Law of the jun­gle as Dis­ney drops Net­flix

Stu­dio is pulling con­tent, plans ri­val stream­ing ser­vice

Los Angeles Times - - BUSINESS - By David Ng

With its more than 100 mil­lion sub­scribers around the world, Net­flix has built a busi­ness model that not only al­tered the way TV se­ries and movies are con­sumed, but threat­ens the very foun­da­tion of the en­ter­tain­ment in­dus­try.

On Tues­day, Hol­ly­wood’s big­gest stu­dio de­cided to strike back, cre­at­ing a new and po­ten­tially se­ri­ous chal­lenge to the dig­i­tal stream­ing gi­ant.

Walt Dis­ney Co. said it will end its dis­tri­bu­tion deal with Net­flix and launch its own stream­ing ser­vice in 2019. The move will de­prive Net­flix sub­scribers of nu­mer­ous Dis­ney movies, in­clud­ing hits such as “Zootopia,” “Moana” and “The Jun­gle Book.”

A spokesman for Netf lix said its do­mes­tic sub­scribers will con­tinue to have ac­cess to Dis­ney movies on the ser­vice through the end of 2019, in­clud­ing all new films that are shown the­atri­cally through the end of 2018.

“We con­tinue to do busi­ness with the Walt Dis­ney Co. glob­ally on many fronts,” Net­flix said. The com­pany said its re­la­tion­ship with Marvel TV, which is owned by Dis­ney, will con­tinue; that has yielded Marvel se­ries on Net­flix such as “Luke Cage” and the up­com­ing “The De­fend­ers.”

Dis­ney’s an­nounce­ment spooked Net­flix in­vestors. Shares of the Los Gatos, Calif., com­pany fell nearly 5% in af­ter-hours trad­ing Tues­day be­fore re­bound­ing slightly. The stock had closed the day down 1.6% at $178.36.

In­dus­try ex­perts said the sell-off might be pre­ma­ture, but they none­the­less sounded a cau­tion­ary note

about Net­flix.

“Los­ing just the Dis­ney con­tent isn’t the end of the world,” said Michael Vorhaus, pres­i­dent of Magid Ad­vi­sors, a me­dia and dig­i­tal video in­dus­try con­sul­tant. But if other stu­dios fol­low suit by pulling out of Net­flix to make deals with com­pet­ing stream­ing ser­vices, “that’s not good.”

Dis­ney said Tues­day that it is boost­ing its stake in Bamtech, a stream­ing video com­pany that is de­vel­op­ing the Dis­ney-branded stand­alone stream­ing ser­vice as well as a sim­i­lar of­fer­ing for the Dis­ney-owned ESPN.

A Dis­ney-branded stream­ing ser­vice could pose a sig­nif­i­cant threat to Net­flix, es­pe­cially in chil­dren’s en­ter­tain­ment. Net­flix has built up such pro­gram­ming in re­cent years to at­tract more fam­i­lies.

Net­flix li­censes much of its kids’ con­tent from other stu­dios but also pro­duces some of its own, such as the re­cent “A Se­ries of Un­for­tu­nate Events.” But Net­flix’s ar­ray of Dis­ney movies, in­clud­ing Pixar ti­tles such as “Find­ing Dory,” has been a ma­jor at­trac­tion since the deal be­tween the two com­pa­nies took ef­fect last year.

“Kids’ con­tent is ev­er­green and they watch the same movies over and over,” said Peter Csathy, founder of the ad­vi­sory firm Creatv Me­dia. “And there is a very high per­cent­age of kids view­ing these dig­i­tal plat­forms. Los­ing that con­tent will have a mean­ing­ful im­pact on Net­flix.”

Net­flix is also com­pet­ing with other stream­ing ser­vices and ca­ble chan­nels in the kids’ en­ter­tain­ment field. HBO took over “Sesame Street” last year, while Ama­zon ex­clu­sively streams some Nick­elodeon con­tent.

Dis­ney said its stream­ing ser­vice will fea­ture the new­est live-ac­tion and an­i­mated films from Dis­ney and Pixar, be­gin­ning with the 2019 the­atri­cal slate, which in­cludes “Toy Story 4,” the “Frozen” se­quel and a live-ac­tion ver­sion of “The Lion King.”

Net­flix has a huge head start on Dis­ney in terms of sub­scribers. The com­pany posted stronger-than-ex­pected sub­scriber growth for the sec­ond quar­ter, which ended in June.

Net­flix counted close to 104 mil­lion sub­scribers world­wide for the pe­riod, nearly 2% higher than it had fore­cast. Net­flix added 5.2 mil­lion sub­scribers world­wide and for the first time counted more over­seas sub­scribers than do­mes­tic ones.

Net­flix has been pour­ing more re­sources into self-pro­duced orig­i­nal con­tent in a bid to be­come less de­pen­dent on li­censed ma­te­rial. It is ex­pected to spend at least $6 bil­lion this year on con­tent, up from $5 bil­lion last year.

The com­pany an­nounced ear­lier this week that it is ac­quir­ing the comic book pub­lisher Mil­lar­world, a move that will bol­ster Net­flix’s pro­gram­ming of su­per­hero-themed se­ries and movies.

Net­flix said it will cre­ate orig­i­nal pro­gram­ming based on sev­eral ex­ist­ing Mil­lar­world fran­chises as well as new sto­ries that au­thor Mark Mil­lar and his team will con­tinue to cre­ate and pub­lish un­der the Net­flix brand.

But de­spite the push into orig­i­nal con­tent, many of Net­flix’s most pop­u­lar ti­tles are shows and movies it li­censes from other stu­dios.

Ex­perts said the stream­ing com­pany will ei­ther need to find movies from other stu­dios or cre­ate its own self­pro­duced ti­tles to re­place the Dis­ney ti­tles.

The Dis­ney an­nounce­ment shows “how de­pen­dent Net­flix is on other peo­ple’s con­tent,” said Michael Pachter, an an­a­lyst at Wed­bush who fol­lows Net­flix.

“In­vestors think Net­flix has all the lever­age. But it’s the con­tent owner who has all the lever­age, and Dis­ney showed that to­day.”

Dis­ney TNS

DIS­NEY plans to end its dis­tri­bu­tion deal with Netf lix and launch its own stream­ing ser­vice. The move will de­prive Net­flix sub­scribers of many Dis­ney films, in­clud­ing “Zootopia,” top, and “The Jun­gle Book,” above.

Dis­ney

Judy Hopps, left, played by Gin­nifer(cq) Good­win, and fox Nick Wilde played by Ja­son Bate­man in Walt Dis­ney's "Zootopia."©2016 Dis­ney. ©2016 Dis­ney. All Rights Re­served.

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