Netflix reacted to this news with a decrease in share value after a large amount of media attention. How serious this news item is though is a matter of intense speculation. This is my take on the issue.
First, in 2016, Netflix saw almost all of its subscription growth come internationally. Their license with Disney is only for the U.S., meaning it will have no effect on international subscriptions which has been its largest form of revenue growth. In 2016, Netflix grew 47% internationally while only growing 10% domestically.
Second, Netflix has been very open about its plan to grow subscriptions through original content. The CEO has stated that they would like as much as a 50% of its content to be original and has promised to spend $6 billion on content in 2017, tripling its budget for original content from 2016.
In conclusion, by itself, Netflix losing Disney does not slow down its long term growth strategy, nor will it have a huge impact on overall subscription growth. However, Disney may be starting a trend that will ultimately cripple the streaming giant.
By leaving Netflix, Disney is adopting a strategy of disintermediation, or “cutting out the middleman”. Disney is betting that it doesn’t need Netflix in order to successfully sell content to consumers via its own streaming service. If it is successful, and able to benefit from this decision financially, it would not surprise me to see other large studios also leave Netflix for another more direct to customer streaming option.
One reason that this hasn’t happened in the past is due to the diversity in programming that Netflix has offered. Consumers don’t want access to just one kind of movie, they want access to a wide variety. Netflix has profited from this by licensing wide varieties of pre-made content and offering it all in one place.
Recent trends suggest that this strategy is no longer viable.
For example, streaming giants Amazon (NASDAQ: AMZN) and Netflix have both substantially increased their budgets for original content. Amazon has nearly doubled its budget to $4.5 billion and Netflix has increased its budget to $6 billion. This is not all being spent on original content, but both companies have claimed they will be doubling or tripling their original content over the next year or two. They are betting on original content to be a significant catalyst for their growth in the future. This is because growing through content licensing is extremely difficult. Studios are able to continually raise their prices keeping profits from growing. The studios have all of the leverage because they own all of the content.
By creating original content, streaming giants are trying to decrease their need for licensing and the continually rising costs it provides. They are trying to become their own supplier.
This is illustrated by the decreasing size of Netflix’s content library. Since 2012, Netflix’s content library has decreased by roughly 40%.
I believe that this is also illustrated by Disney’s recent decision to leave Netflix and start its own streaming service. Disney recognizes, like Amazon and Netflix, that original content is the future. As Netflix’s library continues to shrink, Netflix becomes just another production company competing against a bevy of more experienced and more successful production companies.
What Netflix has going for it, is that it is very popular company with a wide reach. It revolutionized the way that people watch TV and continues to push itself to grow. In order to stay competitive it needs to find a way to differentiate itself from other content producers. As its library shrinks and its number of competitors increase it needs to find another way to stand out.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.