Disney Made a Horrible Mistake
I haven't said a whole lot about the implications for Disney. That doesn't mean they're not interesting.
Even though the groundbreaking part doesn't begin until 2016 — who knows what type of shape Netflix will be in at that point — this is still big. Disney will provide first-run motion pictures to Netflix, an online streaming company, not a traditional premium pay-cable service.
In one respect, you can say it's all about Disney seeing the future: An on-demand world where "everybody" has Netflix streaming on their smartphones, tablets, computers, and, maybe more importantly, their Internet-connected television sets. Sales of televisions that link with services such as Netflix continue to increase alongside streaming players like Apple TV and Roku.
And there's no question that Disney fleeced Netflix on this deal. It depends who you believe, but the estimates range between $200 million and $300 million per year. They could be higher.
To this point, content providers — big companies such as CBS -- bragged about padding revenue and juicing profits by only licensing Netflix (and Amazon.com) content scraps. In other words, small, leftover portions of their catalogs they could not monetize through advertising or other worthwhile means.
That started to change just a little as Netflix became a more important outlet for popular cable series such as "Mad Men." Put a notch on the bedpost for the company here — Netflix established itself as a driver of ratings for cable. You discover past seasons of a show through your streaming plan and start watching fresh episodes as they air on cable.
Disney takes Netflix to a whole 'nother level. If Netflix can duplicate this type of deal multiple times — and stay solvent — look out.
The dust needs to settle, but, at the moment, it's a bad move by Disney.
I prefer the Time Warner approach: Do your own digital offering and, until you absolutely must open it up, make it available exclusively to cable and satellite subscribers. So, say, Listen, we're going to put these flicks on our new premium HBO-like channel, "Disney movies" (does that already exist?) and you can stream them if you subscribe. Disney can make sure the channel gets cleared in loads of households by using the ESPN franchise as leverage.
Why break this golden cable/satellite model? It's so profitable for the content providers and, while there's a petty dispute here and there over fees, the cable and satellite companies aren't complaining that much.
Jeff Bewkes, the CEO at Time Warner, has the right idea with HBO GO. First, he refuses to open it up to people who do not subscribe traditionally to HBO. Second, and this is the extra important part, he's doing a (very good) digital offering through his own platform. Time Warner sets itself up to be as big a digital/mobile powerhouse as it is an old guard media one now.
But Disney chooses to give the reins to Netflix. That doesn't make me as bullish as I normally am on this company and, over the long-term, the stock.
I feel like I have a decent handle on what they're doing at Time Warner/HBO. I would expect Disney to do the same or something similar, particularly after it took ESPN digital much the same way Time Warner did HBO.
Build a digital powerhouse. Take as much of your content inside as you can. Broadcast via your own platforms. And then sell the non-exclusive scraps to Netflix, Amazon, and others, who will likely be more than willing to overpay for it.
Why bust the model open prematurely? And then when you have to bust it open, do it on your own, extending your presence as a creator and distributor of content.
I must be missing something. Or Disney made a really bad mistake. I would love to hear Jeff Bewkes' take on Disney selling the business out to Netflix.
—By TheStreet.com's Rocco Pendola
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