Netflix is staring at higher content costs as Disney and Fox hold merger talks

Key Points
  • Disney has held talks to acquire most of 21st Century Fox's business, sources told CNBC's David Faber.
  • Media companies are merging in part to be more competitive against digital video platforms like Netflix.
  • Netflix's costs are going up.
Netflix Co-founder and Chief Executive Officer Reed Hastings.
Stephane De Sakutin | AFP | Getty Images

A Disney-Fox tie-up could make life increasingly difficult and more costly for Netflix.

CNBC reported on Monday, citing sources familiar with the matter, that 21st Century Fox has been in talks to sell most of the company to Walt Disney. While there's no guarantee that a deal will be finalized, the discussions point to a changing landscape in the media world.

Discovery Communications acquired Scripps Network Interactive in July for almost $12 billion. Comcast bought Dreamworks last year, and Verizon now owns AOL and Yahoo. AT&T and Time Warner agreed to join forces, though the deal could be blocked by the Department of Justice over anti-trust concerns.

CBS and Viacom's proposed merger was withdrawn by Shari Redstone, the vice chair of the board for both companies, sources told CNBC in December.

With 109.3 million subscribers globally, Netflix has become a massive force in the entertainment industry and eaten into the legacy television and cable businesses. But as giant media companies merge their portfolios and roll out their own on-demand offerings, it's going to be harder for Netflix to compete, said Greg Portell, a partner at management consulting firm A.T. Kearney.

Is Disney-Fox deal all about Netflix?
Is Disney-Fox deal all about Netflix?

"If Disney or Comcast or anyone else comes up with something with a similar subscriber profile it will make it that much harder," Portell said.

Netflix has already announced plans to spend up to $8 billion on content in 2018. The company's catalog currently consists of a few buzzy shows, a handful of potential breakout hits and "a whole lot of clutter," Portell points out. Additionally, Netflix has cut ties with "House of Cards" star Kevin Spacey following multiple allegations of sexual harassment against the actor.

Everything is getting more expensive. Amazon is producing original content, and Apple and Facebook are also getting into the game. HBO isn't going anywhere, and AMC has its share of hits. Fox, Disney, Comcast and Time Warner are all co-owners of Hulu.

No more cheap content

Whether it's for original content or older shows and movies, consumers have a growing number of alternatives to Netflix's monthly subscription.

"The days of cheap archived content are over," said Jim Nail, an analyst at Forrester. Companies are "going to ask Netflix for a whole lot of money."

Still, investors are clearly on Netflix's side. The stock has surged 62 percent this year and is trading near a record. Old media companies, meanwhile, are playing defense.

"The mergers are more of a function of the weaker players not being as viable as consumer consumption changes, " said A.B. Mendez, an analyst at Frost Investment Advisors.

CNBC is owned by NBCUniversal, whose parent company is Comcast.