Since its very inception, Netflix has been the unquestioned leader in the OTT market. Its business model was unique and brand new, which meant few people could guess if such a business could even survive, let alone flourish.
The company was founded in 1997, and for the first few years, it recorded losses. In the early 2000s, it started turning profits, but they were not substantial. It was not until 2017, when the company posted more than half a billion dollars in profits, that it grabbed the attention of other media companies.
Netflix’s service essentially came to be known as over the top media (OTT media). Interestingly, 2019 was the year when several other companies entered the OTT market. Amazon launched OTT service with its Amazon Prime, while Disney launched Disney+. The key to this business is not just aggregating existing content on the platform but also having an in-house team for content that is exclusively owned by the company.
The rapid rise of Disney+
In respect of having ownership of original content, Disney not only just had an inventory of old content but already had a lot of projects in the making. Much of its content was already familiar to a lot of users and well received. All it had to do was tweak them to make them more OTT-friendly.
As can be seen below, Disney’s OTT business started in 2019 and saw exponential growth. In a little over three years, its revenue is expected to nearly triple. In 2020, Disney’s total revenues were $18 billion, and more than half of it was coming from its OTT business. In terms of revenue growth, it was completely driven by this segment.
As seen below, it is expected to nearly catch up with Netflix in 2022 in terms of subscription revenues.
In terms of subscribers, Disney sees a sharp growth, too. It had added 74 million subscribers till Q3 2020, although it still remains significantly lower than Netflix’s nearly 200 million subscribers. The Covid-19 pandemic brought about a paradigm shift in this business of media companies. With the lockdowns, people were forced to stay at home. On the other hand, all physical entertainment services which operated in public were forced to close down.
For Netflix, this meant a humongous growth in demand for its services. People locked in at homes turned to OTT entertainment to kill boredom. This offered a tailwind to Netflix’s already growing subscription count.
For Disney, the impact of the pandemic was quite different. Its massive parks segment took a big hit. These are huge assets that require quite some maintenance, so shutting them for prolonged periods of time would mean significant losses. On the other hand, the timing of the Disney+ launch came to the rescue. Having launched in November 2019, a few months before the pandemic, meant that Disney had a segment that would help it survive the crisis.
Stock price impact
Essentially, even though Disney operates several businesses, its entire growth and profits are now being carried by the OTT segment. This brings its stock in direct competition with Netflix. Both names have seen a rising correlation in their stock prices.
Over the past year, Disney has outperformed Netflix by a decent margin. While Netflix has returned a little above 6% to its investors, Disney’s stock has returned a whopping 48% over the same period.
Although on a YTD chart, both stocks have nearly performed at parity, with Netflix slightly ahead, outperforming Disney by almost 4%.
Going forward, the key distinction between the two would be their rate of subscribers number growth. Despite being the incumbent leader, Netflix is facing some tough competition. It will report its 2nd quarter earnings on 20th July. Since the reopening, it has seen some slowdown in its growth. Investors will closely watch the numbers to get a sense of who is winning the OTT battle.