Facts: On Tuesday, August 8th after the market close, Disney (DIS-NYSE) announced on their fiscal Q3 conference call that:
► They will end their distribution agreement with Netflix (NFLX-NASDAQ) for subscription streaming of new releases from Disney and Pixar, beginning with the 2019 calendar-year theatrical slate
►The biggest named productions set for release in 2019 include a live-action Lion King, Frozen 2, and Toy Story 4
►Disney is still undecided on whether to pull Lucasfilm (Star Wars) and Marvel (DareDevil and more) content
► Netflix did not have global rights to our Disney movies. They bought opportunistically in certain markets.
The original deal, which according to Forbes cost Netflix $300 million, began in September of 2016 and is set to expire at the start of 2019. The Disney subscription service will start in the U.S. and move Internationally. For now, new Marvel TV shows such as Daredevil will exclusively with Netflix. Netflix’s stock is down 5.2% after the announcement.
We expect Disney loyalty to increase churn in 2019 – Assuming a complete pull-out of all Disney owned movies, the most impactful movie productions Netflix would be losing out on would be Star Wars, Marvel and Pixar. Exhibit 1 puts into perspective the popularity of Disney/Pixar/Marvel movies versus other popular movies available on Netflix in the U.S. Even more impactful in 2019 will be the anticipated release of Toy Story 4 and Star Wars: Episode IX. With Star Wars movies among the most watched at the time of their release, and Toy Story productions continuing to gain momentum with each sequel, the loss of these movies will be a catalyst for certain subscribers to turn to Disney and cut Netflix. The question is how much of an impact to churn and net subscriber additions will this have?
EXHIBIT 1: Comparison of Disney and non-Disney movies on Netflix
Source: Google Trends, Perspectec
Attempting to Quantifying the churn – Disney movies currently account for around 2.5% of the movie library Netflix offers in the US, however, as seen above these movies tend to punch above their weight in terms of popularity. According to our estimates, movies have a materially smaller effect on net subscriber movements then Netflix original content.
Given the status quo prior to the announcement, we had estimated a churn rate of about 25% by 2019. According to our estimates, the impact can be as low as under 1 million subscribers to over 5 million depending on if Disney does a full pull-out. Given the loss of Disney content, we can expect the following results based on different scenarios regarding the churn:
EXHIBIT 2: Scenario Analysis
Source: Perspectec
Impact on stock price – We see the impact on an EBITDA multiple basis being as much as 20x. In the best case scenario, we see a $4 hit on the stock price (3x multiple hit) and in the case of all content being pulled we see the negative share price impact being $27. At the moment the share price appears to be anticipating Lucasfilm and Marvel series content will be removed from Netflix in 2019.
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