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Tech Drivers

How Netflix plans to use animation to challenge Disney Plus

Key Points
  • Netflix recently signed a deal with Studio Ghibli, Japan's equivalent to Disney in its status as a maker of animated feature films.
  • Netflix chief content officer Ted Sarandos recently boasted about an upcoming slate of animated movies, including one directed by "Disney legend" Glen Keane.
  • Disney Plus says it has 28.6 million subscribers. 
  • "I doubt the most powerful animation franchise in the world is quaking in their boots," said one entertainment expert.
Jason Schwartzman arrives at the premiere of Netflix's "Klaus" which has been nominated for an Oscar in the animated feature category that snubbed Disney's "Frozen 2." It was one of two Netflix animated films nominated in the category.
Kevin Winter | Getty Images

Netflix is talking more about an area of content production that is at the heart of Disney's brand and history: animated films. Fresh off two Oscars nomination for Best Animated Feature — "Klaus," written and directed by Sergio Pablos, the creator of Despicable Me, and "I Lost My Body," a French production which the streaming giant bought at Cannes — Netflix chief content officer Ted Sarandos highlighted its upcoming animated films in the recent earnings call.

Sarandos mentioned "The Willoughbys," which will be released in Q2, and animated musical feature "Over the Moon" in Q4, and he named-dropped Glen Keane's involvement with the latter. Keane is a former Disney character and supervising animator who worked on "The Little Mermaid," "Beauty and the Beast," "Aladdin," "Pocahontas" and Tarzan. Keane was named a "Disney Legend" by the entertainment giant. In 2017, Keane directed Oscar-winning "Dear Basketball," an animated short film based on Kobe Bryant's retirement poem.

"These are big theatrical scale animated features and big scale feature films that would be competitive with anything you'd see in the box office, and I think people really do value them," Sarandos said on the call.

Wall Street took notice, with J.P. Morgan analysts citing the comments from Sarandos ina post-earnings research note. "Netflix's commentary on animated films also stood out to us with Klaus recently nominated for an Oscar and Netflix building to several major animated feature films per year," J.P. Morgan analyst Doug Anmuth wrote.

Klaus was watched in about 30 million homes worldwide during its first month, according to Netflix, and it claims the film had high repeat viewing.

Frozen II dominated the 2019 box office (and is Disney's highest-grossing animated film of all-time), but unlike "Klaus" and "I Lost my Body," the Disney blockbuster was snubbed by Oscars voters. The film raked in $127 million its opening weekend in the United States and was Disney's sixth film to hit $1 billion in 2019. Disney's Pixar "Toy Story 4" was nominated.

Disney brand is 'amazingly powerful,' analyst says
Disney brand is 'amazingly powerful,' analyst says

"While Netflix's creative and experimental animation is paying off during awards season, Disney still dominates in enticing the masses. In 2019, "The Lion King" did over $1.6 billion worldwide, "Frozen 2" did over $1.4 billion, and "Toy Story 4" did over $1 billion. They are among the top 10 box office blockbusters in 2019," said Gene Del Vecchio, author of Creating Blockbusters.

The increased focus on animation comes as Disney's streaming service, Disney Plus, takes off. Disney just reported its first subscriber numbers: 28.6 million subscribers since launch. Disney also has removed the majority of its content from Netflix, threatening its ability to cater to family-driven subscribers.

"Each streaming service is aiming to appeal to all four quadrants, young and old, male and female, in order to gain new subscribers and retain current subscribers. Enticing all four quadrants helps justify the monthly subscription fee in a household," Del Vecchio said.

"I doubt the most powerful animation franchise in the world [Disney] is quaking in their boots," said Jeff Wlodarczak, Founder and CEO of Pivotal Research Group.

Netflix Chief Content Officer Ted Sarandos (L) and then-Walt Disney Company CEO Bob Iger in 2015 in Los Angeles.
Charley Gallay | Getty Images for LACMA

Netflix is not new to animation. It has had a deal with DreamWorks Animation since 2013, through which the animation studio, now owned by Comcast's NBCUniversal, brought animated film characters from popular movies to new episodic content: "Boss Baby Back in Business," "The Croods, "Shrek's Swamp Stories."

At the time, it was Netflix' biggest-ever deal for original first-run content. In 2019, Netflix spent $15 billion in all on content.

In 2016, Netflix and DreamWorks expanded the deal, though the length of the agreement was not disclosed by the companies. The relationship between the two has made Netflix the global home, excluding China, to multiple new original series, such as: Trollhunters, Dragons: Race to the Edge, and Dinotrux and granted streaming rights to the DreamWorks Animation feature film collection. Several shows in the pipeline including the recently announced Jurassic World Series.

Dreamworks' parent NBC Universal is launching its own ad-supported streaming service in April, Peacock, with 600 hours of animated content, including from Dreamworks. WarnerMedia — which is owned by AT&T, which also owns HBO — is taking "Friends" to HBO Max, and NBC Universal has more marquee content, "The Office" and "Parks and Recreation," slated for Peacock, but there has been no indication of any change in the Netflix-DreamWorks arrangement.

A Netflix spokeswoman declined to comment. Dreamworks did not respond to a request for comment.

Every time I talk to someone who has children they tell me their children are willing to watch the same animated episodes over and over and that makes it very valuable to Netflix.
Neil Macker
Morningstar analyst

Neil Macker, an analyst at Morningstar who covers Netflix, said one of the reasons for the DreamWorks deal was to provide NBCUniversal with a new stable source of cash flow, and as a result, he does not think that strategy is likely to change in the short-term. "In the long run, DreamWorks content may tilt to Peacock, but right now that's still up in the air," Macker said, and he noted that Universal movies will continue to be offered through other pay services, a different approach than Disney Plus which is making Disney movies exclusive.

Netflix also signed a new deal with existing partner Nickelodeon (owned by ViacomCBS) last November to produce original animated feature films and television series based on the Nickelodeon library of characters as well as new intellectual property. But as in the case of Peacock, the long-term strategic plans of partners are being blurred by an onslaught of new streaming competitors. Newly merged ViacomCBS is working on a streaming service that will include Nickelodeon programming.

Animation like DreamWorks and Nickelodeon episodic content is key to Netflix in providing children with shows they watch repeatedly. "Every time I talk to someone who has children they tell me their children are willing to watch the same animated episodes over and over and that makes it very valuable to Netflix," Macker said.

Even as Sarandos talks up the "prestige" animated features and the Oscar nominations in this category come in, their ability to draw people into the streaming service only serves an end goal if Netflix can keep them as subscribers by offering their children repeat viewing options. "You're always trying to get content out to kids and not as worried about the level of quality," Macker said, and he added that was the same with the 1960s, '70s, and '80s television.

"Obviously, certain genres are more important than others and the fact that kids are willing to watch the same episode over and over again ... if it was taken away, would the subscriber be more likely to move to another platform?" Macker said. "Netflix looks at what you watch when you sign up and what the kids are watching, and what it could cost if it was pulled."

Where Disney is weak

The entertainment experts say one of Netflix's best bets in animation is not going straight at a competitor like Disney, but hitting Disney where the House of Mouse is weaker, and where there is high global demand.

Wlodarczak said that leads to Japanese anime. In 2014, Netflix began investing in original anime content.

"There is a pretty devoted following for this type of niche content. Disney has almost nothing to do with it, so it makes sense for Netflix to focus where Disney is not," he said.

Netflix recently announced the 21 feature films from the famous Japanese art house, Studio Ghibli, were being adding to its streaming service in many global markets, this month — subtitled in up to 28 languages and dubbed in nearly 20 for the first time. (HBO Max has the rights to Ghibli in the U.S. market).

"Anime has worldwide appeal, especially in Asia, so Netflix is shoring up its presence internationally before Disney's international launch," Del Vecchio said. Disney Plus will have its first international launch on March 24. The company will be starting in Western Europe, followed by India through their Hotstar service on March 29, then launching in Belgium, the Nordics, and Portugal this summer. "Netflix is also taking advantage of a marketing principle that dictates to go where your competition is not. Since Disney is not a major player in anime, it makes sense that Netflix takes a leading role."

Netflix also recently acquired the next animated feature in the well-known Pokémon franchise. Pokémon Company International and Netflix are releasing "Pokémon: Mewtwo Strikes Back — Evolution" on February 27.

WarnerMedia has its own anime streaming service, Crunchyroll, which is part of HBO Max's plans.

Morningstar's Macker said anime is an area where Disney is lacking as it takes Disney Plus international. But at a broader level, Disney still retains the ultimate advantage: The biggest challenge Netflix faces in building its animated library is a factor of it being such a young company and being late to the animated game.

"Netflix is going up against a company that has been doing animation since the 1930s and that's a large library, and it's not like the other studios have been sitting on the sidelines. Netflix is trying to build a library quickly and that means cash spend. All these other companies have been spending for decades to build these libraries."

CORRECTION: WarnerMedia — which is owned by AT&T, which also owns HBO — is taking "Friends" to HBO Max. The story is also updated to correct the spelling of Neil Macker's name.

Disclosure: Peacock is the streaming service of NBCUniversal, parent company of CNBC.