Why Might Disney Be Courting Netflix?

Towards the end of 2016, after Disney had pulled out of talks to buy Twitter, speculation started to mount that The House of Mouse were considering a much bigger digital acquisition instead. Rumours and conjecture began to abound that Disney could be making a move towards Netflix to expand their entertainment empire.

If true, the purchase would come at a great cost to Disney (Netflix’s asking price has been estimated to be somewhere around $70 billion) and has had many financial analysts questioning the value of such a manoeuvre, at least in purely fiscal terms. However, it is possible that Disney would see such an acquisition/merger as a way of solidifying their own future and, likewise, Netflix could be more open to the idea of being under the umbrella of a larger entertainment brand than one would expect given their current success.

It's Lonely At The Top

2016 was a record breaking year for Disney at the box office. It is estimated that the distributor took almost $7 billion in worldwide grosses and all the year’s top 5 films were produced and distributed by Disney. Not only did this leave them responsible for nearly a fifth of all box office takings in 2016 but it also showed that their product had never been more popular with audiences.

This, however, did not translate into a healthy growth in the stock market for Disney as their stock price finished 2016 some 17% behind their value at the beginning of the year. It is highly possible that investors are questioning how much room there is for growth with Disney’s current domination and, if that is the case, then expansion in both product and distribution must be a priority for them, something that the acquisition of the world’s biggest subscriber based streaming service would provide.

Meanwhile, it was business as usual for Netflix in 2016 as they expanded their subscriber base by a further 17 million users worldwide and had a record Q4 for the company as they added just over 7 million subscribers to their service matched by an income of $2.5 billion. But the price of such success is now coming at a huge cost for Netflix as their production budgets for original content ($5 billion for 2016 and increasing to $6 billion this year) are starting to spiral as they not only seek to attract new users but also to keep existing ones, which is likely to become the main challenge for Netflix as they face mounting competition from rival services. Again, the scope for financial growth is starting to look incremental for this leader in their field as increased income looks to be tapered by production costs.

At this juncture, the rumoured acquisition would seem to be a marriage of convenience between the two giants as Disney could extend their reach via Netflix, while the buy-out would help ease Netflix’s escalating costs by giving them access to Disney’s production facilities rather than outsourcing those means as they do currently.

However, Disney would have to take a huge hit fiscally to complete the deal (they would have to put up nearly half of their own market value for the purchase) for a service that is rapidly eating into its profits to remain on top, a fact that would likely cause much consternation over Disney’s own value. But it could be that Disney has seen other inherent values in Netflix that many may overlook.

What Do You Get The Mouse Who Has Everything?

One of the many reasons why Disney could be circling Netflix is the services higher adoption rate with affluent families with 2 or more children, which is revealed below via data from Global Web Index

Gwi Nf

Few brands in entertainment are more synonymous with “family” than Disney and it surely must be a tempting proposition for them to be able to target their content directly to bigger families with greater spending power. While it is unlikely that Disney would tap into this revenue stream directly by something as ill-advised as introducing a pay-per-view service to Netflix, they could use one of the major benefits of the platform to target such viewers to stimulate merchandise sales and push future cinema releases.

And that major benefit is: data, lots of data. While Disney’s status as box office kings is undisputed, their ability to extract meaningful viewer data from cinema is extremely limited. They know huge audiences are engaging with their product, but do they know who they are?

Disney already enjoys a cosy relationship with Netflix and must draw considerable revenue by licensing their product to the service, which would be lost if they acquired the platform. What would be desirable for Disney, though, is Netflix’s almost peerless ability to know exactly who their audience is, what their interests are and, ultimately, what they want to watch.

Netflix’s vast reservoir of user data is a veritable treasure trove consisting of viewing habits, preferences, and core audiences. Not only does the streaming service know what content is in demand but also what led viewers to it and where they went after watching. It is this resource and application that gives Netflix an atypical confidence in commissioning productions and sustaining them as well as being able to keep users engaged with the platform, creating a sense of value for their subscription price. Disney could not hope of equalling this extensive data gathering through ticket sales alone or even by building their own platform, something that has not gone well for the company previously as the failure of their own web mega-portal Go.com in the early 2000’s (it now languishes as Disney’s landing page for their own site).

Netflix is very much a genie in the lamp when it comes to content production. For example, when they commissioned their hit show House of Cards in 2012 at the unprecedented cost of $100 million, Netflix backed up the decision with hard data to show the original Channel 4 version of the show had enjoyed consistent engagement on the service and key players in the new production, such as Kevin Spacey and David Fincher, had seen similar popularity across various content. They knew interest and demand for the show would be high to justify its vast budget and its exclusivity to the platform would draw new subscribers in.

It became a recipe for success that has led the show to four seasons of highly acclaimed and award winning television that shows no signs of stopping and created a template of future successes in Netflix’s original programmes.

Crowning Glory 

This recipe was likely repeated by Netflix when they attained the exclusive right to the most expensive TV show to date. It is probably safe to assume they saw a huge appetite for content focused on the British royal family on their service which led Netflix to break the bank once more when they commissioned Peter Morgan’s biopic of Queen Elizabeth II, The Crown, for a staggering $130 million last year. In terms of audience share, one cannot argue with the results demonstrated by Netflix’s most popular shows as we can see from the exponential amount of mentions from their three big hitters (House of Cards, Orange is the New Black, and The Crown) have received in their opening release windows, which we can see below:

Nf Shows

But this doesn’t just apply to the on-demand service’s biggest series. Their use of data to shape and continue original content has served Netflix so effectively, they have yet to cancel any original adult programming after one season and 70% of their 37 shows are currently officially renewed. This success rate is unheralded in the television industry and even fierce rivals, Amazon Prime, have already suffered a one season casualty, the now cancelled Good Girls Revolt, from a more meagre stock of just 16 original shows -a decision was that seemingly based on viewer demand alone.

While Netflix remains frustratingly secretive with their viewing data -a sign that they are well-aware of its intrinsic value- it is also clear they can operate with more lateral thinking and precision when applying it to a show’s inception and future. For a production company like Disney -who rely heavily on legacy product such as the Star Wars franchise, the Marvel Cinematic Universe, and their rejuvenation of their own classics with remakes of The Jungle Book and Beauty & the Beast- having access to this Aladdin’s Cave of data could lead them into “a whole new world” of content production and future acquisitions.

Whether this justifies a $70 billion price tag or if such a deal is even on the cards is still very much up for debate and speculation. But after Disney stated their intent that they are in the market for an established digital service with their abortive approach for Twitter, there may be few other platforms that will sustain their domination as ably as Netflix can.

David Murphy

David Murphy

EntSight Researcher