Netflix-Disney Deal: Analysts Expect Wider Industry Effects

Netflix and Walt Disney this week drew headlines with a new licensing deal that will bring Disney movies exclusively to the streaming video service beginning with the studio's 2016 slate.

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While much discussion has focused on the agreement's effect on the companies and Starz, which currently has a Disney output deal, Wall Street observers say it could also have a big impact on the broader pay TV and premium TV sector and the cord cutting debate.

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Davenport & Co. analyst Michael Morris highlighted that the arrangement cuts out a traditional premium TV service carried by pay TV operators to provide content to an online service. "Disney makes the call that a stronger Netflix will not disproportionately fuel cord cutting, monetization of library film content will have to be bolstered by a streaming partner and traditional pay TV output deals are now the domain of streaming providers in addition to premium networks (HBO, Showtime, Starz)," he said.

As a result, premium networks, once focused on providing a wide selection of films, will likely further sharpen their focus on original series. "In case it wasn’t previously clear, premium networks are likely to sink or swim almost exclusively as a function of demand for their original content," Morris said. "Premium networks no longer have a lock on the traditional 'pay TV window'."

In terms of cord cutting, or consumers abandoning pay TV services in favor of online video, the deal could provide some risk, according to the analyst. "Disney has a lot to lose if cord cutting were to accelerate," Morris said, highlighting that the company generates more than $8 billion in high-margin affiliate fee revenue in the U.S. alone. "We see risk to Disney should a service like Netflix reaching a critical mass of content that would drive incremental cord cutting."

Content companies could also see ripple effects from the deal as their current Netflix licensing deals, which have provided new revenue and profits, could well expire without renewals over the coming years. "Netflix will have incremental information on what is actually being viewed and will be better positioned to allocate scarce resources to the most important content," Morris said. "This may mean declines in library TV in exchange for an increased premium in feature film."

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Janney Montgomery Scott analyst Tony Wible also cited possible effects on other industry revenue streams, including at Disney itself. "We see the risk of possible cannibalization of catalog DVD sales and of the core TV network revenue," he said. "There is growing evidence that streaming is hurting TV ratings, which could eat into Disney's largest source of profit."

While many have lauded the high price tag that Disney is getting in the Netflix deal, Lazard Capital analyst Barton Crockett said the higher digital revenue may simply offset lower DVD sales. "So we assume no change to earnings, with Disney gaining by keeping its brand in front of kids on Netflix," he said.