Netflix (NFLX 5.54%) has built an impressive audience of 104.2 million subscribers around the world. That's a number that exceeds the size of the entire traditional pay-television audience in the United States by about 12 million customers.
To get to that number, of course, the company has spent dearly building up its library of original content as well as licensing shows and movies from other creators. That's an expense that's been rising, moving from $2.4 billion in 2013 to a planned $6 billion in 2017.
In addition, that number is unlikely to come down soon. The company has to keep creating content specific to the various global markets it serves as well as content that plays globally. That demand will be driven higher as Disney (DIS 0.17%) launches its own streaming service built around its incredibly deep library of content and its unprecedented catalog of intellectual property.
Originals are key
Netflix does break down what exactly what percentage of if content spend goes to original programming and what gets spent on licensing content from other producers. It's clear, however, from the company's Q3 letter to shareholders that the mix is shifting toward original content that it owns in perpetuity.
Our future largely lies in exclusive original content that drives both excitement around Netflix and enormous viewing satisfaction for our global membershipand its wide variety of tastes. Our investment in Netflix originals is over a quarter of our total P&L content budget in 2017 and will continue to grow.
Owning its own content was made more important when Disney decided to pull its content from Netflix and make a go of it on its own. That move showed the streaming leader that licensing is a vulnerable model in which if the company lost enough partners it could lose relevancy.
Don't fear Disney
Disney has an impressive array of content, including Marvel, Pixar, Star Wars, and its own animated classics, among many others. That makes it the one company that can, from launch, offer a service as compelling as Netflix's.
That may seem like a threat to the streaming leader, but it will also be a boon. Disney's service will probably be the kick in the pants many families need to drop their cable subscription. Many of those cord cutters will almost certainly add Netflix along with Disney's service.
Of course, there will be some frugal consumers who use Netflix for a month, then switch to Disney, but the numbers there will be small. Both companies will offer premium, high-value products offering shows for all ages. In most cases, that should lead consumers -- cord cutters especially -- to get both.
Netflix will be fine
Disney's entry into the market may be bad for some second-tier streaming services, but probably not Netflix. Of the 62% of American households that pay for a streaming video service, over half of those have more than one, according to a report from Leichtman Research Group.
Those numbers will climb as more consumers view streaming as an alternative to traditional pay television rather than an addition to it. As that happens, consumers will piece together their own packages, which will, in many cases, use Netflix and Disney's service, along with a live-streaming skinny bundle such as DISH Networks' Sling TV to replace cable.
Netflix has built up enough must-watch content to lure in new subscribers, and there's no reason to believe it won't be able to keep producing shows its membership wants to watch. Disney is a competitor, but it's one of the very few that can even claim to rival Netflix.
Having a new rival may force more of the company's budget into originals, but that's where it was headed anyway. Each new Netflix hit or niche success becomes a way for the company to retain or attract customers. That's expensive, but it also has a very long trailing value that should keep the company moving forward for decades or longer.