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It's Disney -- Not Apple -- That Netflix Needs to Fear the Most

By Rick Munarriz – Updated Sep 6, 2018 at 4:00PM

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Netflix stumbles on chatter of Apple Video's eventual rollout and chances for success, but its real challenger wears mouse ears.

Wednesday's biggest loser in the FANG sell-off was Netflix (NFLX 2.50%), but it wasn't just what some are describing as a market rotation out of the dot-com darlings that weighed on the 6% slide in the world's most popular premium streaming video service operator. Netflix also tumbled on reports that Apple's (AAPL 0.83%) inevitable entry into this niche could be a game-changer

Morgan Stanley analyst Katy Huberty feels that Apple Video could generate roughly $500 million in revenue next year -- not bad for a service that Apple has yet to officially announce. She also sees Apple Video cranking out $4.4 billion in annual revenue by 2025. These are big numbers, but really the only competition that Netflix investors need to concern themselves with in the near term is Walt Disney (DIS -1.83%), with its plans for a namesake streaming video service set to hit the market early next year. 

Orange Is the New Black cover art.

Image source: Netflix.

Disney invasion

Netflix isn't alone in this booming realm of digital celluloid, and that has never been a problem. It already competes with the titans of tech, as Hulu, Amazon's Prime Video, Alphabet's YouTube TV, AT&T's HBO Now, and others have more than enough financial backing to make a dent in Netflix's business -- and have failed to do so. The market is expanding at a faster pace than the competitors, making this a niche where there will be several winners.

Apple is a legitimate threat. Apple Music showed up late to the premium music streaming market, but this summer it reportedly became the top dog in terms of paid U.S. subscribers. Apple is a pioneer in digital video, selling movies and TV show episodes years before the market as we know it existed. However, if Apple Video's appeal is going to be limited to users of iOS products -- and Apple Music is available on Android devices, but good luck finding Android users on the service -- it's going to be a deal breaker. Beyond the advantage of Netflix's platform agnosticism, Apple Video is going to face an uphill battle internationally where iOS penetration is a lot lower than on its home turf. More than half of Netflix's streaming subscribers are now international viewers, and that is where the lion's share of its growth is coming from these days.

Disney is different. The brand is a beloved family entertainment behemoth worldwide. Disney also has what Netflix doesn't when it comes to content. Netflix's growth kicked into high gear when it began throwing money at original and exclusive shows. Disney has decades' worth of productions in its vault, and it continues to dominate the box office. This is the fourth year in a row that Disney has had the highest-grossing movie. And it currently holds all three top slots in 2018 when it comes to domestic ticket sales. 

The House of Mouse is committed to making this work. Spending billions apiece to acquire Marvel, Pixar, and Lucasfilm is paying off at the local multiplex, and Disney has already announced that some of the biggest franchises will have their own new shows that will stream exclusively on its upcoming service. 

Even Netflix CEO Reed Hastings is convinced that Disney will be a major player. 

"I think in particular Disney, with its strength of brand and unique content, will have some real success," he told analysts during its fourth-quarter earnings call earlier this year. Hastings even admitted that he will be a subscriber of the new service.

Apple Video will find its place in this market. Like a spacious loft, there's a lot of room here and the ceiling is high. However, Disney is the one that poses the greatest risk of swaying Netflix consumers who can afford or only wish to pay for one streaming service. Netflix survived Prime Video being given to tens of millions of Prime shoppers at no additional cost, and it's going to have no problem keeping Apple Video and its likely premium pricing far away in the rearview mirror. Disney is the one to watch, only because for a lot of families worldwide, Disney is the one they watch. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Rick Munarriz owns shares of Apple, AT&T, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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