Netflix faces a new challenge as Disney strikes back with its own streaming service


With its more than 100 million subscribers around the world, Netflix has built a business model that not only altered the way TV series and movies are consumed, but threatens the very foundation of the entertainment industry.

On Tuesday, Hollywood’s biggest studio decided to strike back, creating a new and potentially serious challenge to the digital streaming giant.

Walt Disney Co. said it will end its distribution deal with Netflix and launch its own streaming service in 2019. The move will deprive Netflix subscribers of numerous Disney movies, including such recent hits as “Zootopia,” “Moana” and “The Jungle Book.”


A spokesman for Netflix said its domestic subscribers will continue to have access to Disney movies on the service through the end of 2019, including all new films that are shown theatrically through the end of 2018.

“We continue to do business with the Walt Disney Co. globally on many fronts,” Netflix said. The company said its relationship with Marvel TV, which is owned by Disney, will continue; that has yielded Marvel series on Netflix such as “Luke Cage” and the upcoming “The Defenders.”

Disney’s announcement spooked Netflix investors. Shares of the Los Gatos-based company dropped nearly 5% in after-hours trading Tuesday before rebounding slightly. The stock had closed the day down 1.6% at $178.36.

Industry experts said the sell-off might be premature, but they nonetheless sounded a cautionary note about Netflix.

“Losing just the Disney content isn’t the end of the world,” said Michael Vorhaus, president of Magid Advisors, a media and digital video industry consultant. But if other studios follow suit by pulling out of Netflix to make deals with competing streaming services, “that’s not good.”

Disney said Tuesday that it is increasing its stake in Bamtech, the streaming video company that is developing the Disney-branded stand-alone streaming service as well as a similar offering for the Disney-owned ESPN.

A Disney-branded streaming service could pose a significant threat to Netflix, especially in children’s entertainment. Netflix has built up children’s programming in recent years in an effort to attract more families to its platform.

Netflix licenses much of its kids’ content from other studios but also produces some of its own, such as the recent “A Series of Unfortunate Events.” But Netflix’s array of Disney movies, including Pixar titles such as “Finding Dory,” has been a major attraction since the multiyear deal between the two companies took effect last year.

“Kids’ content is evergreen and they watch the same movies over and over,” said Peter Csathy, founder of the advisory firm Creatv Media. “And there is a very high percentage of kids viewing to these digital platforms. Losing that content will have a meaningful impact on Netflix.”

Netflix is also competing with other streaming services and cable channels in the kids’ entertainment field. HBO took over “Sesame Street” last year, while Amazon exclusively streams certain content from Nickelodeon.

Disney said its streaming service will feature the newest live-action and animated movies from Disney and Pixar, beginning with the 2019 theatrical slate, which includes “Toy Story 4,” the sequel to “Frozen” and a live-action version of “The Lion King.”

Netflix has a huge head start on Disney in terms of subscribers. The company posted stronger-than-expected subscriber growth for the second quarter, which ended in June.

Netflix counted close to 104 million subscribers worldwide for the period, nearly 2% higher than it had forecast. Netflix added 5.2 million subscribers worldwide and for the first time counted more overseas subscribers than domestic ones.

Netflix has been pouring more resources into self-produced original content in a bid to become less dependent on licensed material. It is expected to spend at least $6 billion this year on content, up from $5 billion last year.

The company announced earlier this week that it is acquiring the comic book publisher Millarworld, a move that will bolster Netflix’s programming of superhero-themed series and movies.

Netflix said it will create original programming based on several existing Millarworld franchises as well as new stories that author Mark Millar and his team will continue to create and publish under the Netflix brand.

But despite the push into original content, many of Netflix’s most popular titles continue to be shows and movies it licenses from other studios.

Experts said the streaming company will either need to find movies from other studios or create its own self-produced titles to replace the Disney titles.

The Disney announcement shows “how dependent Netflix is on other people’s content,” said Michael Pachter, an analyst at Wedbush who follows Netflix.

“Investors think Netflix has all the leverage. But it’s the content owner who has all the leverage, and Disney showed that today.”

Times staff writer Meg James contributed to this report.