Disney Deal Expiry Unlikely To Impact Netflix In The Long Term

by Trefis Team
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Disney recently announced that it will be pulling its content from Netflix (NASDAQ:NFLX) once its deal with Netflix expires at the end of 2018. Disney plans to launch its own streaming services for its original content, and as such will be removing its content from competing platforms. While this development could have a short-term impact on Netflix’s revenues, we believe that that the long-term impact on Netflix will be minimal, as the company has taken measures to minimize its reliance on external content providers. These measures – which include developing its own popular original content and acquiring content producers such as Millarworld – should allow Netflix to continue to lead the streaming space despite the exodus of some original content producers such as Disney.

Content Is King 

Content is one of the most important (and like the most important) differentiating factors for streaming companies. A company with varied content can not only engage a larger audience base but also retain its existing user base against growing competition. For Subscription Video on Demand (SVoD) services, content plays a pivotal role in reducing churn rates, as a rich repository of video content ensures that subscribers don’t need to leave the platform to watch what they want. Netflix has aggregated a diverse library of content that ranges from the third-party licensed movies and TV shows to its growing stable of popular original content. As part of its strategy to reduce its reliance on licensed video content, Netflix has increased its budget for original content to stay ahead of competitors such as Amazon and Hulu. The company has a long-term goal of ensuring that nearly 50% of the content streamed on its platform is original. The company plans to develop 1600 hours of original content in 2017 and has a budget of close to $6 billion for its programming slate. It is focusing on developing on a wide variety of content such as stand-up comedy,  movies, interactive shows to satisfy the diverse tastes of its global audience. Given the secular trends within the pay-TV industry, as consumers increasingly cut the cord in favor of streaming platforms, we expect Netflix’s domestic user base to grow to over 78 million by 2024.

Furthermore, over the past few years, Netflix has been able to increase the average fees paid by subscribers without any material impact on subscriber numbers, largely driven by the popularity of its original content such as Stranger Things, House Of Cards, and Orange Is The New Black. We expect that the company will be able to increase its monthly streaming subscription fees in the U.S. in the coming years, as its original content continues to grow in popularity.

Content Creator Acquisitions Can Boost Content Pipeline

In 2012, Disney and Netflix signed a deal that licensed Disney’s original TV and movie content to Netflix. However, Disney will be pulling its content from Netflix when the deal expires at the end of 2018. To help boost its future pipeline of original content, Netflix is now exploring inorganic routes. Netflix recently announced that it is acquiring comic book publisher Millarworld, which will help the company leverage the expertise of Mark Millar, whose content has been adapted into popular films such as Wanted and Kingsman. Such acquisitions will help the company to safeguard itself from any losses of third-party content deals as other content creators look to launch their own streaming services. We believe that Netflix may look to acquire other content publishers and producers in the future to further these efforts.  While this could have an adverse impact on the company’s already stressed cash flows, we expect that it would pay off for the company over the long run.

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