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Disney and Netflix: a Mouse of Cards

07 October 2016 IHS Markit Technology Expert

The rumour mill is churning with the possibility of the takeover of Netflix by US studio major Disney. On the surface, the acquisition of a high-potential service such as Netflix seems appealing, but not all would be rosy.

Disney is already invested in online tech infrastructure via Major League Baseball's (MLB) BAMTech and has specifically cited interest in streaming at scale as its rationale for investment. In the US, this has obvious synergies with bundling other premium Disney brands, making a takeover of Netflix for its technology much less compelling.

Netflix would also be overpriced for Disney. As so much of Netflix's worth is based on current growth trajectories and future potential, in order to capture value Disney would have to ensure that Netflix's performance remains strong under new management. Given the controls placed on small business units within umbrella corporations, it seems unlikely that such an arrangement could be feasible.

While the reasons above greatly reduce the likelihood of such a takeover from happening, there are a number of reasons why an acquisition would benefit Disney, especially for international expansion.

What interest does a studio have in SVoD?

Disney has a history of building strong consumer brands and premium franchises-and not just those directly related to the mouse. ESPN, MLB and "Star Wars" are great examples where Disney has recognised brand power and used its experience to really leverage profits over a number of different verticals. Netflix is now a household name for in-home streaming-having made a global mark in in Subscription Video on Demand (SVoD)-and it fits well with Disney's strategy, since the idea of in-home video streaming is now synonymous with Netflix.

Disney has also been increasingly looking at using online delivery to directly monetize the company's intellectual property, bypassing third parties and maintaining not only a direct relationship with the consumer but also control of the user experience. This is evidenced by Disney moving online with DisneyLife in the UK, as well as the growing independence of ESPN. A deal with Netflix would mean gaining a lot of hard-won lessons, infrastructure and streaming technology, giving Disney further options for online rollout, including international expansion.

How would a Netflix takeover mesh with Disney's pay TV business?

Although Disney operates in the pay TV space, it is not beholden to the pay TV industry. Instead it has always existed and operated across the home entertainment spectrum. Disney is probably the most hands-on of all studios when it comes to consumer relations-meaning it would be more than capable of taking control of the SVoD window, especially given the technical backing that Netflix would bring. There is also evidence suggesting that Disney's recent deals to monetize its online assets have been less than satisfactory, further strengthening the case to follow pay TV disrupters, rather than traditional partners.

Many lower-cost pay TV platforms have already made the move to partner with online pay TV disrupters, including Netflix and Amazon. To some extent, a deal with Disney would restore the status quo, where pay TV operators are again dealing with content producers and top-tier aggregators, as opposed to potential competitors. For more premium partners such as Sky in the UK, this could make things a degree harder, as Disney would gain greater leverage at the negotiating table from the wider range of options that they would then hold.

But for content creators, this could spell bad news

For some content creators, especially those enjoying new-found success with Netflix, a Disney takeover could potentially make things difficult. If Disney was to become heavily involved in Netflix operations, content that competes with Disney would likely be given a back seat. However, given how carefully Disney segregates and protects its intellectual property, it is likely that a Chinese wall would exist on the consumer-facing side, if not on the technical. Netflix would largely be left to continue its operations, similar to how ESPN is run, while operational synergies would be gained on the tech front in light of playout and knowledge sharing.

What would this mean for Netflix?

In short, disaster.

While Netflix would likely be left alone to run as a business unit, it would be exactly that: a small unit within a large umbrella organisation. Netflix has a hugely entrepreneurial spirit and a record of taking the uncompromisingly hard road to support strategy, as evidenced by the canning of a small piece of hardware, which became the Roku box and Now TV.

Furthermore, if Netflix existed as a business unit restrained by externally imposed targets and margins, the company would be unlikely to maintain its current level of operational risk and experimentation, and Netflix talent would recognise this. Under a Disney ownership, Netflix would be maintained as a top-class SVoD service, but gone would be the world-beating, risk-taking, disruptive start-up that shook the world of pay TV.

Jonathan Broughton is Senior Analyst for Video Intelligence within the IHS Technology Group at IHS Markit
Maria Rua Aguete, Director for TV Media Intelligence within the IHS Technology Group at IHS Markit, also contributed to this analysis
Posted 7 October 2016


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