On Tuesday, Disney announced that it would break its exclusive movie streaming deal with Netflix in 2019, and launch its own streaming service.
On Disney’s earnings call, CEO Bob Iger clarified that exactly how much Disney content will go on the new service is still being discussed — Disney and Pixar branded movies, definitely; Star Wars and Marvel movies, maybe.
But the general strategic shift for Disney is clear. Disney thinks the future of entertainment will be defined by “direct relationships between content creators and consumers,” it said in the release.
Disney owns the most compelling intellectual property franchises in Hollywood, from Marvel to Star Wars to Disney’s animated masterpieces. Now, as the internet remakes video distribution, it wants to feed those directly to customers.
In the short term, this sounds bad for Netflix. In fact, the news pushed Netflix stock down about 3%. Netflix is one of the middle men that Iger wants to cut out of the equation. And Disney was a special piece of Netflix’s movie strategy that really performed well. But if you look at the long game, this news really should have no effect on Netflix’s prospects.
The movie problem
In December, Netflix content chief Ted Sarandos explained that the company was still trying to figure out the best way to differentiate itself in movies.
Here’s the main issue: If you’re passionate about a movie, you’ve probably already seen it in theaters, or on DVD, and by the time it gets to Netflix, you’re apathetic. People browse Netflix’s movie back catalog to find something to watch, sure, but Netflix has found that its selection doesn’t matter as much as you might think. (Netflix has been able to test this by looking at the differences in viewing patterns between countries, like the US and Canada, that have vastly different movie catalogs.)
In short: Paying a lot of money for amazing major studio movies doesn’t really move the needle for Netflix, as it stands currently. Those rights used to be cheap, but everyone has wised up, and they are no longer an incredible value proposition.
“The rare exception to that is Disney,” Sarandos said in December. Disney movies are the ones “people like to watch over and over again.” There’s something special about them, according to Sarandos. Hence the big flashy deal.
So losing them will hurt. And it will mean Netflix will lose perhaps the most compelling pieces of its movie selection.
But Netflix’s Disney deal — or any big studio output deal — was never going to stay in place as the center of Netflix’s movie strategy.
You can tell from Sarandos’ comments that he doesn’t love that kind of arrangement. He feels the value being destroyed as movies make their way from theaters to DVD to Netflix.
Netflix can’t sit at the end of a pipeline waiting for the next Disney film to drop if it wants to shake up the movie business in the way it has shaken up TV. It needs a new model. And that’s partly why the company is thumbing its nose at the old guard by releasing its own “original” movies online the same day they are in theaters. Netflix doesn’t want to try and conform to the old way things are done.
So while the loss of Disney might sting Netflix temporarily, in the long run Sarandos and company were always going to have to figure out a way for Netflix to stand out as a movie distributor. It hasn’t happened yet (except for in documentaries).
Perhaps one way will be through owning powerhouse intellectual property, like Disney. On Monday, Netflix announced its first-ever acquisition, Mark Millar’s comic-book publisher, which has been responsible for Kick-Ass, Kingsman, and Old Man Logan.
The timing doesn’t feel like coincidence.