Disney and Netflix Are Joining Together at Last

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Disney's (NYSE: DIS  )  fourth quarter conference call started like any other. The call opened with the boring process of the operator turning it over to Lowell Singer, Senior Vice President of Investor Relations, who then passed it onto Robert Iger, President and CEO of Disney. Iger began by remarking that he and the Disney team are pleased with the company's performance in the fourth quarter, noting that net income rose 12% year-over-year on the back of growth in the interactive, consumer products, and parks and resorts segments, while revenue was up 7%.

As I settled in for the one hour marathon that lay ahead, I could already start to feel my eye-lids drooping, anticipating only further formalities until the Q&A segment's arrival. Then Iger woke me up with a startling statement as he said, "We're also making two other important announcements today."

The first: Disney has set the official release date for Star Wars Episode VII as December 18, 2015. This neither surprised nor excited me. Rumors had already made it pretty clear that Disney looks to roll out another Star Wars movie sometime in the 2015-2016 range. An official date doesn't change the fact that the release is still a good two years down the road. 

The second announcement: an "unprecedented" deal in which Disney will create several live-action series and a mini-series event exclusively for Netflix (NASDAQ: NFLX  ) beginning in 2015. In association with ABC Television Studios, Marvel TV will develop four specialized programs, featuring the Marvel characters Daredevil, Jessica Jones, Iron Fist, and Luke Cage. This programming will span over multiple years and culminate in a Marvel's The Defenders mini-series event which will reimagine "the dream team of heroic characters." 

As soon as I heard this I wondered why Disney would team up with Netflix instead of just running these shows on its own networks. Alexia Quadrani of JPMorgan had the same question, and asked just this during the Q&A session. Iger responded, in essence, by saying that Disney already produces Marvel shows which the company runs on its ABC and Disney X.D. networks. With too many of these shows, Disney was forced to look for a different platform and Netflix won out. 

Just before the conference call, Iger made an appearance on CNBC. Iger responded to questions from Maria Bartiromo as to why Disney would pair up with Netflix by saying Netflix is a great platform where Disney can distribute its products. He also added that Netflix is paying Disney nicely for the product it has to offer.

Netflix & Disney are enemies, right?
Shouldn't Netflix and Disney, and all content providers in general, be enemies? Netflix undercuts the value of Disney's content. Why would someone pay for expensive cable TV or go to the movies where they have to pay $10 for a box of candy when they could pay $7.99 for an entire month and watch similar content and original programming in their own home. However, when you think about it, is this really a bad move?

Iger made a good point when he said ABC and the other networks may not be able to handle any more Marvel. While one or two shows is fine, consumers who do not necessarily like Marvel would not appreciate having a Marvel show on every night. If Iger is right, Disney will get paid handsomely for its work and it will nearly be guaranteed a profit.

For Netflix this deal is a big score. If these series perform anything like the Avenger movies did, millions will flock to Netflix to watch these series, in turn driving growth.

The Foolish takeaway
Disney has ventured into uncharted territory by striking a deal with Netflix to produce exclusive content. While you may be quick to criticize Disney for its decision, when you look at the big picture Netflix is just another way for Disney to grow and capitalize on its flourishing Marvel business. For Netflix, this is a major victory. Like always, the devil is in the details, as just how much Netflix is paying Disney for this content has not yet been disclosed.   

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