Disney Dropped the Hammer on Netflix by Refusing Advertisments

Oct 4
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Disney (NYSE:DIS) banned Netflix (NASDAQ:NFLX) from advertising on its entertainment networks such as ABC, FX, Hulu, and Freeform while the company takes steps to release its own streaming content service Disney+ to compete with Netflix.  CNBC reports, “We gotta get Netflix the hell out of FAANG,” Cramer said in an appearance on “Squawk on the Street.” “I tell you that right now. I don’t know how to do it.” Netflix shares have fallen 29% this year on increased competition and the loss of much of its popular content which is owned by other companies looking to start their own streaming services.  This action has worked to fracture the content provider marketplace with streaming service announcements bubbling up from all corners of the media landscape in a desperate attempt to monetize content and increase revenues.  

Removing competitor’s ads from its networks makes sense from a Disney business perspective but does it make sense from a public perception one? It’s difficult to determine how much goodwill Disney has in this case when it is a proverbial giant in the entertainment industry with nearly a century of content and countless acquisitions to properties such as Pixar, Marvel and Star Wars.  Netflix, on the other hand, will now be locked out of advertising leading for its services and expected to face declining subscriber counts and revenue and profit while additional spending is going to be required to create quality content that people want to watch. This is what led to the exclamation by Cramer to remove Netflix from FAANG. At this point, there are not enough positive catalysts to see shares appreciate to make it a smart investment. “I’m not a Netflix fan, here,” he said, “there’s too many competitors.”  

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Needham analyst Laura Martin thinks that Netflix is going to need to drop prices to compete properly with competitors.  They own countless shows and movies they have created that will be able to go onto the Disney+ service. However, some of the decisions that Disney is making with their content release is leaving me confused.  Collider reported a list of content that would be available and it does not include much older Disney content that would draw in more users based entirely on nostalgia and being able to watch some of the older shows and content we may have grown up with as children. I think in the end this is going to depend on the type, quantity, and quality of the content offered in each service.

Laura is expecting Netflix to lose as many as 10 million of its current 60 million subscribers to the competition.  I suspect there will be some defections to these other services but Netflix has made some very smart deals in recent years with companies like T-Mobile (NASDAQ:TMUS) that offer Netflix to their subscribers as part of their standard monthly service.  This will likely set a floor on the number of losses the company will take since many users are already basically bought into the platform through other means than a direct subscription. In addition, Netflix could also start to offer a lower cost advertising-supported service to bring in additional cost-sensitive users. Hopefully, for investors, the company will have some fresh ideas or good news considering the losses that have accumulated this year. 

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