Walt Disney (NYSE:DIS) is launching an all-out assault on Netflix (NASDAQ:NFLX) this November with the introduction of the Disney+ video streaming service. Other traditional media powerhouses have followed suit, announcing a plethora of in-house streaming platforms.
Netflix is staring down a massive array of fresh competitors, many of whom used to be partners and content providers for the leading video service. Like Disney, they have started to cancel their content contracts with Netflix to feed exclusive shows and movies into their proprietary alternatives.
The changing competitive landscape has slammed the brakes on Netflix's stock price gains. Netflix shares are trading 21% below their year-ago prices today. Market makers are ready to declare that Disney and friends are about to kill Netflix, long before most of the proposed rivals become available to consumers in America and around the world.
That foregone conclusion couldn't be more wrong. Neither Disney+ nor HBO Max or any of the other rising video platforms is about to kill Netflix. On the other hand, Netflix won't bend over backward to destroy any of these new challengers. The biggest loser in this conflict between digital video services isn't even in the ring.
It's cable TV.
A tentative timeline
It's true that the simultaneous rise of many streaming services will accelerate the death of cable TV as we know it. Since many of the new services are managed by traditional media giants like Disney and HBO, this amounts to shooting themselves in the foot while trying to chase down this new opportunity -- and its early leaders, led by Netflix.
Here's how I expect the story to play out over the next few years:
- Gathered around the Disney+ tentpole in November, a plethora of new streaming services hit the virtual airwaves. Curious consumers flock to pick up free trials to the more interesting ones, again spearheaded by Disney's unbeatable branding power. Canceling Netflix, Hulu, and Amazon.com's (NASDAQ:AMZN) Prime is not a required move before taking this step, so the early impact on Netflix's subscriber numbers will be trifling.
- Having gotten a taste of the new streaming options, customers will have to make a choice once their free trials end. Which of these platforms are worth the money and which ones just aren't? In some cases, digital video services will do everything you need from a complete entertainment solution. Cutting the cord on cable TV services to make the switch into a total video-streaming package makes more sense every day.
- In a panic, cable operators start slashing prices on their TV packages. But there are limits to how deep these discounts can go without turning profit margins negative, and the cable guys won't have access to a lot of the premium content that has been locked down in a variety of streaming services. This is a losing battle from the start.
- Media piracy accounted for more than 70% of all internet traffic in 2006. At that point, Netflix started offering online viewing and YouTube hit the scene like an avalanche. By 2015, video piracy had faded to a minuscule 3% slice of daily internet traffic. But that's not the end of the piracy story. Illegal downloads of pirated movies and TV shows are on the rise again and that trend should only accelerate as consumers face a fragmented streaming media market.
- Meanwhile, the streaming services battle it out in the open market. Subscribers are won and lost on the strength of each media portal's unique content, reasonable pricing policies, and ease of use. Cash is still king, but convenience is the crown prince. So far, I've seen little reason to doubt that Netflix will continue to dominate the market under these conditions.
- Come back in a decade or so and you'll see a mature streaming video sector. The winners have crushed or acquired most of the smaller names. In few media producers simply gave up on running their own premium video service and got back to what they're actually good at -- producing high-quality content for others to license, or under an exclusive all-rights-reserved contract as the case may be.
What's old is new again
In the end, it'll be a lot like the mature cable TV market, where lots of channels were available in bundles under the management of a smaller handful of cable TV providers. The bundles have simply moved online now. You might still need to pay a couple of monthly subscription fees to get your hands on all the entertainment you want, but it'll add up to a lot less than today's bloated cable packages.
Once the industry starts to consolidate, I think we'll also see piracy rates plunging again. The key to defeating the pirates lies in making media consumption easy and convenient for the end user. Muddying the waters with a plethora of separate services isn't doing the media industry any favors.
Winners and losers
Netflix should remain among the winners in this scenario, having built its media empire on the bedrock of quality content and consumer-friendly media portal experiences. Disney should also hang in there as one of the few surviving single-studio services. A diamond-encrusted brand name makes a big difference here, and the House of Mouse isn't afraid to adjust its business plans as the underlying market changes.
So Netflix and Disney look like big winners in the long run. Other winning investments from here to my vision of 2029 include service-agnostic companies that give consumers access to the simplified streaming media sector -- Roku (NASDAQ:ROKU) comes to mind, and maybe this is how future generations will remember Apple (NASDAQ:AAPL) once the iPhone era fades out.
And the biggest loser is neither Disney nor Netflix. It's the cable TV industry.