Netflix (NFLX 0.10%) is facing some serious competition now that Walt Disney (DIS 0.81%) has released its streaming platform, Disney+. Not only is Disney going to be pulling content from Netflix, shrinking Netflix's library, but the new service already has strong numbers out of the gate, with more than 10 million subscribers signing up on Day One.
There's certainly reason for Netflix to be concerned given that growth in the U.S. market has been a challenge of late, and another major competitor entering the fray isn't going to make things any easier. However, Disney+'s strong start and strong potential might not be enough to lure subscribers away from Netflix, or at least not for a while.
Disney is going to need a lot more content to rival Netflix
There is plenty of good content on Disney+ for consumers to choose from. However, a lot of that comes in the way of movies that have been out for years -- in the case of its classics, decades. Netflix has been able to continually draw in users with fresh new offerings. Netflix has invested a lot in keeping current, which is a key reason its gross margin over the past 12 months has been a modest 36%, with only 7.5% of revenue making it all the way down to its bottom line. By comparison, Disney's gross margin has averaged 41%, while net income has been a solid 19% of sales.
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And do hardcore fans even need the streaming service? Some avid Star Wars and Marvel fans may prefer to own copies of their favorite movies rather than paying a monthly subscription to be able to access them. Exclusive content on Disney+ could certainly get fans subscribing to the service, but paying $90/year in order to be able to do so might be too hefty a price for many fans.
And there's another big problem for Disney+ today: The content might not appeal to a wide enough range of users.
Disney+ could prove to be a niche product
Many of the movies and shows available on Disney+ are animated and will appeal more to kids than they will to adults, and parents who want to keep their kids entertained might already own them on DVD. Given kids' short attention spans and tendency to rewatch their favorites, there might not be a need for that vast a library of movies anyway. Netflix, on the other hand, offers content for kids while providing parents with a lot of options too.
Outside of Marvel and Star Wars, there might not be enough content for adults to be able to justify a Disney+ subscription, especially if they already pay for Netflix. And while Disney will likely continue adding to its content, it's not an overnight process; it could be years before it provides Netflix with formidable competition.
For now, anyway, the Disney+ catalogue is a long way from being a substitute for Netflix. The lower price point will help make it an attractive option, but if consumers cut back on spending as a result of tougher economic conditions, it might be hard to justify paying for another streaming service.
What does this mean for investors?
Disney's stock has risen more than 14% over the past month, as the launch of its new streaming service definitely got investors excited about the platform's potential. And although Disney is a solid long-term growth stock to buy, the excitement around its new service could be a bit premature. The real test will be how much subscriber growth Disney is generating months from now and how much profit it is able to generate from the service. Even then, it could still be too early to see how much of a threat Disney+ is to Netflix.
Currently, there's a lot of hype, since Disney+ is still very new, but that could start to fade as non-Marvel and non-Star Wars fans run out of things to watch. And that's why Netflix might not have to worry about the new competition putting a big dent in its numbers just yet.
