Netflix Weathers Disney's Big Streaming Reveal, But Forecasts Slower Growth

CEO Reed Hastings compared the migration to streaming to the shift from over-the-air broadcasting to cable networks in the 1980s and 1990s — as in, there's room for plenty of competition.

After Disney unveiled price and programming details of Disney+ on April 11, its stock surged 12 percent while shares of rival Netflix sunk 4 percent. On Tuesday, Netflix attempted to flip the script with a strong earnings report that would remind Wall Street that it remains the big dog in streaming and that latecomers have a lot of catching up to do — but the attempt was a bit lackluster.

It started off well for Netflix, which said Tuesday it added 9.6 million subscribers, about 600,000 more than analysts were expecting, but the streaming giant stumbled when it forecasted that it would add just 5 million in the current quarter. Investors reacted by bidding shares of Netflix, which now boasts 148.9 million subscribers worldwide, down 2 percent after the closing bell, while bidding shares of Disney up 1 percent.

Disney+ is set to debut Nov. 12 at $6.99 a month, a couple of bucks less than Netflix's basic plan. And analysts were anxious for Netflix CEO Reed Hastings to reveal what he intends to do to fend off competition not only from Disney but also Apple, NBCUniversal and WarnerMedia, each of which is working on its own streaming initiative. But the exec basically dismissed the looming competitive threats.

Hastings wrote in a letter to shareholders on Tuesday that Netflix is "excited to compete" with Disney and Apple. "We don't anticipate that these new entrants will materially affect our growth because the transition from linear to on demand entertainment is so massive," he added.

BTIG Research analyst Richard Greenfield agrees, arguing that Disney+ could actually help Netflix because its high-quality streaming content makes it easier for consumers to ditch their traditional cable and satellite TV services.

"Investors and the media are obsessed with the Disney vs. Netflix narrative, which reminds us of the Amazon vs. Netflix narrative from a few years ago," says Greenfield. Amazon's success with its Prime video service, after all, hasn't slowed Netflix down. And Bruce Leichtman of Leichtman Research notes that Americans are willing to pay for multiple services, as is the case already in 43 million U.S. homes.

In a video interview for analysts late Tuesday, Hastings made the point that he considers all entertainment, including Fortnite, a popular video game, to be a threat to Netflix's dominance. "There's a ton of competition out there, and Disney and Apple add a little bit. But, frankly, I doubt it will be material," he said.

Hastings also said he isn't worried that Disney, or NBCU or WarnerMedia, for that matter, are cutting back on the content they license to Netflix because it allows the streaming giant to spend more to create its own. Netflix isn't specific, but Goldman Sachs estimates the company will spend as much as $22.5 billion for original and licensed content in 2022, up from about $15 billion this year.

Analysts estimate about 85 percent of Netflix's content spend is for original shows and movies, and chief content officer Ted Sarandos, also speaking Tuesday, said all of the top 10 "most-watched" shows on Netflix are "all Netflix original brands."

"We're eager to have more and more of our money for spectacular new titles," Hastings said Tuesday.

The CEO compared the migration to streaming to the shift from over-the-air broadcasting to cable networks in the 1980s and 1990s. Hastings said that in its most mature market, the U.S., Netflix only accounts for 10 percent of total TV usage, hence there's a whole lot of room to grow, and Disney won't slow it down.

When Netflix is compared strictly to other U.S. streamers, its share will be a whopping 77 percent in 2019 in terms of viewers, says eMarketer. The research firm says for each 1 paid Netflix subscription in the U.S. there are 2.5 viewers, hence 157.3 million people stateside will watch Netflix in 2019 (and 379 million worldwide).

While eMarketer analyst Eric Haggstrom says Netflix has "must-have" status among American consumers, he also says that "price increases and market saturation will cause U.S. subscriber growth to slow moving forward." In January, Netflix announced its biggest price hike in its two-decade history, which took effect immediately for new subs, and it didn't seem to slow growth. For existing subscribers, the price increase rolls out this quarter and it could cause some churn, hence the lower guidance, says Haggstrom.

"The second quarter is traditionally weak and when you add in the higher prices the guidance looks appropriate," says Haggstrom. "But Netflix is really the basic cable of the whole streaming ecosystem, so it won't lose many customers."

But Disney's legacy TV business — ESPN, Disney Channel and the rest — will suffer along with the rest of traditional pay TV. For now, eMarketer figures pay-TV households will drop 3 percent in the U.S. this year and 2.6 percent in 2020, but Haggstrom says the research firm is in the process of ratcheting its estimates higher.

Disney figures its Disney+ streamer won't be profitable until fiscal year 2024. Analysts at MoffettNathanson estimate Disney's overall earnings per share will take an 8 percent hit in 2020 and 5 percent hit in 2021 due to the cost associated with ramping up its streaming initiatives.

"The company is investing more in the near term to generate bigger gains in the long run," says a MoffettNathanson research note. "We think that is the right thing to do."

Jimmy Schaeffler of the Carmel Group is even more bullish. "You've got the ghost of Walt Disney smiling down about as broadly as most can ever remember. Disney+ will draw consumers quickly and quantitatively ... Disney will be the one Netflix goes to bed, and wakes up in the morning, worrying the most about."