4 Reasons Why I Think Disney Should Buy Netflix
The entertainment and media business is in the throes of disruption, which has led some people to speculate about some major acquisitions in the pipeline. Perhaps the most hotly debated tech acquisition is whether or not Disney — the entertainment empire — is looking into buying Netflix.
The basics of the deal are fairly obvious: Netflix has a ton of subscribers and wants to develop its own content, but developing content is expensive. Likewise, Disney is hungry for audience and new distribution models, and it can afford to throw a ton of cash at new business models.
Perhaps the most hotly debated tech acquisition is whether or not Disney — the entertainment empire — is looking into buying Netflix.
Netflix has shown solid performance: Its third quarter earnings report has their stock up 20 percent — and combined with the 3.6 million subscribers they added during the quarter, it’s my view that they are undeniably booming.
Even though it seems obvious to me why Disney should look into purchasing Netflix, here’s my reasoning.
Ridiculous Value Proposition Without Depreciation
If you’re in the empire building business, it’s hard to do better than Netflix.
Their business model is genius: Half of Netflix’s revenue goes to purchasing and producing content. Right now, the company is the #1 buyer of content in Hollywood.
They’re also booming from in-house successes like House of Cards and Orange Is The New Black, both of which are super hits on the international market. The more people who give their dollars to Netflix, the more content Netflix can provide, and the more value each person gets for their dollar. That’s the beauty of a platform model: when the content is acquired and paid for, incremental revenue is pure profit, as all the costs have already been covered.
And it gets better.
Unlike other assets, TV and movies don’t depreciate in value. This means that in ten years, a consumer who stays with Netflix will get 50–75% more value for their dollar, compared to today.
Everybody Loves Netflix
Sure, the content streaming service’s recent worldwide expansion and insanely good value proposition are arguably enough to compel anyone with the cash to make a bid, but to understand why Disney wants Netflix, you have to think about why we love the company so much.
Unlike other assets, TV and movies don’t depreciate in value. This means that in ten years, a consumer who stays with Netflix will get 50–75% more value for their dollar, compared to today.
And love Netflix we do. The service is in about 80 million households spread across 200 countries. We all watch it, talk about it, write about it, plan our days around it. Binge watching is accepted as the de facto viewing style for a really good show, Netflix and chill is firmly embedded in the cultural vernacular; Netflix has become way of life.
But why?
It’s because Netflix just works. The functionality of their streaming service is near-flawless and the platform works like a dream. So reliable is it that no one even thinks about it; we get the peace of mind that comes with taking the availability of our favorite shows for granted. Netflix has developed a network that is actively serving 80 million households — a loosely applied term in our sharing culture — and serves these “households” with such regularity that, on any given day, I know with certainty that I can go home and watch six hours of Luke Cage, no questions, no outages, no problem, no judgement.
I know this as surely as I know that there will be commercials when I turn on my old fashioned cable television. Netflix is cozy and reliable.
Cable Is Absolutely Dying
The reason this matters to Disney is because cable is about to go full-Ozymandias. Cable TV’s empire is in decline and nothing is going to keep it from becoming two vast and trunkless legs of stone in the desert. With 45% of Disney’s operating profit generated from bloated cable content machines ABC and ESPN, they must find a way to bring their fiscal workhorses into an era where TV is personalized, ad-free, and as on-demand as tap water.
There are two routes to this: build or buy. And building a video-streaming platform with the capacity to reliably carry content to millions and millions of people is incredibly difficult.
Just ask HBO, who’ve gone the “build it yourself” route and suffered several embarrassing setbacks. And even with growing pains aside, HBO is only managing content delivery to a few million subscribers, a drop in the bucket compared to the 80 million Netflix reaches. Major League Baseball is also jumping ship from cable and if MLB is busy trying to get your grandpa to buy a MLB.tv subscription, you know cable is as good as dead and buried.
The Secret Sauce: Data
Even without their exponentially ascending value proposition, and not counting any of the content Netflix produces or owns the rights to, and without factoring in the sheer value of the nuts and bolts of their streaming platform, there’s one more thing that should make Netflix very appealing to Disney: Data.
The secret sauce of a Netflix acquisition is subscriber data. Not only does Netflix have all of your basic information — credit cards, addresses, and whatnot — Netflix knows everything about what you watch, when you watch it, and how you like it. More than that, Netflix has a way to act on these data. Free from the cable requirement of “maximizing broad appeal”, Netflix can invest its resources in a very smart, highly specific fashion to maximize their return on investment.
This is how Netflix wound up making a movie with Adam Sandler, to satisfy a huge demand for him in Uruguay, a remarkable sentence that I could not have imagined typing ten years ago.
If Disney can look long-term at the death of cable, they’ll see that their choices are to get ahead (buy distribution) or catch up (try to build it themselves).
And more and more, Netflix is looking like a very expensive solution to Disney’s disastrous future if they fail to prepare for cable’s demise.
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Arne Alsin and Worm Capital clients are currently long Netflix and stand to benefit if the trading price of Netflix increases.
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