Netflix Takes a Page Out of the Disney Playbook

By Berna Barshay

Monday, June 28, 2021
A A

► You streamed it, you liked it, now get your souvenir…

It’s hard to think of a company more successful over the past decade than streaming giant Netflix (NFLX).

The company launched its streaming service in 2007 and original programming in 2009. It has since amassed more than 200 million paid streaming subscribers globally, achieved run-rate revenue of almost $30 billion, and has a market cap of $234 billion.

Netflix is practically synonymous with streaming video entertainment, and everyone in the industry is chasing the company. Books have been written – and more are sure to come – about the rise of Netflix and the ensuing “streaming wars” as traditional media races to grab a piece of the fast-growing streaming pie that Netflix effectively created.

The irony of all this is long before Netflix cut deals for Bridgerton, The Queen’s Gambit, or Tiger King, it pulled in subscribers by repurposing content originally made by other studios for broadcast and cable television and movie theaters. Deals with CBS – now part of ViacomCBS (VIAC) – and Sony Pictures Entertainment were critical to Netflix getting early traction. Back when the original content on Netflix was limited (or non-existent), consumers came to watch back seasons of network hits and movies after their first run in theaters.

One of the biggest deals of all was of course with Disney (DIS), which later realized it helped create a monster that threatened its own lucrative broadcast and cable TV businesses. So Disney announced back in 2017 that it wouldn’t renew the Netflix contract when it came up and would instead take back its content… and use it to launch its own competitive service.

That service, Disney+, launched in November 2019 and has more than 100 million global subscribers. While well behind Netflix, Disney+ is still the most successful of the traditional media launches into streaming and a seeming lock for the No. 2 position in the space.

You could credibly accuse Disney of copying Netflix as it builds out Disney+, along with its other streaming services Hulu and ESPN+… which is why it’s ironic that Netflix appeared to be copying Disney when it announced earlier this month that it was opening an e-commerce shop to sell programming-related merchandise.

Disney is well-known for exploiting every angle of its media content to sell products online and in stores and get people to its theme parks and cruise lines. The irony of Netflix emulating Disney was not lost on the folks at the Chartr analytics site, who captured the situation with the following graphic…

Source: Chartr

Netflix raced ahead of Disney and the other traditional media companies when it came to streaming… Why not try to catch up with them on the merchandise front too?

So far, the Netflix store is a lot of bark but not a ton of bite…

Despite making waves in the press with the surprising announcement of the new merch website, the store decidedly underwhelms at the moment with just 18 items for sale, all related to two anime shows, Yasuke and Eden. You can see more than half the available items in just this picture…

Source: Netflix.shop

Surely there’s more to come… ’80s retro T-shirts, karate suits, and Regency-era gowns – inspired by Stranger Things, Cobra Kai, and Bridgerton, respectively – seem like a lay-up for Halloween. And surely every show that enters the pop culture zeitgeist will be fair game for printing up T-shirts, water bottles, and phone cases…

But even if Netflix greatly expands the items available and executes flawlessly, it seems unlikely that the merch store is going to move the needle in terms of revenues.

Disney brings in around $4.5 billion per year in consumer products – about one-third of it through selling products it makes or at stores it owns and two-thirds from licensing its brands to other companies to make and sell products.

After pulling forward future growth during the pandemic as people sought options for entertaining themselves at home, subscriber growth has been slowing down at Netflix (something I’ve been warning Empire Financial Daily readers was likely to happen since last year).

On top of that, data firm Parrot Analytics reports that Netflix’s share of total streaming viewing in the U.S. has dropped from 65% in 2019 to just over 50% in the first quarter of 2021, as the number of competitors – and the amount of original content on them – exploded.

With growth in its core business slowing, the streamer has made a concerted effort to beef up its consumer products sales. Last March, it hired Josh Simon from apparel giant Nike (NKE) to run the division, and he has since added 40 people – most with experience at traditional retailers – to his team. Deals have been cut with chains like Walmart (WMT) and Target (TGT) for everything from clothes to toys to cosmetics.

Benchmarking to Disney suggests that making and selling entertainment-based merch is maybe a $2 billion opportunity for Netflix, at best. Sure, Disney does a bit over twice that, but the company has nearly 100 years’ worth of characters, brands, and content in its archives to mine… a uniquely strong positioning with children… and a global theme park presence to prop up its consumer products businesses.

Disney also focuses on developing – or in the case of Marvel, Pixar, and Star Wars, buying – evergreen content. The public interest in even the biggest Netflix hit is considerably shorter, as Mark Cohen, the director of retail studies at Columbia Business School, explained to the New York Times

Most of them have a short shelf-life, unlike a Disney property, which is a generational long ride.

Simply put, I don’t think the Netflix e-commerce store has the potential size to offset weak or slowing subscriber growth… which is why I remain on the sidelines with NFLX shares.

If Netflix wants to get the big bucks from consumer goods, it will need a theme park…

In 2019, Disney brought in $26 billion in revenue in its Parks, Experiences, and Products division… That’s more than Netflix did in total sales last year. But of that $26 billion, only about 18% was in consumer products… The rest was generated by theme parks, which back in 2019 had more revenue than all of Netflix. Take a look…

Source: Chartr

It’s fun to speculate about what a Netflix theme park would look like. The (weird) possibilities are endless, as Chartr comments…

A roller coaster through the upside down (Stranger Things), tea with the royal family (The Crown) or a fight with terrifying monsters (The Witcher) – a Netflix theme park based on its original content could certainly have some appeal.

As fun as it may be to try and conjure what Orange Is the New Black: The Ride might look like, I think we can all agree that the likelihood of a Netflix theme park seems slim. As much content as there is on Netflix, most of it isn’t theme park source material.

Building a park costs billions of dollars and doesn’t seem like a wise bet… although licensing its content to someone who already has one would be free money for Netflix, with almost no incremental cost attached to the revenue.

But I don’t think that any media company that competes against Netflix is going to line up to hand it money, nor enhance its presence and relevancy with consumers… so don’t expect to see any Netflix-themed rides popping up at Disney World or Universal Studios. But for the folks working in business development at Netflix, it might be worth giving a call to the people over at Six Flags Entertainment (SIX)…

If the merchandise opportunity is relatively small, why is Netflix bothering with it?

Getting merchandise associated with a breakout hit to market quickly only enhances its viral buzz. And while independent merchants on sites like Etsy (ETSY) and Redbubble (RBL.AX) have done a good job reacting quickly to trends with unauthorized goods, inserting itself into the action will give Netflix the chance to better control its emerging brands and the content surrounding them even more. Plus it’s not that hard to try… Netflix is using Shopify (SHOP) to power its store, minimizing the resources it needs to apply to the e-commerce effort.

Licensing has always been a low-effort, high-return way to extract more money from content and build up the profile of a property. According to trade group Licensing International, sales of licensed products tied to shows, films, and characters was a $128 billion global business in 2019. And every person who buys a TV-themed T-shirt becomes a walking advertisement for the show.

So expect to see more of this, especially when it comes to properties that have broad, evergreen appeal. It has been 10 years since the final Harry Potter movie came out, and just this month Warner Brothers opened a large store in New York City devoted to the franchise. The store is expertly designed and a destination for any fans of the series. Here are some pictures from my recent visit…

Just like Disney’s parks and stores help keep decades-old franchises fresh, an expertly crafted themed retail destination like Warner’s new Harry Potter store can do the same. I think it will prove a wise investment for Warner… and may be a hint that Prediction No. 19 from my 21 Predictions for 2021 could be in the cards over at HBO Max…

Prediction 19: In an effort to prop up HBO Max and take a page out of the Disney+ playbook, Warner will go back to the Harry Potter catalog and start mining for spin offs.

If we can have 10 new Star Wars shows, why not a few about the popular witches and wizards?

In any case, the new online shop from Netflix and Warner’s fabulously immersive Harry Potter retail experience are signs that the convergence between the worlds of entertainment and retail is here to stay.

In the mailbag, readers react to Silicon Valley startups ending their consumer subsidies in search of profitability, and great feedback for guest columnist Joel Litman and his Uniform Accounting research…

What goods, if any, would you like to see at the Netflix shop? Do you think the store will be a success? Which other franchises would you like to see get the Harry Potter treatment with an immersive, in-person retail experience? Share your thoughts in an e-mail to [email protected].

“Hi, I have noticed the huge price hikes on Uber Eats. I don’t think a lot of people notice that they tack on a dollar on most items as opposed to going to the restaurant directly.

“I tested my theory and here are the results. At Portillo’s, two cheeseburgers and two small fries are $18.27 at the restaurant. If I use Uber Eats to deliver, the amount is $31.11. A whopping 70 percent upcharge! Even without delivery and using pickup, Uber charges $22.93. That is a whopping 25% price hike!

“I don’t know how people can afford to throw away that kind of money? 25 to 70 percent extra is crazy. I guess it will take the economy to tank before people wake up. Sadly, people are lazy and don’t want to do anything anymore. It isn’t any harder to order food thru Portillo’s website or Portillo’s app.

“People just don’t care to even look to see if they are wasting money.” – Mike K.

Berna comment: Mike, you made me look! I ordered from my local pizza shop on Saturday using Grubhub. While it didn’t increase the menu item prices, it added 14% in fees to the price of the meal.

I tipped 20%… But Grubhub applied the percentage to not just the food, but also to the taxes and fees. This was good for another 4%. In summary, I paid 18% in fees… Layering on the tip, I paid 36% more to avoid a five-minute drive. You are right – it’s wasteful (although in this case, I was watching kids in a pool… so necessary).

“I am sick of Silicon Valley.” – Chris C.

Berna comment: Based on recent polling of Americans’ views about tech billionaires, you aren’t alone, Chris!

“Aloha Joel, Your story about your mother and how she influenced you to study accounting was a fascinating read.” – Jim P.

“I especially like the clarity that Joel’s work provides. He makes it possible for people who are not accountants or research analysts to actually get a clear picture of the financials. Sorely needed service!!” – Dave P.

Regards,

Berna Barshay        
June 28, 2021

Whitney Tilson
Get Whitney Tilson’s Daily delivered straight to your inbox.

About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to more than $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

Click here for the full bio.