Who’s Afraid of the Big, Bad Mouse?
Hollywood doesn’t have a Disney problem, it has a Netflix problem
In December of 2017, the Wall Street Journal reported that Disney had reinstated talks to purchase assets of 20th Century Fox. There was a furor among followers of the movie industry claiming that Disney was becoming a monopoly, that Disney wouldn’t let Fox make adult movies, Disney’s only interested in blockbusters, that media consolidation was a bad thing, or that Hulu would wind up collateral damage. The thing nobody seemed to be paying attention to however, is that Disney is and always has been the underdog in this fight. That Disney isn’t a problem for Hollywood; if anything, Disney is the only thing that can save it.
In January of 2006, Disney officially announced that it would purchase Pixar studios for $7.4 billion. This put to rest a long disputed renegotiation between Disney and Pixar’s previous contract. As part of the new contracts, Ed Catmull and John Lasseter were named President and COO, respectively, of Disney animation. While having two separate animation departments under the Disney umbrella seemed redundant to some, Catmull and Lasseter insisted they remain. Having had such a significant impact on the movie industry, they did not want to see Walt Disney’s legacy disappear. As Catmull points out in his book Creativity, Inc., he assured the team at Pixar that nothing would change under the Disney acquisition. He later reflects that this was the biggest mistake of his career. You can’t take over leadership of a second company and expect things to remain unchanged.
During the early 1990’s Disney animation experienced what is now referred to as the Disney Renaissance. After two decades of relatively stagnant box office returns, Disney was able to release a string of huge hits: The Little Mermaid, Beauty and the Beast, Aladdin, and The Lion King. Disney appeared to be back on the map; however, this success would soon be short-lived. Follow ups like Pocahontas, The Hunchback of Notre Dame, Hercules, Mulan, and Tarzan were received lukewarm at best. Disney, it would appear, had lost its groove.
So it’s no surprise that Disney execs were considering retiring the Disney animation banner upon the acquisition of Pixar. Pixar, with hits like Toy Story, A Bug’s Life, Monster’s Inc., and The Incredibles would be able to return Disney to it’s former animation glory. Catmull and Lasseter had other plans. After all, why have one great animation studio when you can have two?
Catmull rehired many former Disney employees with the task and vision of bringing Disney animation back from the dead. They started softly with moderate successes like The Princess and the Frog and Tangled; growing into bigger successes with Wreck-It Ralph and Big Hero 6; and finally restoring Disney to its former glory with massive hits in Frozen, Zootopia, and Moana. (Frozen and Zootopia both grossed over $1B worldwide with Moana grossing $600M and garnering two Academy Award nominations.)
In 2009, under the auspices of acquiring more IPs, Disney took a huge risk by purchasing the flailing Marvel Studios for a cash-and-stock deal valued around $4 billion. Under the leadership of Kevin Feige, Marvel has experienced a remarkable amount of success. Understanding that “spectacle” was what brought home the bacon, Disney brought many fans’ dreams to life when they agreed to purchase Lucasfilm i.e. the rights to Star Wars for a paltry (in retrospect) $4 billion in 2012. (Adjusted for a generous 15% cost of capital, Disney has already experienced a positive return on investment within just 5 years.) Then, harnessing the technological advances in movie making, Disney decided to begin venturing in to the live-action remake scene; trying their hand at doing live-action remakes of some of their more popular movies. The Jungle Book brought in an astonishing $900 million, followed by Beauty and the Beast which brought in over $500 million worldwide. Obviously wanting to capitalize on this success, Disney has a few more live-action remakes reportedly in the works such as Aladdin, Dumbo, The Lion King, and a second Jungle Book.
As of this writing, Disney appears to be back on top churning out hit after hit. They can appear to do no wrong. Within a little over the decade, under the leadership of Bob Iger, they have quickly become the 900-lb gorilla in the room. Warner Bros., recovering from the end of their Harry Potter and Lord of the Rings/Hobbit runs, tried to replicate Marvel’s success with their DC IP’s with little aplomb. (Even after grossing over $600 million worldwide with Justice League, Warner’s DC division is reportedly making big changes to their leadership and trajectory.) Sony, who still owns a powerhouse in James Bond, struck a deal with Disney, giving them access to Spider-man. Paramount has Transformers, Star Trek, Mission:Impossible, and Teenage Mutant Ninja Turtles; respectable, but nothing compared to Disney. Universal has the oddly popular Fast & Furious franchise, Jurassic Park, Bourne, and ill-fated Mummy franchises. Meanwhile, Fox has the Avatar powerhouse which is due out with a sequel or two one of these days and the X-men franchise. Their attempt to reboot the Ghostbusters franchise was met with scorn; while faired relatively well at the box office, was mostly hated by critics.
Five of the big six movie studios seem to be doing their best to replicate, or at the very least keep up with, Disney. Critics, journalists, YouTube movie reviewers have begun to be particularly critical of Disney believing that Disney is ruining Hollywood. They claim that nobody sees independent or stand-alone movies in lieu of reboots or sequels. There seems to be a sense of fear that traditional Hollywood is coming to an end and it’s all Disney’s fault. Naturally, the announcement that Disney would acquire 20th Century Fox struck fear into the hearts of movie fans across the globe. The irony here is that Disney is not killing Hollywood; if anything, Disney is the only thing that can save it.
In 1997, Reed Hastings infamously returned a copy of Apollo 13 to his local Blockbuster. He thought his wife had returned it, so when he returned it late, he was charged a $40 late fee. “There has to be a better way,” he thought. Thus Netflix was born.
We all know the story of Netflix so I needn’t harp on it here. In just the past year Netflix has doubled their subscriber count from 56 to 110 million active subscribers. They recently raised the price of a monthly subscription from $9-$12 a month. Their stock has experienced an 89% jump just over the last year. “Netflix & Chill” has somewhat humorously entered the American lexicon as a descriptor of watching TV. In fact, these days if you’re not up to date on the goings-on of shows like Stranger Things, Black Mirror, and Narcos, people give you quizzical looks.
*I, for one, don’t quite get it. Black Mirror, while unique, is kind of depressing; and Stranger Things just seems like a rip-off of Goonies. And aside from that, what is there? I did enjoy House of Cards though it lost its mojo after first season. To be fair, most people I know love Netflix. My mom is always watching some new weird random British show she’s become infatuated with, my step-sister likes quirky comedies and baking shows, my step-mom likes documentaries, and my buddy likes reruns of The Office, Parks & Rec, and Arrested Development . I don’t watch TV but I am impressed by their UI. When I am at my mother’s house, I do enjoy playing around with the selection screen. The way it’s set up to suck users into its ecosystem is fascinating to me. I am also a tech nerd, so that is to be expected.
Netflix currently trades at a P/E multiple of 261. Which, for a company that offers no dividends, is too rich for my blood. According to their 4Q17 earnings report, they exceeded targets by hitting $11 billion in revenue and yet somehow manage to still have negative cash flow. They additionally issued $1 billion dollars in debt to fund production of new TV shows. They leave shocking amounts of cash on the table by not releasing their movies in to theaters and by not allowing ads. How could they be so irresponsible?
However, people made similar arguments about Amazon at similar price points and Netflix appears to be going nowhere but up. Furthermore, Netflix has brilliantly positioned themselves as the OS of the home entertainment system, specifically the television. You can hear it in the way people communicate. They no longer “watch TV,” they “watch Netflix.” Binging on a show has become a point of pride. If you aren’t in the know of what’s happening on Netflix, you are out of the loop. While “Seinfeld” became synonymous with water-cooler talk, Netflix is the new water-cooler talk. (Seinfeld, who not so coincidentally was paid a reported $100 million to bring his “Comedians in Cars” show to Netflix. Sorry Crackle.)
In August of 2017, Disney announced they would eventually be removing their movies and shows from the Netflix streaming service when they launched their own streaming service based around their own IPs. People were dismayed by this. After all, if my theory is correct and Netflix is the OS of the television, people don’t want to have to purchase or even use a second OS. That would be like Adobe saying that in order to use Photoshop, you have to exit out of Windows and load Adobe OS X. Granted, that is the problem that Roku is attempting to solve and why its stock has performed so well since their recent IPO.
The obvious problem in the “battle for eyeballs,” if you’ll forgive me for using that cliche, is that people are only willing to submit to so many streaming services. If Amazon, Netflix, HBO, Disney, Hulu, and YouTube, all vie for your attention, each asking $10-$20 a month, eventually one will win out over all the rest. Especially since none of them offer any sports. (There is a lot of argument over whether Disney will offer sports since they technically own ESPN, but there is so much regulation, royalties, and frankly nonsense surrounding the sports world that it causes a headache to even try to speculate on it.)
Meanwhile, movie theaters have experienced serious declines over the last few years. AMC theatres has missed revenue targets six years in a row and has experienced a 60% decline in stock price just over the last year. Regal cinemas was recently purchased by Cineworld, a UK based theatre group, for a generous 43% premium. Unfortunately, Dalian Wanda Group, who purchased a controlling share of AMC for $2.6 billion back in 2013, is now considering selling their shares. Of course, who do analysts predict will buy AMC? Netflix, of course. No surprise there.
The crux of the matter is that Hollywood does not have a Disney problem, they have a Netflix problem. Netflix has changed the business model upon which Hollywood has relied for over a century. And the only company with the brand recognition, commitment to innovation, history of risk-taking, and capital to be able to compete with Netflix, is Disney. Furthermore, the only way to compete in the new world is through recurring revenue. Amazon knows this, Adobe knows this, Netflix knows this; every technology company knows this. People do not want to spend $30 at the theatre to see one movie when they could spend $12 a month to have access to a sea of movies at home, even if they’re not that good. But while people may shell out the $30 a couple times a year, they re-up for Netflix every month.
And let us not forget that television is coming after movies in a big, bad way. Television has become astoundingly visceral and interesting. An episode of Game of Thrones is just as good, if not better, than watching a movie. There are currently over 400 scripted television shows in production at the moment. You would have to quit your job and double your lifespan just to watch all of the shows available at the moment. Plus, TV is attracting the best writers. After all, in a television show, writers are allowed to use much more creativity and narrative, they’re able to tell longer more in-depth stories, they have more creative control, and they are able to take bigger risks. It actually would not surprise me if at some point in the future movies go the way of the dodo bird and just leave television.
So, for all the people who fear the Disney-Fox merger I’m afraid to say, this is just the beginning of a larger consolidation in Hollywood. Disney already has their foot in the door to Sony studios, and it’s just a matter of time before the others fall as well. It is nothing to be feared however. As competition gets more fierce, the quality expected goes up and up and consumers benefit. People seem to forget that blockbusters fund the smaller independent movies. In fact, I believe Disney to be the underdog in this fight; because in the end, I believe only one will be left standing. I, for one, can’t wait to see how this all plays out. After all, who doesn’t enjoy a good fight. I think the real question is who’s favored and what’s the spread? My money’s on Netflix.
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