Disney used to make hundreds of millions of dollars a year selling its stuff to Netflix.
Now it is going to spend billions of dollars a year to try to beat Netflix.
Disney executives didn’t mention Netflix once during their three-hour-plus investor presentation Thursday, at which the company laid out its plans to build up a suite of subscription streaming services — most notably Disney+, a $7-a-month service bursting with movies and TV shows. Disney+ launches in the US in November and will feature everything from Disney’s recent theatrical offerings, like Captain Marvel, to classic Disney movies like Bambi, and new, original stuff like The Mandalorian, a Star Wars TV-show spinoff.
And Netflix isn’t the only company Disney will be battling in the years to come; the list of competitors and would-be rivals now includes everyone from Amazon to Apple to AT&T.
But make no mistake: Netflix is the primary reason Disney is making the giant leap from selling its stuff to distributors to launching its own streaming business, where it hopes to sell its stuff directly to tens of millions of consumers, via its own apps
As the Information reminded us this week, Disney — and just about every big media company — used to view Netflix as a great place to make easy money. Netflix desperately wanted to build up its own streaming business, and Disney and other big media companies were happy to take Netflix’s money.
In 2012, for instance, Disney struck a deal to sell its movies to Netflix for an estimated $300 million a year, instead of striking a deal with conventional distributors like HBO or Showtime.
And in 2015, even as Netflix was attracting tens of millions of customers to its ad-free, all-you-can-eat streaming, and while Disney’s cable channels were simultaneously losing millions of viewers, Iger still said he was happy to keep doing business with Netflix CEO Reed Hastings: “We look at Netflix as more friend than foe. They’ve become an aggressive customer of ours,” he told Wall Street.
Two years later, Iger had done an about-face: He said Disney would stop selling its stuff to Netflix and would launch its own service, which would stream everything from blockbuster titles like its Star Wars and Marvel movies (after they’d been in theaters) to original programming based on popular Disney characters and brands.
All of that is going to cost Disney real money: It has to to build up the technical resources it needs to run its own streaming serviceand create original programming for subscribers. And, of course, it is also giving up the hundreds of millions of dollars it used to make selling its stuff to Netflix and other distributors.
Disney is putting a positive spin on this: It says it will sign up 60 million to 90 million subscribers for Disney+ by the end of its 2024 fiscal year (with two-thirds of those subs coming from outside the US). It also projects up to 12 million subscribers for its ESPN+ service (which sells sports programming that isn’t carried on its regular ESPN cable networks) and up to 60 million Hulu subscribers.
But the bill for that will be in the billions. Disney’s three streaming operations will run a loss of $3.9 billion in the company’s 2019 fiscal year, estimates analyst Michael Nathanson. That number will jump to $4.9 billion the next year, with Disney+ accounting for $2.5 billion of that loss; Bernstein analyst Todd Juenger says those numbers will get worse if Disney decides to expand Hulu outside the US, since it will have to spend even more on content. Disney says it will start making money on its streaming businesses by 2024.
Context: Disney can afford to throw billions at this venture because it’s a giant that just got bigger by swallowing much of Rupert Murdoch’s 21st Century Fox. Disney generated $59 billion in revenue last year, and made more than $10 billion in profit. This year, as it adds Fox assets like The Simpsons (also coming to Disney’s streaming service), it is projected to make another $10 billion profit on $71 billion in revenue. By 2023, it should be a $100 billion company.
More context: While Disney is making a big strategy shift here, it is not blowing itself up. Disney’s core businesses — theme parks, movies, merchandise, and cable TV — are all staying intact, and the company expects it will stay as such for a long time. Notably, while the company is selling ESPN+ directly to hardcore sports fans, it is keeping its main sports product safely behind the pay TV wall: For now, at least, the only way to get ESPN is to subscribe to a bundle that includes dozens of other pay TV networks, too.
So what’s Netflix going to do about all this? Per Hastings, the same thing it has been doing for years: spend billions each year to build up its own content library, and hope to add to the 139 million subscribers it already has worldwide.
“You do your best job when you have great competitors,” Hastings said when asked about the coming competition from Disney and others last month. If you’re looking for an updated answer, check back Tuesday, when Netflix reports its newest earnings numbers.