The king is dead, long live the king.
It’s been a busy few months for streaming and entertainment in general, but the long and the short of it is that for Netflix (NASDAQ: NFLX) it’s a summer difficult times, while for Disney (NYSE: DIS) it was much more profitable.
And yet, it seems like a surprise to most people, even though the writing has been on the wall for months…the problem is that some people just didn’t want to see it.
Now that it’s clear Disney is in the catbird seat, maybe it’s time to take a closer look and realize that’s a position it doesn’t intend to take. give up anytime soon…and the sooner investors realize this, the more money they can save.
First, as always, a little background.
Disney had been on its way to catching Netflix faster than expected for a while, but hit a barrier it never should have been.
This barrier is one that Netflix knows very well… revenue.
Disney’s earnings a few quarters ago showed a slowdown in streaming subscribers and the investment community collectively lost their minds. It felt like the world was ending because Disney pulled in a few million fewer new subs than expected.
And that forgets that CEO Bob Chapek basically had warned it happened a few weeks before at an investment conference AND that the service itself had been a cash cow since “go”.
Remember that Disney as a business has been successful for a while without the influx of revenue from streaming so having what amounts to about $1 billion+ extra money about every two months only adds to an already well-oiled machine.
Yet after Netflix released a shortfall, that disclosure sent the media into a frenzy and the sky was falling on streaming as a whole. Regardless of whether other streamers were posting earnings, Netflix and Disney’s “failure” tale was too good to pass up.
Then Disney bounced back and did it in a way that calmed even the most jaded analysts. The company’s most recent results showing a influx of 8 million subscribers, which, combined with the aforementioned continued success of other streamers, has taken Netflix from the center of the universe to an outlier.
Funny how fast that happens, isn’t it?
But still many are watching streaming and predicting a bubble burst similar to the dotcom and housing meltdowns of years past. I’m not saying we won’t get there, but we’re not there yet and it’s important to note why.
Netflix hasn’t slipped because there’s a problem with streaming in general.
Netflix slipped because it has an internal issue around streaming in general.
Business problems are largely self-inflicted and most stem from overspending…whether on content or number of people, it burns a ton of money. He also kept the “if it ain’t broke…” mantra for years, even when something was actually broken.
Being reluctant to try anything new – which is surprising after setting the bar high by trying something new in the first place – turned out to be a major Achilles heel. Netflix refused to abandon the batch/binge model, do anything live (including sports) or add an ad-supported option, all of which were things that had helped rivals win over them.
Now that the emperor’s missing wardrobe is visible, you see the ad level accelerated and some LIVE options teased …yet they are still firmly behind the all-in-one model. Dropping or changing this method would significantly extend the life of Netflix’s content and reduce the amount it is forced to spend per quarter.
Although there may be hope, as a new report from Bloomberg indicates that Netflix may (finally) be moving towards releasing its movies FIRST for a widened period of time. The day/date technique long decried by cinemas could be on the way out.
It’s really no surprise either, because with the amount of money Netflix has spent on original content they need to ensure a return to shareholders. Knives out is a prime example as the streamer spent $400 million securing the rights to the franchise and two sequels. The Mystery is one of the films that would be considered to hit theaters with a 45-day exclusivity window.
The whole thing is fascinating because it represents a complete about-face and really puts into perspective just how far Netflix has fallen. Yet it also makes sense because the pandemic has forced studios and theaters to revamp their policies.
What we learned is that the previous 60-90 window was no longer necessary and audiences will pay to be the “first” to see something if the content is deemed “worth it” to them. Once, studios saw that they were more open to playing ball with theaters because now they could double their revenue.
Encanto is a great example. The Disney movie had a solid theatrical run from Thanksgiving with nearly $100 million in revenue. It then moved to Disney+ around Christmas and continued to take off and grow in popularity. The amount of money it was “leaving on the table” by expanding out of theaters wasn’t much in the grand scheme and Disney likely clawed it all back (and then some) through subscription fees.
What’s also lost in conversation is the one move that I’m personally surprised Netflix has lagged behind – expansion. The main reason Netflix’s rivals are successful is that they aren’t JUST streaming companies. This is important because it means that when one division of a business (i.e. streaming) has a bad quarter for whatever reason, the others pick up the slack.
That’s what happened with Disney.
When he missed the stream, top investors and analysts were quick to point out that his parks division was up 99%.
That’s something Netflix can’t indicate, so when the company misses – it misses hard.
Netflix isn’t coming back anytime soon…it’s Netflix, so yeah, it’ll probably right the ship eventually, but it won’t be an overnight fix. So in the meantime we have two options, we can either continue to view Netflix as a North Star and have a debate about whether streaming has an identity crisis every quarter OR we can look at companies like Disney that are more comprehensive.
Disney’s streaming game isn’t just Disney+, but also Hulu and ESPN+ and that’s in addition to several linear channels that are all powered by the same vast content pipeline. There’s a lot to do and that rings true for its cinema, parks and consumer products divisions.
It is a versatile company that has been playing the synergy game for years.
Netflix’s reliance on sticking to the model it created and its slowness to adapt has held it back and dragged the industry down. Netflix may still be a powerhouse, but it’s no longer the center of the streaming universe.
Once we accept this shift, expect to see a similar change of pace in the industry and perhaps finally some stability.