Netflix, Disney and Cable

I have been away for a few weeks with somewhat limited access to e-mail and some of my normal business news sources. Opening up the mail last night, I found a number of statements about the state of the media world. Those that I can repeat included:

“Netflix is toast. Disney’s moves will take a few years but Netflix will be crushed.”

“Say goodnight, Comcast and Time Warner. AT&T’s purchase of Time Warner will prove to be one of the biggest blunders in American business history.”

“A freestanding ESPN is going to drag cable down, down, down.”

“Disney does not get it. They clearly have no idea how hard it is to start a streaming service from scratch.”


What is all the hysteria about? On August 8th, Disney Company CEO Bob Iger announced several things. First, Disney will end its partnership with Netflix in 2019. After that, Disney content will not be found on Netflix. Also, Disney will launch it own streaming service in 2019 which will be the only place where one can watch new Disney material including action and animation. Content from the Disney Channel, Disney Jr. and Disney XD will be available on this entity as well.

Separately, ESPN, a Disney property, will begin a streaming service in 2018. It will feature 10,000 events a year including much live programming. Simultaneous to both announcements, Disney revealed that they will have a majority stake in BamTech, which is a significant streaming as well as marketing service.

So, the Disney changes are what precipitated the four quotes that I received from Media Realism readers and friends. Are the above comments correct? What is going to happen?

Here is my quick take on what appears to be going on:

1) Over the last couple of years, ESPN, until recently, a spectacular cash cow for Disney, has been struggling a bit. They were bidding up the rights fees for various sports properties which they were trying to pass on to advertisers. As more people cut the cable cord and young people used many online properties to get sports news, ratings began to sag a bit. ESPN, in a belt tightening move, laid off a number of on air personalities, some of whom were making seven figures in compensation.

2) For years, many pundits were saying that a large group of people ONLY were cable subscribers to obtain ESPN and its sister channels. If ESPN went freestanding, Disney could earn more money than now. Anecdotally, a number of young men in their 20’s told me that they would definitely dump cable if they could receive all ESPN platforms on line for $15-18 per month.

3) Cable has definitely lost some penetration in the recent past due to cord cutting and cord-nevers. As part of an experiment, I used Netflix, You Tube and Apple TV as a surrogate for a cable subscription about 18 months ago and had 95% of my video needs met admirably.

4) Netflix—the August 19th edition of BARRON’s, a Dow Jones publication, cautioned stock investors about Netflix. It is selling for over 200 times earnings, has high debt and, as they put it, are a “hit renter” rather than a “hit owner.” It would require them to spend massive amounts on content to keep growing. The author suggested that with such a high market cap they could easily float some new shares to either pay down debt or finance new programming. I agree but have a different take on Netflix than most. Several years back, I thought that Netflix had arguably the best business model that I have ever seen (Single exception! I grew up outside Providence, RI so the mob may have had a better one in the 1950-70’s given the high cash nature of their business interests). To me, as a consumer, Netflix is an outstanding product. I absolutely love it. As an old movie buff, I have over 100,000 films to choose from and also their made for Netflix properties, a few owned and others rented which are often of excellent quality. The pricing to me is a steal. Consumers these days are sensitive to price increases so they may have to move subscription rates up slowly. Outside of the US growth is still fairly strong and they now have an eye popping 100 million + subscriber base. My problem is that movie making and TV shows are generally a pretty crappy business. Over my active media career, I tracked that 72% of new televisions shows were cancelled in the first year (I would assume that today a similar statistic would be operative). And, most films lose money. So, Netflix had a wonderful model but now that they have become a programmer they have added a lot to their risk exposure. Also, people tend to forget a vital thing about Netflix growth. For years, they were competing against hapless Blockbuster. I am certain that in the future, the Harvard and Wharton MBA programs will be using Blockbuster as a preeminent case study on how NOT to run things. Netflix shrewdly hopped on the digital train as it left the station and Blockbuster continued to build brick and mortar stores as one new CEO replaced another. Blockbuster also refused to consider a bid to buy a substantial hunk of Netflix went Reed Hastings (founder of Netflix) went to them hat in hand.  Also, Netflix is now facing direct competition from Amazon Video and will soon have another deep pocketed competitor in Facebook. And, do not forget that Alphabet (Google) has a sleeping giant in YouTube if they choose to get in the mix in a much bigger way.

So, what is going to happen over the next 36-48 months? I do not know and anyone who tells you they do is as sensible as those talking heads that I see on CNBC or Bloomberg telling you precisely what is going to happen to the Dow Jones Industrial Average over the coming week. Clearly, while no one knows how the media merry-go-round is going to develop, there is certain to be some upheaval. Disney has content and Comcast and Time Warner (likely to soon become AT&T) have both scale and buying power. Netflix has consumer preference but not the deep pockets of a Facebook or Alphabet. So, on balance, I would have to say that Netflix which I love as a consumer may well be the most vulnerable when I look at it unemotionally as a media analyst.

Frederick the Great of Prussia once famously said that “God is on the side of the big battalions.” Directionally, that is where my bet would be as well for 21st century media.

If you would like to contact Don Cole directly, you may reach him at doncolemedia.blogspot.com or leave a message on the blog.