In August, Disney sent a missile into the media stratosphere when it abruptly announced that it was creating a pair of digital streaming services : one built around ESPN sports programming that will launch in 2018, and one devoted to Disney entertainment, to debut in 2019. This alone wasn't shocking—Disney has long discussed creating its own streaming apps. But then CEO Bob Iger dropped another crucial detail: Disney will end its lucrative licensing deal with Netflix in 2019 and transfer Disney Animation and Pixar films, as well as TV shows from the Disney library, to its own service. Suddenly, the target became clear. Disney was going to war with Netflix.
Five days later, Netflix retaliated by announcing a multiyear production deal with Shonda Rhimes , whose Shondaland dramas ( Scandal , Grey's Anatomy ) have been a centerpiece for Disney-owned ABC for the past decade. Disney's rejoinder came in September, when Iger announced that the company would also pull Marvel and Lucasfilm (i.e., Star Wars ) content from Netflix to put on its entertainment app.
The battle lines within the entertainment world are quickly being redrawn. Just a few years ago, Netflix was still regarded as an online video upstart, and its content chief, Ted Sarandos , was preoccupied with trying to "become HBO faster than HBO can become us," as he said in 2013. Today, with more than 100 million worldwide users, 91 Emmy nominations for original shows this year, including Stranger Things and The Crown , and a $7 billion content budget for 2018 (nearly three times that of HBO), Netflix has eclipsed its onetime rival in many ways. It's now racing to transform into something even bigger: a one-stop entertainment empire that not only launches new shows and movies seemingly every day, but also creates zeitgeist-rattling brands that extend beyond the living room and into physical products. In other words, Netflix wants to become Disney—before Disney can become Netflix. It's a dynamic being repeated across industries, from finance to hospitality, as technological innovations proliferate: The digital disrupter and the legacy player are coming into direct competition.
The stakes are high for both Netflix and Disney. With content and distribution pipelines fusing across the entertainment industry, Netflix needs to prove that it isn't dependent on licensing other companies' shows and can become a creative powerhouse in its own right. (Disney will surely not be the last studio to pull its content from the service, although Piper Jaffray analyst Michael Olson estimates that Netflix will have 150 million subscribers by 2020, with or without Frozen .) Disney, meanwhile, needs a streaming arm to build powerful, direct relationships with viewers, which will be increasingly important to sustaining its many other divisions, from toys to theme parks, in a world of growing entertainment options. That means Disney must build a digital presence that has, so far, eluded the company.
Disney will also have to create the kind of seamless, user-friendly interface that companies such as Netflix and Hulu have perfected over the years. Although Disney invested $2.5 billion to become the majority owner of BAMTech, which is building the back end of its apps, it still needs to attract and empower tech talent to develop its new services. "Who comes out of MIT and Stanford and goes, 'I want to work at the Walt Disney Company. I want to work at Time Warner. I want to work at Viacom.'?" says BTIG analyst (and relentless Disney bear) Rich Greenfield. "They don't want to work for media companies' stock. There isn't the upside potential, and there isn't the work environment that there is in Silicon Valley. If you spend a day at the Google campus and spend a day at the Disney campus, they're totally different experiences."
Disney's strength, of course, is the intimate hold that it has on consumers around the world—and the myriad mechanisms it has to reinforce that embrace. Disney love seems to materialize simply from breathing air, such that a 3-year-old who has never seen The Little Mermaid will still proudly wear an Ariel T-shirt, listen to the soundtrack, and read Little Mermaid books from the library—all with little encouragement from her parents. This depth of engagement will help the company mobilize its new digital offerings. Internet entrepreneur Jason Calacanis has posited that Disney could offer a free trial of its streaming services to all of its theme-park guests and instantly amass millions of subscribers.
In contrast, Netflix has been obsessively focused on doing one thing better than anyone else: Streaming. Its original content garners critical acclaim and buzz, but not yet the kind of marketplace momentum that drives revenue in other areas, such as clothing and books. For Netflix to compete with Disney, it will need to build brands that resonate beyond a night on the couch—and then market the bejesus out of them. "Netflix needs to do a lot of offline marketing," says one digital insider. "Outside of the House of Cards billboards on Sunset [Boulevard], they haven't had to do that yet on a global basis."
Jimmy Kimmel Live! Netflix is starting to demonstrate a similar acumen—it premiered a trailer for the new season of Stranger Things during the Super Bowl and streamed the first eight minutes of the show's first episode on Twitch. But its primary weapon remains money, as was evident during this year's Emmy campaign, when the company rented out a lavish space in Beverly Hills and hosted nonstop cocktail parties to promote its shows.
Signs of Netflix's broader strategy are starting to emerge from its new foray into physical products. Late last year, it launched a line of merchandise based on Stranger Things . Sold through the retailer Hot Topic , it's rumored to be heading to Target. Netflix also poached a VP from entertainment agency WME to become a licensing manager, charged with finding "curated ways to interact with our most popular content," according to the job posting. This push is still in its infancy, but it coincides with Netflix's desire to own more of its original content. The company has traditionally licensed even its original shows, such as Orange Is the New Black and House of Cards , from production companies. But it wholly owns Stranger Things and titles from Millarworld, the comic-book company that it acquired this year—allowing it to reap profits from any ancillary products. Evergreen items like T-shirts and posters would also allow Netflix to drive awareness for its content, which is released all at once online and deprived of the drawn-out buzz of season-long rollouts for network and cable shows.
This marketing buffer could help as Netflix looks to fill a "gaping hole," as one source put it, in its kids' programming. Without Disney, Netflix's biggest supplier of children's content is DreamWorks Animation, which licenses movies such as Madagascar and Trolls and creates original shows for the service. But it's hard to put Dawn of the Croods in the same league as Disney's Sofia the First . Netflix's own efforts have yielded clever kids' shows such as Bottersnikes and Gumbles , though nothing that's broken through. As EMJ Capital's Jackson says, "They're going to have to show that they have the same chops on the children's spectrum that they've shown in the dramatic area."
As Disney and Netflix duke it out, other emboldened players are entering the field. Apple will reportedly invest $1 billion in original content in 2018—and that's just in its first year of programming. Facebook is also said to be piling $1 billion into getting people to watch original videos created expressly for its platform. And Amazon, which is nipping at Netflix's heels in both subscribers and spending, is putting $4.5 billion into content in 2017, a figure that could rise next year. "This is shifting on a daily, weekly basis," says Peter Csathy, chairman of Creatv Media, a tech- and media-focused advisory firm. "It's one big race to reach our hearts and minds and eyeballs." And when the technology inevitably changes, it'll start all over again.
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