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Can Netflix Copy This Key Disney Strategy?

By Adam Levy - Sep 9, 2018 at 9:36AM

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Netflix's latest hire comes straight from Disney. Did she bring the playbook, too?

Netflix ( NFLX -0.28% ) might be losing Disney ( DIS 3.05% ) films from its content library next year, but it's already taken something else from Disney. Earlier this month, Netflix announced it hired Christie Fleischer as head of consumer products.

Disney's consumer products business is a significant source of revenue and operating profits for the company. Fleischer previously oversaw merchandise for Disney's theme parks, stores, and licensing deals.

With Netflix's growing slate of self-produced original films and series, Netflix has more control over how it uses the intellectual property of those stories. It brought in Fleischer to help make monetize that IP and potentially offset some of the additional costs associated with producing originals in house.

Still from Stranger Things.

Image source: Netflix.

A quick look at what Disney built

Disney's consumer product and interactive media segment brought in $3.5 billion of Disney's $45.1 billion in revenue through the first nine months of the fiscal year. It's the smallest of its divisions, but it produces a higher operating profit margin than Disney's other businesses.

Segment

Operating Margin (YTD F2018)

Consumer products and interactive media

36.7%

Media networks

27.5%

Parks and resorts

23.9%

Studio entertainment

30.4%

Table source: Author. Data source: Walt Disney third-quarter earnings release.

Of course, that high-margin business is subject to seasonality and consumer demand. It's closely tied to Studio Entertainment revenue as a big box office hit usually translates into more toy sales. When Disney released Frozen, it saw a 22% increase in operating profits from the consumer products segment alongside a 22% increase in total revenue from the studio business.

The consumer products business is a great way to capitalize on the hits. Even then, it has to be the right hit. Sales are actually down for the division this year because Disney released the Spider-Man and Cars films last year, and Avengers and Black Panther toys don't have the same appeal in the toy market.

Can Netflix copy Disney's success?

Netflix has had quite a few hit series in the six years or so it's been making original content. Netflix has already developed some merchandise based on Stranger Things, releasing clothing, figurines, coffee mugs, and a frozen-waffle-based card game based on the series.

Netflix is pumping out more and more originals, with plans to release 1,000 new titles this year. It's increasingly pushing big-budget films and series. Next year, it plans to release a big action film titled Six Underground directed by Michael Bay and starring Ryan Reynolds. That's the kind of film that could lend itself to merchandising (and sequels).

Being able to sell merchandise based on the characters and stories of big-budget films and series can help offset some of the costs associated with producing them. Netflix currently expects to burn about $3 billion to $4 billion in cash this year as it brings more of its original content production in-house.

In the long run, producing originals in-house actually saves Netflix money versus hiring out a third-party production company. It also gives it the ability to license and merchandise the intellectual property instead of allowing another company to retain those rights. Netflix is still at the whims of public opinion as to whether its productions will become hits and whether it can franchise popular films the way Disney does, but it's good that it'll have a team in place to capitalize on the opportunity if and when it strikes.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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