The streaming video on-demand market, which was already overcrowded, has now gotten even more competitive with Disney announcing its entrance into the fray. But contrary to the popular belief that Disney’s original programming expertise will dent Netflix’s (NFLX) fortunes, the entrance of Disney into the streaming market will actually benefit all the players in the industry, specifically by expanding the overall market size.
What did Disney do?
Hurt by declining revenues from its crown jewel, ESPN, Disney decided to take the plunge into the streaming video on demand market by announcing its plan to launch a new video streaming service by 2019. Disney’s CEO Bob Iger said during the recent earnings call that the streaming service will be priced substantially below Netflix, as it will be starting off with “substantially less volume.”
“Disney is developing new television series based on some of its biggest franchises -- 'Star Wars,' 'Monster Inc.,' 'High School Musical' and Marvel -- that will be carried on a Netflix-style streaming service set to launch in the second half of 2019,” Iger told analysts.
The company is also planning to launch an ESPN streaming service next year called ESPN Plus, dedicated to the sports niche where ESPN still remains one of the top players.
Both these are indeed massive announcements, and let there be no doubt that it will prepare Disney to stay relevant in an entertainment market that is increasingly tilting towards internet-connected devices for consumption. With cord cutting accelerating in the last couple of years, it’s imperative that the entertainment major position itself to take advantage of that shift.
TechCrunch reported in September that cord cutting has accelerated in a big way this year. The technology website wrote:
“Bad news for traditional pay TV: cord cutting is accelerating at a pace faster than previously estimated. According to a new industry report from eMarketer, there will be 22.2 million cord cutters ages 18 and older this year – a figure that’s up 33.2 percent over 2016. The firm said it’s had to revise its forecast as the pace of cord cutting has increased. Previously, it believed there would only be 15.4 million cord cutters in the U.S.”
The entrance of Disney into the field will be one of the best things to happen to the streaming industry. The company is a powerhouse in movie production and owns marquee franchises such as Star Wars, Marvel and many more that have hundreds of millions of fans across the globe.
With Disney finally accepting internet-based delivery systems to release its high-value content, the value proposition offered by the streaming industry as a whole goes up a notch, while the traditional pay TV market continues to be left behind.
Hopefully, this will further accelerate the cord-cutting trend as more and more customers find value in streaming their content instead of opting for a media bundle. Most of the streaming providers - Disney included - have now accepted that Netflix is the top player in the market, which has allowed Netflix to charge a hefty premium for its offering and quietly taking the high-end of the streaming segment.
The one reason that the streaming market is overcrowded at this point is because customer base expansion has been restricted by existing cable and satellite subscriptions. Now that the video viewing world is on a cord-cutting rampage, and companies like Disney are moving to an Internet-based content delivery model, that consumer base can be expected to grow strongly over the next several years.
Not only will that help Disney’s assets, but also companies like Netflix, which can exploit new market segments that the appealing and attractive new content will help open up.
NFLX data by GuruFocus.com
Due to its high growth rate, Netflix continues to trade at a high price-sales valuation, which was a little more than eight at the time of writing this article. Indeed, Netflix is a great company with a solid future but, at the current valuation, most of that future growth seems to already be priced in, leaving a negligible margin for safety.
If you want to buy Netflix, wait for a bad quarter before you get in, and keep a really long time horizon to build into a position.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
