Netflix (NASDAQ: NFLX) has been a thorn in the side of major media companies for years now, but only recently have TV and movie studios started fighting back. Disney (NYSE: DIS) announced plans to take its films off Netflix earlier this year, opting to offer a direct-to-consumer streaming service of its own. 21st Century Fox (NASDAQ: FOXA) hasn't been renewing its most popular TV series on the streaming service, as it moves to offer its own commercial-free viewing experience distributed through pay-TV providers. And other media companies like Time Warner (NYSE: TWX) have considered extending the window between a show's original air date and when it shows up on streaming services like Netflix.
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The recent report that Disney held talks with Fox to acquire its film studio and some of its cable networks should concern Netflix investors. Even though the Disney-Fox deal is dead, there's still a considerable amount of merger and acquisition talk throughout the media industry. As media companies join forces, they gain greater leverage over Netflix and could produce more competition in the streaming video-on-demand (SVOD) market.
Let's make a deal
The media industry is full of merger talks. Earlier this year Discovery (NASDAQ: DISCA) agreed to merge with Scripps (NASDAQ: SNI). Meanwhile, AT&T (NYSE: T) is still trying to gain regulatory approval for its acquisition of Time Warner. The big impetus is the accelerating trend of cord-cutting. As more consumers flock toward stand-alone services like Netflix, cable and media companies are looking for ways to fight back. The best way for them to do that is by bundling more products together:
- Discovery and Scripps hold more negotiating leverage over distributors together than they do separately.
- AT&T can provide cheap pay-TV service and free HBO as an add-on to its top wireless service plans with its acquisitions of DIRECTV and Time Warner.
- A combined Fox and Disney would have more content to attract viewers to Disney's forthcoming direct-to-consumer product, as well as the additional negotiating leverage found in the Discovery-Scripps deal.
Netflix is just another distributor
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Netflix is just another distributor for media companies, and merged businesses will not have as much incentive to license content to Netflix as before:
- Traditional TV distributors like AT&T may find it more economical to forego licensing content rights to Netflix if it keeps more people from cutting the cord.
- Horizontally merged companies like Discovery-Scripps may be able to negotiate higher distribution rates, incentivizing similar behavior. It could also enable the company to charge Netflix more or require Netflix to take more content.
- Combined companies have a greater ability to offer a service similar to Netflix. Hulu is the result of three (now four) major media companies coming together. AT&T is already producing content exclusively for DIRECTV Now subscribers.
As such, Netflix could find itself paying more for licensed content, or not being able to license some of the best content at all.
Isn't Netflix all about originals now, anyway?
Now that it's about five years into its original content strategy, Netflix is certainly less reliant on licensed content than before. But subscribers still love to binge on reruns. In fact, recent data from Nielsen indicated 80% of time spent on streaming services goes toward watching back-catalog content. That ratio might be lower for Netflix compared to other streaming services, but it still shows the importance of licensed content for Netflix.
What's more, the top media companies' moves toward their own direct-to-consumer services creates direct competition to Netflix. Not only will the SVOD leader be unable to license the top content, consumers may opt to subscribe to Disney and FX's streaming services instead of Netflix to watch the shows they like most.
For its part, Netflix says its original content strategy is paying off and produces subscriber growth in the form of new customers joining and keeping old customers from leaving. But as more companies merge and more direct-to-consumer options hit the market, it'll be important to keep an eye on Netflix's content catalog and how it impacts subscriber growth.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool recommends Scripps Networks Interactive and Time Warner. The Motley Fool has a disclosure policy.