Disney's $71 billion deal for the majority of 21st Century Fox's entertainment assets has closed. It will take years to judge whether Disney CEO Bob Iger spent his company's money wisely, but the benchmark for success should be clear -- make Disney look and trade like Netflix.
Iger has been pretty clear about why he was willing to break the bank for Fox -- a deal that cost him nearly $20 billion more than he originally planned to spend, after Comcast topped Disney's initial bid. Disney is building a direct-to-consumer streaming service called Disney+, and Iger wants Fox's content, which includes series like "The Simpsons," "Modern Family," and the X-Men and Fantastic Four characters.
"Our acquisition of 21st Century Fox was driven by our strong belief that the addition of these great businesses, brands, franchises and talent will allow us to move faster, reach farther and aim higher – especially when it comes to building direct connections with consumers," Iger wrote in a note to employees Wednesday that was shared with CNBC.
Iger is betting on the streaming service because investors have already declared Netflix victorious in its fight against traditional media companies.
Just this week, Netflix CEO Reed Hastings reiterated that his company is more of a media company than a technology company.
And yet, Netflix has a forward price-to-earnings ratio of nearly 57 and an enterprise value-to-trailing EBITDA ratio of about 97.
Those numbers are important because they're two good indicators of how investors value Netflix. Comparable companies should have similar valuation metrics.
Disney's forward P/E ratio is 15. Its enterprise value/EBITDA ratio is 11. That's a lot lower than Netflix.
Disney's business will never be directly comparable to Netflix. It owns an enormous theme park business. It makes hundreds of millions each year in merchandise. Its legacy media business, driven by ESPN, has a completely different business model than streaming licensed and original content.
But as the disparity in those ratios show, investors have largely snubbed Disney in favor of Netflix. Disney shares have risen 15 percent in the last three years. Netflix is up 258 percent in the same period.
So Disney is going all-in on playing Netflix's game. Iger is pulling all of Disney's films from Netflix in the coming year so they exclusively live on Disney+, which will debut later this year. Disney now has Fox's production assets and library content as another streaming option that can compete for consumers' time and dollars against Netflix, Amazon's Prime Video, AT&T's WarnerMedia streaming services, and so many others.
Typically, the process of ascertaining whether or not an acquisition "worked" is complicated and more art than science. But in this case, if Disney's new streaming service vaults the company's trading multiple to something that looks more like Netflix and less like Viacom, you can deem its acquisition of Fox a success.
And if it doesn't? Iger's successor will have to figure out company's next transition plan.
Disclosure: CNBC's parent company NBCUniversal is owned by Comcast.