Can Netflix Survive in the Age of Disney?
Netflix (NASDAQ: NFLX) is facing a very tough and dramatic battle for survival. Its biggest content supplier; the Walt Disney Company (NYSE: DIS), may soon be become its greatest competitor.
Disney now owns 60% of Netflix’s biggest direct competitor Hulu. Disney already owned 30% of the privately-held video-streaming solution, when it purchased 21St Century Fox (NASDAQ: FOXA) in December 2017. Fox owned 30% of Hulu, which would give Disney a majority ownership stake if the Federal Trade Commission (FTC) approves the deal.
A Disney-controlled Hulu is problematic for Netflix because that service is growing fast. Between 2nd Quarter 2016 and 4th Quarter 2017 Hulu added five million subscribers, Statista reported. Hulu had 12 million subscribers on 4 May 2016, and 17 million subscribers in 4th Quarter 2017.
Hulu’s growth has been absolutely astounding, back in 4th Quarter 2010 Hulu had just 300,000 users, by 4th Quarter 2017, it had 17 million. Add exclusive Disney content like Marvel or Star Wars movies and series to the mix and you can see the menace Netflix might face.
Disney Plus Fox Plus Hulu Equals Doom for Netflix
The menace might grow because Disney can now add all the movies and TV shows from the Fox vaults to the Hulu library. That includes such classic films as The Sound of Music and MASH, and lucrative franchises like Aliens, Planet of the Apes, and Buffy the Vampire Slayer.
A lot of that material can be mined for new series, games, or movies which can be distributed through Hulu. Disney is already making money off of Star Wars and third-tier Marvel superheroes like The Black Panther, The Guardians of the Galaxy, and Iron Fist. Imagine what it can do with Buffy, Angel, Spike, and the Aliens. To add icing to the cake Disney, now has the movie and TV rights to the X-Men, Wolverine, The Fantastic Four, Dr. Doom, Cable, The Silver Surfer, The New Mutants, and Dead Pool. All of which have strong series potential.
Despite the new resources, Hulu has a long way to go to equal Netflix. Netflix’s video subscription had 54.75 million users in the United States alone in 4th Quarter 2017, Statista estimated. Netflix had 117.58 million subscribers worldwide at the end of 2017.
Yet one has to wonder, how many subscribers would Netflix lose if Disney pulled all the Marvel or Star Wars content from it? Or simply decided not to release the next few Star Wars or Avengers movies through Netflix?
Surprise Netflix is Making Money!!
Netflix’s ecosystem is more than ten times as large as Hulu’s but is it making money? That question must be asked because Hulu now has Disney’s resources; including $55.137 billion in revenue for 2017, behind it.
Netflix is making some money it had an annual operating income of $838.68 million and a yearly net income of $558.93 million on December 31, 2017, Stockrow data indicates. The company also reported a yearly gross profit of $4.033 billion on revenues of $11.692 billion for 2017, so Netflix is making some money.
The problem is that Disney is making far more money Disney reported an annual operating income of $16.915 billion; and an annual net income of $13.403 billion on 30 December 2017. The Magic Kingdom generated a gross profit of $31.445 billion on revenues of $55.17 billion for 2017.
Disney also reported $4.677 billion in cash and equivalents for 4th Quarter 2017. Netflix reported $2.822 billion in cash and equivalents for 4th Quarter 2017.
What will Disney do with Hulu
In addition to a vast amount of content, Disney is now in a potential to pump a vast amount of money into Hulu if necessary. Other content that it can add to Hulu includes ABC television programming; and all the sports broadcast through ESPN -which includes NFL Football.
Disney is already building a sports streaming service, it owns a third of BAMTech a streaming service owned by Major League Baseball, Recode reported. The company had previously announced plans to launch a Disney-branded streaming service, and an ESPN-branded sports streaming outlet.
Adding ESPN to Hulu might enable to monetize sports and save that sinking network from oblivion. Another option would be to offer an ESPN Hulu or a Hulu Sports streaming service.
Owning Hulu has some drawbacks for Disney, Comcast Corporation (NYSE: CMCSA) the owner of NBC and Universal Studios still owns around 30% of the streaming service. It is not clear whether Comcast would sell out, fight Disney for Hulu, or try to organize some sort of streaming video cartel.
Major problems here will be anti-trust regulators which are likely to go after Disney in both the United States and the European Union. Another threat is Amazon (NASDAQ: AMZN) which now has a strong incentive to try and buy Netflix to keep Disney from getting a stranglehold on streaming video.
Disney is Still a Far Better Investment than Netflix
There is one certainty, here for investors Disney is still a far better stock than Netflix. Shares of Netflix were trading at $315.65 on13 March 2018 which was absolutely dumb, the stock is not worth a 10th of that price.
Disney was a little overpriced at $103.66 on the same day. Even though it was a bit high that share price can be justified. The price for Netflix is sheer fantasy. Investors should stay far away from Netflix because this company’s stock is heading for a huge collapse.
All it would take is an announcement from Disney that one Marvel blockbuster is not being released to Netflix, to send its stock into freefall. Investors should stay far away from Netflix; but seriously considering adding Disney to their portfolio, because that company might be in a position to dominate a large portion of the streaming video thanks to Hulu.
This story initially appeared at the Market Mad House — please visit us to see more stock analysis and other fun stuff.