Last month, Netflix (NASDAQ: NFLX) released its first earnings since Disney (NYSE: DIS) announced that it would pull its beloved content from the streaming site after 2018 to start a competing service.
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When Disney made the announcement in early August that it would be ending its deal with Netflix in 2019, investors were concerned for the streaming giant. Not only will Netflix lose compelling and beloved content from its site, it will also have to fight off another competitor in the streaming space.
Netflix CEO Speaks Out on Disney Pulling Content
On the company's recent earnings call, Netflix CEO Reed Hastings made it clear that the streaming site doesn't need Disney. In fact, the company's international growth has been promising, despite it only offering Disney content in the Netherlands, Australia, and Canada.
"So, although it's got an enormously significant brand in terms of its significance relative to growth, you can see that we've done very well in international without it," Hastings said.
Netflix added 4.45 million international subscribers, blowing past estimates for 3.72 million net additions. In the more saturated U.S. market, Netflix added 850,000 subscribers, vs. estimates for 774,000 additions.
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Clearly Netflix doesn't need help adding international subscribers. But how will dropping Disney titles from the catalogue impact existing subscriber numbers?
Do Netflix Users Care About Disney Content?
A survey that was conducted by Piper Jaffray after Disney announced it was pulling content from Netflix in 2019 found that subscribers aren't spending a lot of time watching Disney shows on the platform. Based on a survey of more than 500 U.S. Netflix subscribers, only about 20% of Netflix subscribers spend more than 10% of their Netflix viewing time on Disney content.
Piper Jaffray estimated that Netflix spends about $200 million per year to license Disney's content, which is only about 3% of its overall content budget. In 2019, Netflix will be able to use that extra change to continue producing original shows. In 2016, Netflix spent roughly 20% of its content budget on original content but that's expected to jump to 50% in the next three years, the firm said.
Netflix Has a Head Start on Disney
This continued momentum in international subscriber growth coupled with more and more high quality original content will help Netflix ward off competition from Disney and other media players that decide to try out streaming service on their own, according to a note from Morgan Stanley to investors on Tuesday.
"As it navigates a wary but likely still willing partnership with traditional, vertically integrated media companies, its position as a studio and the clear positive impact that its original programming is having on the business provide a nice hedge to strategic shifts by historical suppliers such as Disney," Morgan Stanley managing director Ben Swinburne wrote in the note.
Disney plans to launch an ESPN-branded sports platform in early 2018 and a live action and animated movie platform in 2019. Netflix shares dipped about in the weeks after Disney announced the new platforms on August 8. However, Netflix shares are now trading up over 15% since mid-August thanks to a strong earnings report and the continued success of its original programming. Most notably, the second season of the company's hit show "Stranger Things" had a strong premier on Oct. 27 with 15.8 million people viewing its first episode within three days, according to Nielsen.
Netflix is taking an aggressive approach to its original content strategy that banks on high quality shows luring in those who have yet to subscribe. The company announced on Monday that it plans to spend between $7 billion and $8 billion on content in 2018, compares to about $6 billion spent this year.
Netflix's original content strategy gives the company exclusive content, but more importantly, it keeps the service from being too reliant on outside content providers. With that groundwork laid, even the departure of Disney won't hurt the streaming service too much.
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