Disney's deal with Netflix looks like a mistake

Why break the cable/satellite model? It's profitable for the content providers and, while there are disputes over fees, the carriers aren't such a competitive threat.

By TheStreet Staff Dec 11, 2012 4:16PM

thestreet logoThe Netflix logo on a television screen © Paul Sakuma/AP PhotoBy Rocco Pendola, TheStreet

 

Even though last week's deal giving Netflix (NFLX) exclusive U.S. rights to movies from Walt Disney (DIS) Studios doesn't begin until 2016, it's a groundbreaking development.


Of course, we don't know what shape Netflix will be in three years from now, but this is big: Disney will provide first-run motion pictures to Netflix, an online streaming company, rather than the traditional premium pay-cable services like HBO or Showtime. 

 

In one respect, you can say it's all about Disney seeing the future: An on-demand world where "everybody" has Netflix streaming on their smartphones, tablets, PCs and, maybe more important, their Internet-connected television sets. Sales of televisions that link with services such as Netflix continue to increase alongside streaming players like Apple (AAPL) TV and Roku.


Netflix's arrival as a bidder for the television rights to Hollywood movies means that studios can now play the streaming-video option off against traditional pay-TV networks to extract higher fees in contract-renewal negotiations.


Big media companies such as CBS (CBS) had always bragged about padding revenue and juicing profits by licensing only leftover scraps to Netflix and Amazon.com (AMZN). In other words, the content creators were pleased to offer portions of their vast catalogs for on-demand streaming, allowing them to monetize the content through advertising or other means.

 

That started to change just a little as Netflix became a more important outlet for popular cable series such as "Mad Men." Put a notch on the bedpost for the company here -- Netflix established itself as a driver of ratings for cable. You discover past seasons of a show through your streaming plan and start watching fresh episodes as they air on cable.


But the Disney announcement takes Netflix to a whole 'nother level. If Netflix can duplicate this type of deal multiple times -- and stay solvent as they kick in -- look out.


Don't fix what ain't broken

The dust needs to settle, but, at the moment, it's a bad move by Disney. I prefer the Time Warner (TWX) approach -- do your own digital offering and, until you absolutely must open it up, make it available exclusively to cable and satellite subscribers.


Better for Disney to say something like, "Listen, we're going to put these flicks on our new premium HBO-like channel, 'Disney Movies' and you can stream them if you subscribe." Disney can make sure a new movies channel would be available to loads of households by using the ESPN franchise as leverage with the cable networks.

 

Why break this golden cable/satellite model? It's so profitable for the content providers and, while there's a petty dispute here and there over fees, the cable and satellite companies aren't complaining that much.

 

Jeff Bewkes, the chief executive at Time Warner, has the right idea with HBO GO. First, he refuses to open it up to people who do not traditionally subscribe to HBO. Second -- and this is the extra-important part -- he's doing a (very good) digital offering through his own platform. Time Warner sets itself up to be as big a digital/mobile powerhouse.

 

But Disney chooses to give the reins to Netflix. That doesn't make me as bullish as I normally am on this company and, over the long term, the stock. I feel like I have a decent handle on what they're doing at Time Warner/HBO. I would expect Disney to do the same or something similar, particularly after it took ESPN digital in much the same way that Time Warner did HBO.

 

Build a digital powerhouse. Take as much of your content inside as you can. Broadcast via your own platforms. And then sell the non-exclusive scraps to Netflix, Amazon and others, who will likely be more than willing to overpay for it.

 

I must be missing something. Or Disney made a really bad mistake. I would love to hear Bewkes' take on Disney selling the business out to Netflix. 

 

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4Comments
Dec 12, 2012 10:48AM
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Yes, this author IS missing something...Disney already tried and failed to build their own internal digital powerhouse. Link: http://disneymoviesonline.go.com/news

The other thing this author is missing is that you need to go where the audience is. Time Warner has a subscriber base of 12 million customers (although all Pay-TV numbers seem to be dropping-Link: http://arstechnica.com/gadgets/2012/08/us-homes-drop-pay-tv-as-directv-comcast-time-warner-lose-subscribers/ ) HBO has a subscriber base of 29 Million in the US alone (Link: http://en.wikipedia.org/wiki/HBO ). I would call that established, and HBO has a 35 year presence in the pay TV arena.

Enter Netflix, who has 32 Million subscribers as of 3Q 2012 (link: http://finance.yahoo.com/news/netflixs-3q-profit-slumps-y-163417206.html ). this is already larger than HBO's established user base in just 12 years of existence, and Netflix is not tethered to a landline company.

Netflix works on mobile and home sets, or desktops and laptops, on WiFi or 3G/4G/LTE networks. Netflix has one cost, no add ons, and everything is on demand, no programming schedules. As more and more people embrace tablets (as evident by the iPad/Kindle Fire/Galaxy Tab/Surface/etc. revolution in the past 2 years) less and less people will want to be tied to a company that primarily delivers content to their home.

I see this as Disney following the sage wisdom of Wayne Gretzky: "A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be." (link: http://www.brainyquote.com/quotes/authors/w/wayne_gretzky.html )

Disney is where the puck will be in 2016. "Don't fix what's not broken" (as the author suggests) sounds like the desperate pleas of the buggy whip manufacturers as the horseless carriage rumbled past.

Dec 13, 2012 4:04PM
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There are those of us who enjoy this news-- we obviously care about entertainment more than profit.  I'm glad to have all these movies available at the same $8 price point, especially since the Starz deal broke off early.

 

This author is certainly catering to a different market than Netflix and Disney fans.

Dec 13, 2012 7:36PM
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the great businessman that is rocko bendova ......hows that $100 facebook stock coming along?
Dec 12, 2012 5:02PM
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saw this morning that Red Box is going to start a subscription service.  Netflix has never impressed me with their offerings.
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