Netflix (NFLX -9.09%) has dominated the streaming space for more than a decade. But recently a slew of well-heeled competitors has emerged, not least of which is Walt Disney (DIS 0.16%). The entertainment giant has 222 million customers across Disney+, ESPN+, and Hulu, and some project that Disney+ alone could overtake Netflix by 2025.
Then last week, Netflix reported its year-end results and its subscriber count hit nearly 231 million. Investors may rightly wonder which company's stock is the better buy. Let's break it down.
Netflix is still the big brand at home and abroad
For many, Netflix is synonymous with subscription video on demand (SVOD). Having launched its streaming business in 2007, the company has positioned itself as the most dominant SVOD service in the U.S., where, according to Statista, 78% of households have a Netflix subscription. For comparison, that figure is 72% for Amazon's (NASDAQ: AMZN) Prime Video, and 9% for Disney+.
Netflix also used its first-mover advantage to expand to more than 190 countries since 2010. A key aspect of its success outside the U.S. is its choice to produce and acquire regional content. That's a strategy that Netflix's competitors have emulated, only adding to the company's pressure.
But Netflix seems to recognize the strength of its rivals, and so it is entering a whole new area of entertainment -- video games.
Playing in a new arena
In a fiscal 2018 fourth-quarter letter to shareholders, Netflix co-CEO Reed Hastings cited popular video game Fortnite as a serious challenge to the company's bottom line because the free-to-play title drew consumer attention away from the streaming platform. The video game space is estimated to be worth almost $221 billion in 2023, far surpassing the almost $96 billion SVOD is expected to reach this year.
Seeing the risks and potential rewards that video games present, Netflix has made notable inroads into the space. The streamer has acquired multiple video game studios over the past couple of years and also launched dozens of iOS and Android games that are exclusively available to its subscribers. And while some reports indicate relatively few customers are actually playing those titles, the company is clear that video games are going to be a key part of its business.
"[W]e believe that the future of television of films and the games is streaming," noted Netflix Co-CEO Ted Sarandos during the company's most recent earnings call. "And we're working hard to continue to grow our lead in this area ... we can only do that by bringing the shows, the films, and games that people love."
A company built on classics
As a business that has operated for almost a century, Walt Disney has earned an iconic status, built on characters such as Mickey Mouse and Donald Duck, along with classic animations such as Snow White and The Lion King.
Walt Disney has shown adeptness throughout the decades to capitalize on its global fandom through licensing deals, theme park experiences, and more. Indeed, Walt Disney's vault of pop culture characters and instantly recognizable movies and TV shows have long served as a fairly reliable bet for investors.
But as the global pandemic showed, the House of Mouse can be vulnerable to unpredictable events.
Old habits die hard
Walt Disney was forced to close all of its theme parks through much of 2020 and 2021, causing it to lose many billions of dollars in sales. And because movie theaters around the globe closed too, Disney could not rely on box office sales during that time.
Of course, as already outlined, streaming is becoming a significant part of Disney's business, but the company is ultimately still reliant on its old playbook of creating beloved characters it can then monetize via lunchboxes and roller-coaster rides.
A whole new world
As people have become more accustomed to staying at home for both work and play, one must wonder how long a company like Walt Disney can afford to not be a more significant player in the video game space. While it could be argued that Netflix has yet to make a real dent in the video game industry, the company is at least recognizing its potential rather than solely doing what it's always done.
Market watchers would do well to pay attention to Netflix's upcoming Q4 results, particularly for any mentions of its long-term video game strategy. Walt Disney is also worth keeping an eye on, if only to see if it will follow Netflix's lead.
