Families with young children will subscribe to Disney's service almost guaranteed, and since a few years ago Disney has enough content for the parents, too. Why pay for two or three streaming services? Maybe Disney is enough. Disney's portfolio will also not shrink like Netflix' does often due to expiring licensing contracts but steadily extend over time.
Netflix might grow like crazy currently but they are massively in debt due to their movie making and their startup-like growth will eventually stop. As a Netflix subscriber I wish them the very best but I really, really hope they are aware of Disney and will be able to keep up.
Disney movies are just the top of the funnel that feeds revenue into their theme parks, dvd sales, television stations, and soon their streaming service.
By the time a movie gets to their streaming service, it has already made millions from the theatrical release. By the time a TV show gets there, it's already made money from advertising on TV. The streaming service doesn't have to find its own content or buy it from someone else like Netflix does.
http://money.cnn.com/2017/12/14/media/disney-fox-deal/index....
An acquisition like that might be as likely to throw Disney into chaos as anything and give Netflix a leg up on stealing market share, given the corporate history of very large acquisitions.
That also of course depends on what the Netflix growth profile looks like over time as well.
For example, does Netflix routinely still generate 15%-20% annual growth after they're up over $20 billion in sales? If so, there's nothing Disney can do to stay with them short of continuing to buy up the rest of the entertainment universe.
The global subscriber momentum Netflix has now is incredible. By the time Disney figures out exactly how all of their streaming pieces are going to fit together, Netflix might be up to 250 million global subscribers.
> Apples to apples in terms of where they compete, Netflix will be comparable to or larger than Disney in size in 2018 or 2019.
For share of streaming wallet yes; but they hover at only about 5% of net income. So Disney doesn't need to be anywhere near the subscriber amount to reinvest heavily in content and acquisition. Also - Netflix has the US mostly saturated so they have to create or sign content for the various international markets. While Disney already has great content with global appeal.
That's not quite the context. Netflix is rapidly growing sales and plowing its potential income into content expansion.
Disney has zero sales growth, with a large traditional investor base that expects profits to at a minimum not contract. That traditional investor base holds Disney to a particular standard that Netflix doesn't have to suffer (for now). Disney can't reinvest any more of their existing sales & profit toward content creation without subtracting from the profit figure they report. If they do that at any meaningful scale, the stock will crater.
Disney's situation is actually even worse than that, as the erosion of cable is eating into their solidly profitable TV business (especially ESPN). So they're facing a declining context on sales, profit and margin, and they can't afford to redirect a meaningful share of their existing profit.
Simply put, right now Disney has no sales growth to direct at new content investment. They have existing profit that is already allocated to placating investors that expect the net income statement to look great and expect the dividend to remain or increase. This is why Disney is looking to spend a vast sum to buy business expansion with Fox, to perhaps placate shareholders a while longer (how long will they tolerate zero growth otherwise?).
Netflix gets to operate on different terms of shareholder expectations than what Disney does.
Otherwise, Netflix would have a market cap about 90%-95% lower than it is right now, if Netflix (~220 PE) were being judged on a more near-term profit basis as Disney is (~14-15 PE). It's the exact same growth expectation benefit that is being given to Amazon ($3b net income) vs Walmart (~$14b net income).
Netflix is approaching - or already larger than - the size of Disney's comparable entertainment business, and Netflix is growing relatively fast whereas Disney's business isn't growing much or at all.
Disney's studio division does $8.3 billion in sales. Their media networks arm, which includes ABC & ESPN, does $23 billion.
Netflix will hit ~$14-$15 billion in sales this year. Apples to apples in terms of where they compete, Netflix will be comparable to or larger than Disney in size in 2018 or 2019.
Five years from now Disney isn't likely to be much larger than they are today (just look at their growth the last few years, flat to minimum). Netflix will very likely be over $25 billion in sales at that point (which would plausibly be larger than Disney's largest business, the media networks group).
At the scale Netflix has reached, every dollar of new growth that Netflix is obtaining is taking some bit of revenue away from Disney. Disney is going to mostly cannabilize themselves in switching to their own streaming service, including the mess at ESPN (the end of the hyper lucrative, subsidized cable & satellite subscribers that have been artificially fattening Disney's entertainment wallet for years).
Disney is mostly in a scenario of attempting to hold their ground. The same place Walmart is in with Amazon and for the exact same reason (minimum overall market expansion, low consumer spending growth across the developed world, while the new competitor is starting to eat your existing house).
Interestingly another similarity between those situations: Amazon is willing to compete at near zero profit generation in retail to pursue sales growth, which is brutal to an established giant like Walmart who has a huge investor base that expects them to generate considerable profits every year. Walmart can't just drop their profits dramatically to compete, their stock would implode. Disney is facing the same storm: Netflix operates at a level of minimal profit (~4%-5% net income margins), whereas Disney's long-established shareholders expect rich profits and a dividend (Disney typically sees 10%-20% margins in their entertainment groups, with a 16% overall net income margin). Netflix is willing to plow almost every dollar back into content production and licensing, and their shareholders cheer that on so long as the top-line growth continues.