Disney vs Netflix, and the Future of Entertainment

Disney’s world is getting a whole lot bigger in the next several years. On July 27th, 2018 it was announced that Disney and Fox shareholders approved a deal in which The Walt Disney Company would acquire 21st Century Fox for $52.4 billion. The deal is expected to officially close by June 2019. In previous years, Disney acquired Marvel for $4 billion, Pixar for $7.4 billion, and LucasFilms for $4.06 billion. So why did Disney buy 21st Century Fox for more than the 3 previous purchases combined? The short answer is that Disney is (correctly) placing its bets that whichever media corporation has the most amount of content--and therefore the most powerful streaming service--will control the future of entertainment.

The Slow Death of Cable Television and Rise of Streaming Services

According to reports released by the Federal Communications Commission, traditional cable television subscriptions in the US peaked around the year 2000, at 68.5 million total subscriptions. Since then, cable subscriptions have been in rapid decline thanks to the invention of streaming services. With the rising cost of cable TV, Netflix and other streaming services offer a better alternative. Streaming services offers you your favorite cable tv shows and movies but also produce their own movies and tv shows all without the inconvenience of ads, all at a low monthly membership cost. Consumers were drawn to the fact that if they waited a few months, they could watch the same TV shows without ads and essentially any popular movie for a standard monthly rate and from the comfort of their own home. In fact, a new report from the Video Advertising Bureau shows that the number of households that use only streaming services has tripled since 2013, and the number of households who cut cable from their life will continue to increase. In 2018, nearly 1 in 4 Americans no longer had a traditional cable or satellite TV subscription, and by 2021, more than 55% of the population is expected to cancel cable.

Picture Source: Variety

Furthermore, most Americans who still have cable are 50 years old or older. However, the main reason they stick with cable is because it is cheap bundled with home internet service, according to Deloitte's 2018 Digital Media trends survey. Another big club cable still has left to wield is live sports. Watching major leagues like the NFL without a cable package is infuriatingly difficult, because major media companies — in the case of the NFL, NBC, and CBS — own the broadcast rights, and dictate which channel a game will be on, and when. It has been reported that the NFL is soliciting new proposals for the Thursday Night Football package, and is seriously considering selling distribution rights to a streaming company. As new technologies like fixed wireless 5G make home internet cheaper and more competitive, cable companies will lose the advantage of the bundle pricing and lose customers in the process. When cable companies sell sports distribution rights to streaming services, even more consumers will defect to streaming platforms.

Netflix Becomes the Top Streaming Service

With the declining rate of cable TV subscribers and the remaining subscribers mostly belonging to older generations, it is clear that streaming services will be the future of home entertainment. Most entertainment studios have launched or will launch a streaming platform. Other businesses involved in the entertainment industry, like Apple and Amazon, have or will offer their own streaming services. Netflix has become the top streaming service by offering quality original content. While Amazon Prime and Hulu do offer original content, the vast amount of exclusive content Netflix offers differentiates Netflix from other competitors. Take this situation as an example: a consumer could only afford one streaming service and was choosing between Hulu and Netflix. They are interested in Hulu’s The Handmaid's Tale, but also wanted to watch Netflix’s Stranger Things, Black Mirror, the Crown, and Orange is the New Black. This consumer would most likely opt for Netflix over Hulu because it has more shows they are interested in. Netflix remains the top streaming service platform and has been basically been unrivaled for 12 years.

*Pie Chart Notes

  • Netflix and Hulu’s numbers are accurate as of the Q4 of 2018.

  • Julie McNamara, executive VP of original CBS content reported that CBS All Access had 2.5 million subscribers as of August 2018. There has been no official updated number.

  • TimeWarner offers HBO Go and HBO Now. HBO Now is their subscription package where cable TV is not needed and therefore it is the number the pie chart has used.

  • Amazon Prime Video is a Prime membership. Amazon is notoriously tight-lipped about the number of Amazon Prime subscribers but in a rare statement founder and CEO Jeff Bezos said in spring 2018 that there were more than 100 million Amazon Prime subscribers around the globe. While 100 million is not a fair depiction of how many of the Prime members actively use Prime Video but it is the only number available.  

Disney+ and Hulu Step Up to the Plate to Compete With Netflix

Disney’s streaming service, Disney+ launching in late 2019 will be yet another streaming service option for consumers to buy. Consequently, Disney needs to differentiate themselves to compete with Netflix. Disney’s strategy includes offering a combination of syndicated tv shows, movies and original content. By buying Fox Studios the “Mouse House” will own The Simpsons, the X-Men/Deadpool franchise, Avatar franchise, Fantastic Four franchise, Planet of the Apes movies, Kingsmen movies, and National Geographic as well.

Another complication is the ownership of Hulu. Originally, Hulu started off as a way for the big media companies to take advantage of the video streaming market and starve off Netflix’s domination of the market. Fox, NBCUniversal, and Disney all own 30% of Hulu, and TimeWarner owns 10%. Now that Disney is taking over Fox’s 30 percent stake in Hulu, it’ll have the majority control of Hulu. Disney CEO Bob Iger told shareholders that “managing Hulu becomes just a little bit more clear, a little more efficient, a little more effective as a controlling shareholder.” In other words, Disney will not only have veto power over its partners at Hulu, it’ll also be better positioned to argue with NBCUniversal and TimeWarner about giving any of its content to Netflix. Disney will also, of course, be able to withhold all of 21st Century Fox’s properties from Netflix. Additionally, Disney will be getting the distribution rights of the previous movies and shows Fox has released in its entire history. Acquiring Fox Studios will allow Disney’s streaming services to have more content than Netflix.

In August 2018, Disney announced that it would slowly start pulling all of its titles from Netflix when the contract expires in 2019. Disney plans to make Disney+ the catch-all for its family-friendly content, while Hulu will be its subscription for edgier, more adult-oriented fare. It also told the press that any movie released in 2019 and onward would only be available through Disney+ when the movies arrive in the ancillary market. That includes content from the Disney brand itself, Marvel, Pixar, Star Wars and National Geographic. It has already been announced that original content for Disney+ is in the works, including multiple, all-new, original, exclusive Star Wars and Marvel tv series, and new kid shows.

The Future of Entertainment: Small Monthly Subscriptions Fees

Since Disney essentially owns Hulu after the Fox acquisition, other shareholders will launch their own streaming services to compete with Disney and Netflix. AT&T who owns HBO and other WarnerMedia content is launching a streaming platform in 2019; NBCUniversal announced that their streaming service will be ready as early as 2020. Additionally, it was announced that Apple’s standalone streaming service will launch late spring 2019. These media conglomerates will most likely pull their content from Netflix.  

Picture Source: Yahoo

Netflix is already preparing for a future of mostly original content. Netflix’s CFO David Well said to the press that Netflix is driving toward having half the content on its streaming service be original productions: “We thought a long time ago that the unscripted networks are also going to want to keep their own content for their own services. We started investing our own unscripted programming and have had some really great out-of-the-box hits with Nailed It and Fastest Cars and Queer Eye.” This investment has so far paid off. Netflix original content such as Roma, Black Mirror, the Crown, Stranger Things, Orange is the New Black are all serious award season competitors, as well as praised by audiences and critics alike. Additionally, Netflix plans to spend upwards to $12-$13 billion on content; 85% of it will be for original series and movies.

Vertical integration is when the same company both produces a good or service and owns the network that distributes that good or service. A horizontal merger involves the combining of two companies that do the same thing. Disney buying Fox's content is more of a horizontal merger. However, the Fox-Disney merger also has vertical components because Disney will own Hulu. In other words, Disney is integrating vertically and expanding horizontally at the same time. Vertical integration used to be clearly illegal under antitrust law. The US government wouldn't have allowed Disney to own Hulu or its own streaming service. In fact, they probably would've forced Netflix to break up into separate streaming and content-producing companies.

However, in the 1980s, the government loosened antitrust laws under the logic that vertically integrated companies can still face competition from other vertically integrated companies. Since Netflix, TimeWarner, Apple, Amazon, and NBCUniversal will all have their own streaming platforms the Disney-Fox acquisition will be allowed under federal laws. Whether you like it or not, this is the near future. Watching tv shows and movies at home will take effort. Consumers will have to login into multiple websites according to which studio owns the movie or TV show and must pay separate monthly subscription fees. On the bright side, competition breeds creativity and innovation. Audiences will have a plethora of original content to choose from.