Push and Pull: Hollywood, Netflix and the Future of the Entertainment Business

Five years ago, two very different companies decided they could help each other.

The Walt Disney Company agreed to give Netflix members immediate access to some of Disney’s deep catalog. And, starting in 2016, Netflix would become the exclusive pay-TV home for recently-released Disney, Pixar, and Marvel feature films.

Back then, Netflix was fresh from killing Blockbuster with its DVD mailing service and was looking to further disrupt the entertainment industry by taking on cable TV. Landing a preeminent content creator like Disney was a coup that boosted Netflix into the realm of HBO or Starz. And the arrangement gave Disney, which was still dependent on partners to air its movies and shows, access to younger, savvier customers. 

But in August, Disney announced it would not renew the deal. Instead, the $151 billion media company said it would launch its own branded streaming service in 2019 when its deal with Netflix ends, essentially cutting out the middleman.

Chalk it up to one of the first rules of business: Companies adapt or die, said Eunkyu Lee, a professor of marketing at the Martin J. Whitman School of Management at Syracuse University. 

“People can probably recall the time when they could see a Blockbuster Video in almost every town,” said Lee, who has studied Hollywood contracts and deals. “You know what happened to it.”

Blockbuster famously could have bought Netflix for $50 million in 2000. Similarly, Disney could have bought Netflix outright in 2012 for less than $10 billion. Netflix’s value has since  skyrocketed to nearly $90 billion, compared to Disney’s value of about $151 billion.

During those five years, Netflix evolved into a media company producing its own content—and became a Disney competitor. Rather than offering a catalog of ’80s movies, Netflix plans to release 80 movies. That’s 80 original films—all next year. The company announced recently that it was going to spend $8 billion to make its library 50 percent original by 2018.

But Netflix isn’t just applying pressure, it’s feeling it. Like Disney, it’s watching warily as deep-pocketed Internet giants Facebook, Google, and Apple begin wading into original content. 

The Wall Street Journal reported that Apple had a budget of $1 billion to create its own programming next year. This year it debuted “Carpool Karaoke” and “Planet of the Apps” on Apple Music. The Journal said Apple could add as many as 10 more TV shows next year and reported that Facebook planned to spend up to $1 billion next year on content for its new Watch video platform.

An ascending company

Who will win? 

“Technology can be very brutal when your business is really dependent on … one level of technology,” Lee said. “So, I think in that sense Netflix really has a lot more risk than a company like Disney that seems to be a lot more diversified.”

Lee said Disney may see the streaming channel as an experiment, rather than a long-term commitment. Disney owns 30 percent of Netflix competitor Hulu, whose star is also rising on the success of an adaptation of author Margaret Atwood’s The Handmaid’s Tale.

“I don’t think Disney is fully committed to using its own online network and not using all kinds of third parties like Netflix and Hulu,” he said.

Richard Greenfield, a media and tech analyst who has been Wall Street’s biggest Netflix bull, disagrees that Disney has the upper hand. In an August interview on CNBC, he said Disney was great at creating movies but was falling far behind Netflix in building audience and buzz.

“By the end of 2019, Netflix, we estimate—these are our numbers—should have about 158 million worldwide subscribers, and they will be spending well over $15 billion a year on content creation. At that point, Disney will have zero subscribers. That’s a pretty good lead.”

Don’t forget the kids

The question is: What are those companies going to do about Finn Jorgensen?

The 15-year-old high school freshman from Seattle doesn’t watch sitcoms or dramas. He doesn’t watch news programs or documentaries.

He’s more interested in playing games on his PC because he is an active instead of passive participant. He’ll put on a movie—but for background noise when he’s doing woodworking.

If he’s curious about a topic, he’s more likely to seek out a 2-minute explanatory video on YouTube than to settle in for a 90-minute documentary.

“It’s just more concentrated entertainment, I suppose,” he said.

And he’s not alone. Nielsen’s most recent audience report indicated that in the first quarter of this year, Americans aged 18–24 were watching, on average, 1 hour and 47 minutes per week less than they were a year ago.

Some personalities on YouTube are making more money than movie stars. Swedish comedian Felix Kjellberg reportedly made $12 million in 2015 for his channel PewDiePie, which has over 57 million subscribers hooked on watching his expletive-laden commentary as he plays video games.

Syracuse’s Lee says that could present major challenges for companies like Netflix and Disney that produce content and distribute it.

“I think that the [desire for the] mobility and the convenience of being able to watch something whenever you want—and especially as the younger consumers are more used to being able to do that and then as they become a greater proportion of the population—is a trend I don’t see reversing.”

Citation for this content: MBA@Syracuse, Syracuse University’s online MBA program

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