How Disney's Plan to Pull Movies Could Impact Netflix

Bob Iger and Reed Hastings - Split - Getty - H 2017
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The conglomerate's dramatic move accelerates the need for the streaming company to own its own content. "The fairy tale has an unhappy ending," one analyst says.

Disney’s bombshell Tuesday announcement to yank its movies from Netflix in 2019 is a shot across the bow, and Hollywood is paying close attention to the giant subscription company’s counterattack.

With all its moves into original programming with titles like Orange Is the New Black and House of Cards, Netflix is still wildly dependent on the movies and TV shows it licenses from the major entertainment companies, some of which could follow Disney’s lead and cut Netflix off. At the least, they’ll demand higher fees for their product.

“The fairy tale has an unhappy ending,” Wedbush analyst Michael Pachter said Wednesday. “Netflix is at the mercy of content owners and can only secure its future and justify its valuation if it successfully develops compelling, owned, original content.”

Netflix knows this, and its latest move to own more of what it streams, in fact, came earlier this week when it acquired Millarworld, creator of superhero franchises Wanted, Kick-Ass and Kingsman, along with about 15 others that haven’t yet been turned into movies or TV shows.

Disney ditching Netflix will coincide with the launch of the conglomerate’s own, Disney-branded streaming product. Analyst Pachter opines that Disney will eventually yank all of its content from Netflix — including ABC and Disney Channel shows — and put them on its own upcoming service.

Despite such warnings, investors are taking Disney’s move in stride, bidding shares of Netflix down just 4 percent on Wednesday, giving the company a $74 billion valuation. But Pachter told his clients on Wednesday that they should expect Netflix shares to be cut in half in the next 12 months.

Other Wall Street analysts weighing in on Wednesday weren’t quite as bearish, but it was tough to find a silver lining for Netflix after Disney’s dramatic move.

“We believe that recent Disney films, such as Zootopia, The Jungle Book, Finding Dory and Moana (among others), have been growth drivers for Netflix over the past 12 months, particularly with younger viewers,” said Jefferies analyst John Janedis.

“It arguably reduces the consumer value of Netflix, which remains the biggest strategic challenge to linear networks in the expanded basic bundle long term,” Credit Suisse analyst Omar Sheikh wrote in a report.

Speaking to Wall Street on Tuesday, Disney CEO Bob Iger wasn’t much for details about the upcoming streaming service, except that Pixar- and Disney-branded movies will be there, which means Star Wars and Marvel movies may not. Iger said those franchises might go to a Netflix competitor, or even back to Netflix for the right price, but all this could get too confusing and frustrating for both casual and die-hard fans.

Plus, Disney may need these hyper-popular titles to successfully launch a brand-new streaming service, much like CBS will be putting Star Trek: Discovery exclusively on its streaming service, CBS All Access, starting Sept. 24.

There's only a small number of Star Wars and Marvel films streaming now at Netflix, with Marvel's Captain America: Civil War and Doctor Strange joining Lucasfilm's Rogue One: A Star Wars Story. But it's worth noting these 2016 releases are among their freshest offerings, which gives the impression that after the theaters, viewers might be able to depend on seeing the films pop up on Netflix. On social media, users generally expressed displeasure with the notion of having to pay for a separate streaming service and that these titles would be leaving the streamer.

Even if Netflix manages to keep the Star Wars and Marvel movies after 2019, the loss of Disney and Pixar are enough to dent the streamer’s popularity, many are arguing. “There is no dispute, Disney and Pixar movies are fantastic collections of entertainment content. The Netflix service, or any service, is better off having them," argued Bernstein analyst Todd Juenger

But there's a counterargument, too. “There is evidence from Starz that losing Disney movie output doesn't necessarily have any visible impact on subscriber growth,” Juenger said. “Starz lost rights to Disney movie output beginning in 2016. … Since then, there has been no discernable impact on Starz subscriber acquisition, churn, or net paid subs.”

The analyst also highlighted that the end of the Disney licensing deal only affects Netflix in the U.S., “whereas the vast majority of Netflix sub growth, both near term and long term, is international.”

And Juenger noted that David Letterman announcing this week that he’ll host some shows exclusively on Netflix might be an underappreciated development.

“Six new David Letterman special episodes coming to Netflix in 2018 is a bigger ‘good guy’ for Netflix U.S. than the Disney announcement is a ‘bad guy’ — especially since Netflix will have two years to build a plan to prepare for life after Disney/Pixar output,” Juenger said. 

Morgan Stanley analyst Benjamin Swinburne, in a report titled “Imitation Is the Highest Form of Flattery,” wrote that “Disney's unique content and brand relationship have no doubt helped Netflix build its business, but we are relaxed about this loss for three reasons.”

First, he pointed out that Netflix has already seen “popular intellectual property move off its platform, recently including content from 21st Century Fox and AMC Networks, both of which shifted to the more friendly Hulu.”

Second, Netflix “has already shifted aggressively to original programming with an estimated 30 percent of its spend on originals, and about 15 percent of Netflix's content asset library reflects fully self-produced content."

Third, “this loss of Disney-branded films will not impact the service until the second half of 2019,” so Netflix “has time to keep diversifying away from key suppliers like Disney and will remain a key customer for major studios around the world.”

Aaron Couch contributed to this report.