Why Netflix lost the lead and to Disney in streaming

This week Disney announced that it has surpassed Netflix in the number of subscribers worldwide. The news surprised. Disney got into streaming for real just over three years ago, when it launched Disney+. Netflix launched its streaming platform 15 years ago and until last year it was the absolute leader in the industry.

In the second quarter of this year, Disney+ added 14.4 million new subscribers, bringing its global total to 152.1 million subscribers. Thus, Disney’s total subscriber base reached 221.1 million customers across all of its streaming platforms, including ESPN+ and Hulu. Netflix reported last month that it had 220.67 million subscribers.

A series of mistakes help to explain the downfall of Netflix, from the increase in competition from new streaming platforms in the market, to the wrong decisions of the owner of Tudum, such as giving up live sports broadcasting, making significant price increases in subscriptions and increase production volume losing artistic quality of content.

But probably, the explanation for Disney’s advantage is that the traditional giant understood before Netflix that the victory would go to whoever had the best content.

Disney+ bet on quality, not volume

Yes, Netflix has taken the lead in streaming. But it grew quickly only while using the productions of the big studios and TVs. When traditional content producers started not renewing licensing contracts to invest in their own streaming platforms, Netflix was forced to make original series and movies.

At first this didn’t seem like a big problem. House of Cards, Netflix’s first original production, launched in 2013, was a success. The series was a high-quality product, with big stars, and it opened the door to a type of authorial content that talent didn’t find space to make on TV or cinema.

The problem is that Netflix needed to replace what it lost in its catalog at an ever-faster pace. Thus, it invested billions of dollars in its productions, prioritizing volume. The bet was on growth based on increasing debt to have more production volume before other competitors hit the market. The problem is that creating blockbusters is difficult and takes time. The fallacy that data could solve the problem didn’t help either.

Bob Iger, CEO of Disney, told Vanity Fair in 2019, two months before he launched Disney+. “What Netflix is ​​doing is creating content to support a platform. We’re creating content to tell great stories. It’s very different,” said the executive.

Disney+ executive Agnes Chu stated shortly before the launch of the Disney platform that the approach would be nostalgic but also very careful. “We’re not doing a lot of stuff just to get it done,” she said. “Everything we do, we have a very clear focus that has to meet the standards set by the originals and hopefully take it to another level on Disney+.” Fellow executive Ricky Strauss also noted, “Netflix has been around for years doing what they do. So yeah, we wouldn’t be competitive in quantity.”

During the pandemic, Netflix’s plan worked. Disney+ was also driven by isolation. The problem started late last year, when people returned to normal lives, staying at home less, and interest rates began to rise, making the debt of streaming companies more expensive. This made investors start to charge profits from companies.

Darth Vader wins Stranger Things

When Disney launched its streaming, it could afford to adopt a quality strategy for the simple fact of having left decades ahead. In addition to owning the ABC TV channel, and having globally recognized characters like Mickey, Disney began a series of purchases to rejuvenate its properties while Netflix was still shipping. DVDs by post.

In 2006 Disney bought Pixar Studios, which owns beloved franchises like Toy Story and Finding Nemo, for $7.4 billion. In 2009 came the astonishing purchase of Marvel and its star-studded squad of heroes for $4 billion. In 2012, it was the turn of powerful Lucasfilm franchises such as Star Wars and Indiana Jones to take control of Disney for $4.05 billion. Netflix was founded in 1997, and in 2007 it launched its streaming service.

Successive box office records for Pixar, Marvel and Lucasfilm have made Disney by far the most profitable movie company. But the appeal of brands is not limited to movie theaters. Just 16 months after its launch, Disney+ reached the 100 million subscriber mark. It took Netflix a decade to reach that number.

Stranger Things is Netflix’s biggest franchise, but even for being much younger, it’s tiny compared to the Marvel and Star Wars universe.

Disney has another advantage. When releasing the results this week, the company reported a 26% jump in revenue. Streaming subscriptions helped, but the company’s theme parks posted record revenue. Unlike Netflix, which lives off subscribers, Disney’s most profitable business is its parks, resorts and cruises.

Disney parks are a consumer’s dream

Sales at the Parks, Experiences and Products division – which includes Disneyland, Walt Disney World and four resorts in Europe and Asia – reached a record $7.4 billion in the quarter, up 70% from 2021.

The new Guardians of the Galaxy roller coaster, a visit to Darth Vader or the unforgettable moment of a photo with Mickey makes parents happily part with the money in their wallets. This allows for scale. While Netflix expects to spend $17 billion on content this year, Disney projects to spend $30 billion just on producing content across all of its properties.

About a third of that $30 billion is spent by Disney on sports licensing. ESPN, which until recently was being studied for sale, has now become one of Disney’s gems. The company even discarded the sale plans. Streaming looks a lot more like traditional TV than many realized, as sports are also becoming the big draw on platforms.

Fox purchase changed the game

Disney’s acquisition of Fox in 2018 was visionary. In addition to franchises like Deadpool, Avatar, and The Simpsons, Disney took Hotstar. Fox’s streaming platform was very strong in Asia, in large part because it owned the rights to the Indian Premier League. Disney+ has 38% of its subscribers in India and Southeast Asian countries. The most populous region in the world is a cricket fanatic and broadcasts of the games have brought thousands of subscribers to the platform.

Despite the high investments, Netflix does not take off in the region. The company would have 5 million subscribers compared to 36 million for Disney platforms.

Disney’s successive acquisitions and the different strategies of each company’s platform help to explain why analyzing its numbers is complex, especially in a direct comparison with Netflix. Even Disney switching over to Netflix is ​​questionable.

1 + 1 = 3?

Disney’s total count adds up to three Disney bundled services: Disney+, ESPN+ and Hulu (of which Disney owns 77%) – while Netflix is ​​evaluated individually. A better comparison would be to look at Disney’s unduplicated streaming subscribers (i.e. families), but the company doesn’t disclose that number.

Another important point is that in recent months Hulu has grown faster than Disney+. The platform does particularly well among older audiences, who tend to care less about Star Wars and Marvel’s heroes.

Whether Disney is the subscriber leader or not is perhaps the least of the company’s problems. Part of the explanation for the company’s rapid growth was its low prices, particularly in Latin America and Asia.

Disney predicts that Disney+ will not profit until the end of 2024. But the company’s losses from streaming are growing. Operating loss for the segment soared to $1.06 billion in the quarter from $293 million in the same period a year earlier. Netflix posted net income of $1.44 billion in the same period.

In the United States, Disney generated just 39% of Netflix’s revenue per subscriber in the second quarter (ARPU). That is, Disney’s average revenue per user is less than half that of Netflix. Overseas, the difference is even greater: Disney+ Hotstar had an ARPU of $1.20/month for the quarter ended July 2, while Netflix had an ARPU of $8.83/month for the Asia-Pacific region. , points out to Variety.

Plan price skyrocketing

To reverse the situation, Disney announced that it will increase the subscription price of Disney+ in the United States by 38%. The price of ad-free Disney+ will increase from $7.99 per month to $10.99 per month, or $109.99 per year. Disney+’s new basic ad-supported service, which will launch in December in the United States, will cost $7.99 a month. Increases are also planned for combos with Disney+, Hulu and ESPN+.

In addition to the growing losses, Disney advanced having a pessimistic view for streaming in the coming months. On Wednesday, the company lowered its long-term forecast for Disney+ subscribers to 215 million to 245 million subscribers. That’s a drop of 15 million on both the lower bound and upper bound of the last forecast.

Disney is lowering its forecast for Disney+ in part because it doesn’t renew Indian Premier League rights, but also because it believes rising inflation and a slowing economy around the world will impact the industry. The company cut its content investment forecast by $2 billion this year, from $32 billion to the $30 billion it announced last week.

Another initiative to improve accounts will be the launch of the advertising version of Disney+. Netflix also announced a cheaper plan with ads, while HBO Max is already considering a free plan with ads.

Disney is ahead of Netflix for now. But if streaming is indeed a game of quality content and cash to buy and create great franchises, the risk for Disney is being overtaken by the tech giants.

Apple+, Google and Amazon are bigger and richer companies. And like Disney, for big techs, streaming is just a way to sell higher-value products. We will still have large productions, but cost cuts are already a reality, as are increases in subscription prices. The golden age of streaming is over.

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