Why Disney Should Buy Netflix

I’m in the smaller camp of folks who don’t think Apple should by Netflix. I’m not going to dive into why (perhaps another time if anyone really cares) but there is little doubt Netflix will need a cash infusion that won’t likely come from the public market or by subscriber revenues alone. In my mind, the logical acquirer is Disney.

Why Does Netflix Need to Be Bought?
One of the things that has become glaringly clear as we analyzed both Netflix and Amazon’s original content strategy is just how capital intensive content production is, particularly movies and TV (music much less so). We hear about the $200 million dollar production costs of major motion pictures and remember Hollywood is a hit driven business. The only reason their model works is because they are good at creating one big hit a year and, if they are lucky, several. This is one reason we see studios take less risk and focus more on sequels and tried and true brands. They are simply less risky and Hollywood does not like risk. It’s one of the several reasons it will likely get disrupted. The main point is, original content is very expensive.

Out of that context comes Netflix and Amazon, the two companies who are best positioned to give Hollywood a serious run for its money. It will not be too long before Netflix and Amazon start producing big budget movie brands, exclusive to subscribers. As I articulated in my Netflix and Story as a Service article, the subscription model for storytelling is the one I think has the most upside. But this is very expensive.

Amazon has multiple businesses that will allow them to fund the costs of their media empire ventures. This is what makes them a very worrisome competitor for media and entertainment companies. Between the public market, massive margins in AWS, their e-commerce strategy, Prime subscriber growth, and more, they can afford to pour money into their media empire in ways many competitors can not.

Netflix does not have this luxury. They are a one trick pony. Their ability to re-invest profits will be more constrained than Amazon because they have to rely on the public market to invest in their potential. For now, that has been stable but one or two missteps could spell disaster. Netflix needs deep pockets and, of all the companies I can think of, Disney is the right fit.

Disney Likes to Shake Things Up
Disney has already been pushing the limits on distribution windows and they have the shortest window from theater to DVD of any studio, on average. We used to do a lot of consulting in the media and entertainment industries with companies like Universal, Walden Ventures, Lions Gate, and more, and the topic of Disney’s aggressiveness to shorten the distribution window caused many to worry. I think Netflix fits beautifully into what we have observed Disney do with distribution.

Imagine being a Netflix subscriber and having Disney movies on-demand within 60-90 days. Given the assets they have, I can imagine the idea of the full catalog of Disney movies and shortened distribution windows could drive significant subscriber growth and loyalty all by itself. Furthermore, and this is perhaps the most interesting strategic element of this, Disney would acquire consumer data around media watching behaviors and what is hot and trending that is tremendously useful to their production strategy. Amazon is so disruptive to retail because they have much better data on consumer shopping behavior and interests so they know what to promote, recommend, and what to slap their own brand on and white label. Similarly, Disney would get a leg up on their competition by seeing what kinds of content is popular and using that to their advantage as their storytellers look to create the next new franchise.

As I debated this in my head, there are certainly counterpoints to this proposal. The strongest is that, if Disney owned Netflix, it could impact Netflix’s ability to license content from other studios. Hollywood, like politics, is remarkably tribal and I can see other studios either pulling their content from Netflix, not licensing further content, and/or raising their price to Disney. The neutrality of Netflix is a current advantage with studios that will be gone if owned by Disney.

My second startup was a failed attempt, during the dotcom era, to bring technology to artists and labels to benefit to their fans. I learned very quickly that Hollywood is run on fear and greed. That is one of the things that makes the tech industry raging mad when trying to negotiate with them. Ultimately, I have strong hunch Netflix is going to need some help to take on the big boys. Disney makes the most sense in my opinion, unless Amazon can step in and consolidate it. I expect much change and turmoil to come as consumer behavior changes and their content demands increasingly challenge the establishment’s ability to adapt.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

2 thoughts on “Why Disney Should Buy Netflix”

  1. Another option for Netflix would be to securitise some of their original content. That way they can use the original content as collateral and offer an interesting investment opportunity to those who are happy to buy bonds backed up by, say, House of Cards but are not interested in buying Netflix shares.

  2. I would be interested in hearing your thoughts on why Apple would not be a good suitor. While I believe it has its merits, I’ve always been on the fence about it. Your insights, as always, would be much appreciated.

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