There's no shortage of voices egging Disney (DIS 0.26%) on to snap up Netflix (NFLX -0.67%). The latest ode comes from Bernstein analyst Todd Juenger, sending out a note that, while not explicitly endorsing a combination of the two companies, certainly doesn't seem to be against the proposed pairing.
Juenger suggests that, while Disney could possibly build up a platform that could challenge Netflix for a lot less than the streaming darling's present $50-billion market cap or the roughly $70 billion that it would require to seal a deal, Disney would still be diving into a market where Netflix is still in its way with 86.7 million subscribers -- and counting -- worldwide. It would take years and a major drag on its bottom line to achieve a shot at market leadership. Disney buying Netflix would make it the unquestionable top dog overnight.
He's right, and if all that Disney wants is to be the next Netflix, it makes more sense to be the parent company of the current Netflix. Too many tech, telco, and media juggernauts are trying on the Netflix model for size, and none of them are gaining ground on the runaway champion. Netflix is growing its reach by millions of couch potatoes with every passing quarter, padding a seemingly insurmountable lead.
However, all of the logic behind Juenger's argument and those pushing hard for a pairing of Netflix and Disney seem to overlook the downside to owning the over-the-top streaming service. It's not just a matter of what this would do to the revenue and earnings multiple of Disney shares in an all-stock transaction. There are some serious issues that would creep up for Netflix under Disney's watch that don't presently exist.
Interest of conflicts
One of the biggest advantages that Netflix has in its present state is that it's studio-agnostic. It chases down marquee content from all content creators. Will that really be true at a Disney-owned Netflix? It will try to be unbiased on the surface, but you just know that Disney-studio content will trickle into the digital vault, and the moment it gets promoted, rival studios will be up in arms.
Rival movie and television-show producers will be hesitant to license their content to a rival, knowing that it may weaken their own standing in the near term, but diminish Netflix's appeal in the long run.
Advocates of the proposed combination will argue that Comcast (CMCSA 0.95%) is already doing all of this. Comcast's NBC competes against Disney's ABC. Both companies have iconic movie studios, and their theme parks compete head-to-head in Florida, California, and Japan. Comcast has the country's leading cable-television service, so why can't Disney buy its way into the lead for premium streaming video?
Well, media giants know that they need Comcast's 22.4 million video customers to make their content investments pay off. The same can't be said for Netflix. It's gravy, but if strategy dictates that keeping content away from Netflix is the better move, it's one that's hard to question.
Disney would have to pay a lot for a Netflix, which doesn't have any reason to sell itself cheap these days. If Disney were to emerge victorious as a suitor, Netflix could be less valuable in Disney's hands. This deal just doesn't seem like it's going to happen.