Netflix's CEO Thinks Disney's Streaming Service Will Succeed

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Disney (NYSE: DIS) already has one customer lined up for its over-the-top streaming service: Netflix (NASDAQ: NFLX) CEO Reed Hastings.

"I think in particular Disney, with its strength of brand and unique content, will have some real success. And I know I'll be a subscriber of it," Hastings said during Netflix's fourth-quarter earnings call.

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Disney announced plans to launch two direct-to-consumer streaming services alongside its third-quarter earnings results last year. One service for ESPN will launch later this year, while a Disney-branded service will launch next year. The potential acquisition of most of Twenty-First Century Fox's (NASDAQ: FOXA) assets makes the streaming services even more attractive.

Disney is one of the few companies that has the brand and content to take on Netflix. But even though Netflix thinks Disney will be successful, that doesn't mean it's a big threat.

The benefits of competition

Hastings noted that there are some benefits to the increasing amount of competition in the streaming video space. For one, Netflix can keep doing what it's doing, which clearly works, and doesn't have to worry about experimenting with different concepts too much. Smaller competitors will be forced to differentiate their products, and Netflix can easily learn from them what works and what doesn't.

For example, Disney is expected to have three separate streaming services: one for ESPN, one for Disney brands, and it could take control of Hulu if the Fox deal goes through. That sort of segmentation is very different from the catch-all service Netflix offers. But if Disney has a particular success with one of those channels -- perhaps ESPN -- it could encourage Netflix to invest more in that type of content -- like sports.

To that end, Netflix doesn't see the Disney-branded service as a big threat. Disney CEO Bob Iger agrees; it's not trying to make a Netflix killer with its streaming services. The Disney service will be priced below Netflix in the United States, and the content library won't be nearly as broad.

"What we have to do is not get distracted," Hastings said on the earnings call. "We've got a path ahead, everyone else in streaming is trying to find one." So far, Netflix's strategy is working, but it should pay attention to what Disney and others in the space are doing.

Will others join Disney?

Disney has some of the strongest brands in entertainment, so it's more apt to go direct-to-consumer than other media companies. Still, it's very likely Disney won't be the last company to pull its content from Netflix and attempt to reach consumers via a different route.

The challenge is that Netflix is very good at monetizing content by aggregating it from multiple sources and using its data to offer recommendations and keep subscribers engaged. And as long as Netflix can monetize content extremely well, it'll be willing to pay top dollar for it. That means media companies will have to be able to monetize content nearly as well if they go direct-to-consumer.

Roku (NASDAQ: ROKU) thinks it has a solution for media companies that splits the difference between licensing and going direct-to-consumer. It plans to invite media companies to put their content on the Roku Channel and partake in an ad revenue share with Roku. That takes out some of the costs of going directly to consumers while still benefiting directly from how popular the content is.

There are lots of different models for media companies interested in becoming more independent from Netflix -- that's why Netflix has worked to diversify its risk and started producing its own original content. While that requires a lot of cash, Netflix says it's also turned out to be its most efficient content spending in terms of customer engagement and acquisition. So, as long as Netflix focuses on what it does best, but pays attention to the things the competition is doing (that work), it shouldn't have any problems with competition from Disney or anyone else.

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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 has a disclosure policy.

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