Comcast's (CMCSA) exit from the bidding war for Twenty-First Century Fox's (FOX) assets has big ramifications for Netflix (NFLX) . If Disney (DIS) gains a controlling interest in Hulu this quickly, it will represent the biggest threat that Netflix has faced to this point. When it comes to Disney, we're talking about a company that turns everything into gold. This company is a content machine. Disney has a long history of successfully creating quality entertainment that turns profits. In contrast to Netflix, they don't create a bunch of debt to do it. If everything goes as it seems it will, we're talking about a double whammy for Netflix. Not only will Disney have gained a comparable and growing platform to assert itself in the streaming business, but it will also gain control over a ton of content that it can deny Netflix from having. That in turn will drive up Netflix's need for original content. That means even higher spending moving forward. Can Netflix handle that at a time when user growth appears to be slowing?
I am perhaps eating my words a little bit here, as I did feel that Netflix could hit higher price targets in the near term as long as competition took time to develop. I failed to anticipate how quickly Comcast would give up the fight with Disney. The ardent fight being waged by the Justice Department against AT&T's (T) relentless attempt to gain Time Warner (TWX) has kind of made it clear that Comcast would face one hell of a fight to succeed in getting FOX. This is likely why they've pulled the plug. One has to question how much market share these company's should really have.
Previously, Disney had said at times that it planned to roll out its own streaming service in the coming year. Now that they appear to have won the battle for FOX, I don't think they'll have to wait that long. Owning two thirds of Hulu provides them with an already succeeding platform. They don't need to make their own. They're buying one.
To demonstrate the immense problem this presents to Netflix, you need only look at Disney's size. Unlike Amazon (AMZN) , which doesn't really have a background in content creation, Disney's entire existence revolves around creating experiences for the masses. The theme parks, the movies, the tv shows, the sports programs, they're masters of entertainment. The company made nearly $9 billion last year. Netflix in contrast produced $557 million in net income.
To produce the content needed to drive revenues, and subsequent earnings, Netflix nearly doubled its long term debt to $6.53 billion. Disney has also taken on liabilities, but their long term debts increased at a lower rate of around 16% to $19.12 billion. The big difference here is that Disney doesn't need to use debt to finance its content creation the way that Netflix does. Much of their debt lies in investments and acquisitions. Sure they finance movies etc, but it's not like Netflix. Netflix is forced to create negative free cash flow (a problem Disney doesn't have) to push their content experience to drive user growth. If Disney goes out of its way to deny Netflix outside content, which it surely will, this problem will be exacerbated.
It's old news that Disney is cutting ties with Netflix in 2019. By acquiring big pieces of Twenty-First Century Fox, that means it is about to deny Netflix a lot more content. I particularly view things like the FX channel as potential sources of major streaming content. Merge that with the content being created by Hulu at present, and there's a real contender here. As all the big media players attempt to get their piece of the streaming equation, I expect protectionism of content to become a bigger and bigger issue amongst these companies. Who can make the best stuff? Who can draw in viewers? History shows that Disney can do it profitably. Thus far, Netflix has done it through burning up cash. If Disney's acquisition goes through, it will make Netflix's stock price seem a lot more expensive. Let's not forget that Comcast indirectly holds a big piece of Hulu. Assuming they don't negotiate the sale of the rest of it to Disney, they'll likely be funneling their content toward it as well, rather than Netflix.