Tragic Kingdom

Disney Hits Netflix Where It Hurts

Losing access to important programming has long been a chief risk factor for the web-streaming company.

Disney might run the happiest place on Earth. But it's not so cheerful for Netflix.

Disney has decided it wants to create its own internet services built around its ESPN and Disney entertainment brands. As a result, Disney said it would stop making its newly released movies available to stream on Netflix beginning in 2019.

That means Netflix Inc. has roughly 18 months to figure out how to replace fresh Disney and Pixar movies, which are popular draws for its subscribers. A Netflix executive has said movies from Disney and other companies are responsible for roughly 30 percent of Netflix viewing in the U.S. (Disney movies are available on Netflix only in the U.S. and Canada.) Netflix shares dropped about 2.5 percent in after-hours trading on Tuesday.

Cost of Independence

Netflix is burning cash in part because of its spending on programming it can own and control

Source: Bloomberg

Note: Free cash flow is cash from operations minus capital expenditures.

Losing Disney's movies isn't a disaster for Netflix. The company had tens of millions of Web video subscribers before it struck a deal to stream Disney movies starting a year ago. And Netflix still has plenty of TV series and movies to keep subscribers entertained.

But losing access to important programming has long been one of the chief risk factors for Netflix and a big reason Netflix is mortgaging its present so it owns more of the TV series and movies on its service. Netflix's do-it-yourself strategy is risky, but so is relying on entertainment from companies like Disney and Time Warner that are growing wary of selling their programming to others. 

High Hopes

Netflix shares have climbed about 88% in the last year

Source: Bloomberg

This Walt Disney Co. announcement may also explain why Netflix on Monday announced the first acquisition in its 20-year history, for a company that specializes in creating superhero characters. Netflix also has an arrangement with Disney's Marvel brand under which Marvel makes series exclusively for Netflix based on Marvel characters. That relationship  is responsible for buzzy Netflix shows including "Daredevil" and "Luke Cage." 

Disney CEO Bob Iger said on a conference call Tuesday that his company was internally "discussing and debating" arrangements with Netflix involving the Marvel series and the "Star Wars" franchise that Disney also owns. It's clear Disney is trying to lock more and more programming inside its Cinderella castle rather than let it go to Netflix or others. Netflix must believe it may lose its Marvel deal at some point, and it bought its own comic book hit maker as a hedge. 

The unraveling of Netflix's access to Disney movies must have dawned slowly on the web-streaming company. As recently as April, Netflix executives said the company had "a great relationship with Disney." Now Mickey Mouse is going solo, and Netflix is left to figure out what to do in his absence. 

(Corrects executive's estimate of the percentage of Netflix viewing that movies account for in the U.S. in the third paragraph to reflect that it includes more than Disney films.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Shira Ovide in New York at

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