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Netflix set to be squeezed by Disney and Apple?

When Disney announced that it would be launching its own streaming service at the end of last week for the sum of $6.99 a month, starting in November this year the shares surged to a record high, despite the fact that management suggested that it is willing to use the business as a loss leader until 2024.

Given the diversity of Disney’s business model this is something that should worry Netflix particularly since Netflix doesn’t have the Disney pedigree as a film studio, merchandiser and theme park operator.

The additional revenues Disney can derive from these other businesses means that it can easily subsidise a loss making business, as can Apple who also recently announced its intention to get into streaming on line content.

Even so Disney still has an uphill climb when it comes to catching up with Netflix in terms of subscribers, where Netflix is the market leader, accounting for up to 15% of all global internet traffic.

In its most recent quarter Netflix reported revenue of $4.19bn with total subscribers increasing by 8.8m to reach 139.26m, which was an increase of 29m subscribers from a year ago. In an increasingly competitive market place Netflix’s position as the market leader is way ahead of the rest in this particular space, but it is likely to face further competitive challenges over the course of the next five years.

In this context while Apple’s new streaming service Apple TV+ being touted as a “Netflix killer” it is unlikely to be anything but in the short term, however the long term is likely to be a different prospect, and this is where the challenge for Netflix lies.

The arrival of Disney+ in November, as mentioned earlier, is also another added element of competition that will serve to keep long term pressure on Netflix, and in particular on its margins, as pressure builds on it to hold down prices, while attempting to stay ahead of its bigger, but late to the party rivals.

As things stand the valuation for Netflix is still way ahead of the challenges it is likely to face in the short term, and this could exert further downward pressure on its share price in the longer term, particularly since it also competes with Amazon Prime, which is also spending more money on content.

This remains the biggest headwind to Netflix’s dominance of the on-line streaming market, and while Netflix has the advantage of first move advantage, it is still spending billions of US dollars a year on new content at a time when streaming services could be about to hit critical mass when it comes to subscriptions.

For now consumers appear happy to spend money on one or two additional subscriptions, like Amazon Prime and Netflix being the most obvious examples. Add in a Sky subscription as well for UK audiences and the only way for Apple and Disney to significantly gain market share is likely to be as a result of churn.

This will be the biggest challenge to new entrants to the on-line streaming market, that of limited consumer appetite for multiple subscriptions, which means that content is likely to be key, though where Netflix might have an advantage is its creation of bespoke foreign language content.

For the moment Netflix has the edge, with its spending on original shows like “The Crown” as well as the funding of new films like “Bird Box” and “Roma” but with a share price that has gained over 400% in the last five years how much of this is already priced in?

Source: CMC Markets

It is also wise to assume that a lot of the films Netflix currently has rights to, it will likely lose if new major competitors withdraw the licensing to show these films. Disney has already gone down this route with respect to its Star Wars and Marvel franchises, with the likelihood that these films will disappear from Netflix by 2020.

Over the last four months the shares have been trading sideways, dropping to towards support at the 200 day MA, currently around $338. A move below these recent lows could well trigger further losses towards $320.

Today’s results are expected to show profits coming in at $0.58c a share, after the close, but it is future expectations that are likely to be key, as the streaming space becomes ever more competitive.


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