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The real reason behind Disney’s decision to dump Netflix

JUNO INVESTING ©
The real reason behind Disney’s decision to dump Netflix

 

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Website story by Stephanie Munro

The business world was shaken to the core by Disney’s decision to leave the Netflix family – and is there more pain to come?

In recent weeks, Disney announced it won’t be renewing its movie contract deal with Netflix, meaning it’ll lose upcoming blockbusters like Toy Story 4 and Frozen 2.

This news hit Netflix shares hard, resulting in them dropping by as much as 5 per cent just hours after the decision was revealed to the public. Shares in both companies have been trending down since.

It may seem like an obvious decision to make on paper, but if you take a closer look, you’ll see there’s more than just one reason behind Disney’s decision to leave the online streaming giant.

Netflix_Shares_Graph.png

Rather than hosting its movies on a third-party streaming service such as Netflix, Disney has decided to launch its own Disney-branded online streaming service (so basically its own version of Netflix), which is set to launch in 2019.

After the announcement, investors were quick to move their shares away from Netflix, fearing this new move would result in people cancelling their subscriptions.

Netflix is refusing to comment on Disney’s announcement to leave. However, Disney chief executive Bob Iger has released a statement saying there was no larger disagreement between the two companies that lead to this decision.

 “There’s no change from our side . . . we’ve had a great relationship with them,” Variety reported Iger saying.

It was only a few months ago that Wall Street was hyping up on the speculation that Disney was set to buy Netflix . . . but instead, Disney gained majority control of the Major League Baseball-founded BAMTech streaming-video company, which is what they’ll use to launch their own Netflix-style subscription video service.

But this still leads us to the question: why did Disney leave Netflix?

When it all comes down to it, it’s about return on investment . . . and Netflix wasn’t really coming to the party in terms of payouts.

According to the most recent report, Netflix currently pays about $200 million a year to Disney, which is only around 3 per cent of its total projected content budget of $7 billion for 2018 (to put it simply, this isn’t very much at all).

So why couldn’t Netflix have just paid Disney more?

Well . . . in this case, it’s about Netflix not wanting to invest its money with Disney.

You may have noticed that the content selection on Netflix has changed quite a bit since it first launched. That’s because Netflix chooses to focus most of its spend on original productions, over mainstream productions made by companies such as Disney and Universal.

Disney has made the decision to trade in its contract with Netflix, to instead hold a 75 per cent stake in its own ESPN-branded streaming service. 

This leads us to ask another highly anticipated question for Netflix shareholders . . .

Will Netflix see a big drop in subscribers when Disney removes all its movies in 2019?

Well, according to Piper Jaffray & Co. analysts Michael Olson and Yung Kim: no, most likely not.

A recent survey of Netflix subscribers found that only one-fifth spend more than 10 per cent of their total Netflix viewing time consuming Disney content.

“We believe essentially none of the other 80 per cent of subs, who spend 10 per cent or less of their time on Netflix watching Disney, will be compelled to cancel due to loss of Disney content,” the analysts wrote.

The obvious demographic which might cancel its subs would be families with young children, but analysts say Netflix can still provide similar content for this audience.

“We recognise the strength of [the Disney] content, particularly for younger children,” the analysts wrote on Monday.

“However, we believe Netflix can license similar genre content from other sources and/or use the cost savings for original programming.”

Are you still happy with the shows on Netflix? Tell us what you think.