Disney (NYSE:DIS) recently confirmed that its new Captain Marvel movie won't be appearing on Netflix (NASDAQ:NFLX) following its theatrical debut, but will be seen exclusively on the new Disney+ streaming service that will launch later this year.
While Netflix risks losing customers as providers like Disney, AT&T, and Comcast pull content because they are starting their own competing services, investors shouldn't worry about the impact all that much. Netflix rivals may feel a backlash of their own and find they need Netflix just as much as it needs them -- and their content may eventually appear again on the streaming service.
Betting on the future
Netflix CEO Reed Hastings previously admitted the loss of content from Disney and others would cause it to lose customers, but it was something the streaming giant had been anticipating. It's no coincidence Netflix has vastly ramped up its original programming over the past few years, and Hastings says international subscriber growth can more than offset any losses experienced back home.
Yet it's not a cost-free move by Disney, either, as CFO Christine McCarthy told analysts during the company's first-quarter earnings conference call that Disney identified at $150 million the "foregone licensing" revenue that it would lose from output partners like Netflix pulling content.
For a company generating over $15 billion in consolidated revenue as Disney is doing, the hit to licensing is not a major wound. CEO Bob Iger contextualized it as "a bet on the future of this business and we are deploying our capital basically so that long-term, the growth of this company is stronger than it would have been without these investments."
But that's only if Disney+ takes off, which is not a sure thing. The value in Netflix is that it is largely agnostic about where it gets programming and is willing to accept virtually all content from anyone. That's what's helped it grow into a service with 148 million subscribers worldwide and almost 61 million in the U.S.
While Disney+ doesn't need those kinds of numbers to be successful, it is going to have to attract a lot of subscribers willing to pay for nothing but Disney content. It's a question AT&T and Comcast are going to have to answer as well when they launch their own channels: Are there enough people willing to pay to subscribe to numerous individual services?
Netflix still can come out on top
Disney has been losing pay TV subscribers at its premier ESPN channel, an estimated 13 million over the last five years. It's seen domestic subscriptions on cable TV decline at its other properties too, including Disney Channel, Disney XD, Disney Junior, and Freeform.
Check out the latest Disney earnings call transcript.
The benefit of streaming content over the internet, beyond the idea of watching what you want when you want to, has been the discount pricing compared to cable TV. But that price differential has slowly dissipated as streaming services raised their prices, and that gap will shrink even more once consumers understand they have to purchase numerous services to get the programming they once enjoyed in one place. Cord-cutting has been a real phenomenon, but streaming companies could very well halt its advance by continuing to make their content exclusive to their own service.
Make no mistake, Disney programming is always going to be popular and will find an audience, but as its various channels are discovering, it's not an immutable law that people will always subscribe to get Disney content. In the end, Disney and other content providers may find that having Netflix as a partner is a necessary evil that actually returns more than it costs.