Walt Disney’s reported talks to buy most of the film-studio assets of 21st Century Fox aren’t about Disney or Fox. They’re about Netflix.
The streaming-video service, which started out as a repository for other companies’s content, now has more than 100 million members worldwide and is a producer in its own right. It’s snagged top-notch directors like David Fincher and Martin Scorsese and TV showrunners like Shonda Rhimes, all with an eye toward decreasing its reliance on the back catalog of old TV shows and movies that have formed the foundation of its library.
This is why Disney’s latest movie releases are leaving Netflix and heading to Disney’s own subscription-streaming service, which it plans to launch in 2019. The offering will become the streaming home for Pixar, Marvel, Lucasfilm, and Disney Animation movies as well as other programming from Disney and its TV networks.
The media mammoth wants to take back control of its relationship with consumers, amidst subscriber declines in the cable-TV space and uncertainty in the broader media landscape.
Disney already has a deep bench of family-friendly assets that people love, from its animated kids movies to Marvel and Star Wars. The talks with Fox, which the Wall Street Journal reported (paywall) Disney initiated, would give Disney an even wider breadth of content to play with. Fox’s TV production arm, for example, makes shows like This Is Us for NBC, and its cable-TV networks like FX are home to popular zeitgeist-hitting shows like Atlanta and American Crime Story.
“It’s a sign of Disney wanting to develop scale in order to compete with Netflix,” Toby Chapman, an associate partner at global strategy consultant OC&C, tells Quartz. “On its own, it’s difficult for even a company like Disney to compete with breadth of content that Netflix has. You’ve got to have something really broad or something with really specific strengths.”
To be sure, a deal between Disney and Fox is far from done. The talks may be just that, talks. CNBC reported that they were on and off for the past few weeks. The two sides may not reach an agreement.
But if Disney were to combine the best of what it owns already with 20th Century Fox (the century-behind name of the film studio) into a streaming service, or services—Disney is keeping its family-friendly and sports offerings separate, and could conceivably do the same with a general-audience service—it could reach the same scale as Netflix and competitors like Amazon Prime and Hulu. (Hulu is a joint venture between Disney-ABC, Fox, NBCUniversal, and Turner.)
“Netflix has a hail-fire that’s about to hit them if this deal happens because that means tremendous competition that can also match the scale that Netflix operates in,” said Eric Schiffer, chief executive of the private-equity firm The Patriarch Organization. “This gets [Disney] a mammoth amount of programming to be able to strike at the jugular of Netflix during a time where there’s just a lot of risk in the space.”
On top of competing with Netflix for subscribers, Disney, with Fox in the wing, could drive up the cost of content at crucial time for Netflix. The fewer deep-pocketed players there are vying for top talent like J.J. Abrams, the more the cost for that talent goes up. Hollywood is also a relationship business; Fox would bring more relationships with talented showrunners like Ryan Murphy and Donald Glover to Disney.
Netflix, for its part, has been able to woo talent by offering big checks and creative freedom. But it’s already spending a ton of money producing and acquiring TV shows and movies; it plans to spend $8 billion on content in 2018, up from $6 billion this year. And investors are taking note.
“This has to prompt a reply from Netflix,” said Greg Portell, a partner at management consulting firm A.T. Kearney.