming services such as Netflix and Amazon (AMZN US).

Strategically, it is an acknowledgement that streaming services, video on demand and changing viewing habits are fundamentally changing the entertainment and sports landscape, particularly with its impact on the pay / cable television industry.

Essentially, Disney is taking back more control of its content, which is where the most value lies and potentially setting a precedent for other major Hollywood studios to do the same.

What does this mean for Netflix?

Netflix’s shares dropped 5% in aftermarket trading on the news, with investors fearing that this signals a new era in the content wars where content owners such as major Hollywood studios will also look to restrict what they distribute to Netflix and / or potentially set up their own streaming service. Only the largest studios and best capitalised companies will have the quality of content and sufficient funds to establish their own streaming services but this could certainly signal the beginning of the disaggregation of content away from Netflix and Amazon.

This means both will have to invest further in either original content and / or pay more for premium content from other content producers to attract and retain subscribers.  With Netflix planning to spend around US$6 billion on content in 2017 and a long-term budget of US$15.7 billion, Netflix may have to invest even more in content and stretch its balance sheet even further.

Amazon does not have the same financial pressure – with more financial resources and a diversified business model with Prime subscriptions offering more than streaming video, Amazon is more than equipped to keep investing in its streaming service.

Of course, Disney’s plans for its two new streaming services are also likely to have further long-term ramifications for pay TV providers like Comcast (CMCSA US) and AT&T’s DirecTV (T US), as they continue to deal with the ongoing ‘cord-cutting’ phenomenon of consumers moving away from pay TV subscriptions and to streaming services.

Netflix has been a breath of fresh air for consumers – it has allowed viewers to watch content whenever and wherever they want and with increasingly better content as it invested more in both original and third-party content. Without its investment in original content, viewers probably would not have had the pleasure of watching Hollywood stars such as Kevin Spacey in a television series like House of Cards.

However, we have always been concerned with Netflix’s valuation (currently at 89x 2018 price / earnings ratio) and the fact that it does not have other businesses to rely on if it does not keep pace with technological changes or if competitive threats emerge such as Disney’s recent move. While it continues to execute well in growing its subscriber base, it is running on negative cashflow and will need further funding as the content war escalates.

With a current market capitalisation of US$77 billion, Netflix is roughly the same size as Time Warner (TWX US), which has a market value of US$79 billion. Time Warner owns the premium content channel, HBO and associated streaming service, HBO Now, amongst other diverse media assets. HBO has produced and owns a plethora of successful television series such as Game of Thrones, The Sopranos, The Wire and Sex and the City to name a few and is widely considered to be the content leader in this genre. With that in mind, some investors have questioned why Netflix should have the same value as HBO (and other media assets owned by Time Warner) in an era where content owners will be ultimate winners.

 

At the time of writing, the AtlasTrend Big Data Big Fund and the AtlasTrend Online Shopping Spree Fund owned shares in Amazon.com.