Disney (DIS) CEO Bob Iger keeps hinting that the world's largest entertainment company needs to have greater control of how its movies and television shows are distributed.
Speaking on a Nov. 10 investor conference call, Iger said Disney is interested in "further strengthening its technological capabilities" and would consider an acquisition that brings the company "closer to the consumer."
In agreeing last month to an $85.4 billion takeover by AT&T (T) , Time Warner (TWX) CEO Jeff Bewkes said much the same thing. Merging with a pay-TV operator means getting direct access to consumers without having to wait for pay-TV operators to build the kind of easy-to-use platform that turned a modest mail-order service, Netflix (NFLX) , into a media behemoth with a market capitalization of almost $50 billion.
But buying Netflix would probably require a cash-and-stock deal that could reach as high as the price AT&T plans to pay for Time Warner, said Craig Huber, a media analyst at Huber Research Partners in Greenwich, Conn. That should give investors a sense of the premium being paid for distribution.
"One of these large-cap entertainment companies should have bought Netflix years ago," Huber said. "That's what these executives and boards of directors are paid to do, think out strategically long term. Now Netflix is eating everyone's lunch."
Indeed, Netflix continues to add subscribers worldwide, helping to drive down TV viewing time along with eroding ratings. And at $10 per month, Netflix remains a very attractive product.Disney and Netflix continue to do a lot of business together. In September, a new deal began by which Netflix became the exclusive pay-TV source for the most-recent films from Marvel, Pixar, Lucasfilm and Disney Studios. Were Disney to buy Netflix, Iger could package ESPN with the world's most popular video streaming service.
"Combining Disney and Netflix effectively recreates the best of the legacy video bundle, removes the distributor, packaging together great content with best-in-class technology spanning all devices consumers love to use," BTIG media analyst Rich Greenfield wrote recently.
But does Disney need Netflix?
Back in August, Disney paid $1 billion for a 33% stake in BAMTech, the video-streaming unit of MLB Advanced Media, Major League Baseball's well-respected and much-used technology platform. When Time Warner, for instance, wanted to roll out HBO as an online offering, it contracted with BAMTech rather than build its own network. This is high-demand technology.
The BAMTech acquisition marked a turning point for Disney as it's increasingly come to focus on distribution and technology. In years past, Iger has aggressively -- and observers would likely acknowledge, successfully -- acquired content companies at prices that initially shook heads but in hindsight now look like steals.
Iger bought Pixar in a $5.8 billion stock transaction in 2006, Marvel Entertainment in a 2009 cash-and-stock deal valued at $3.8 billion and LucasFilms in 2012, also a cash-and-stock transaction worth $4.05 billion. Throw in Maker Studios, the short-form video house, in 2014 at $500 million and it's no wonder that Iger was able to convince investors last week that the company's creative side is healthy and strong.The problem for Iger is that the future of "media consumption" -- an inelegant industry term for how people watch video -- is online. The traditional 150-channel TV bundle will be around for a while, probably longer than print, but growth and lower overhead point to an online future.
"It's one thing to be as fortunate as we are to have Disney, ESPN, Pixar, Marvel, Star Wars and Lucasfilm," Iger said in October at an event hosted by the Boston CEO Club. "But in today's world, it's almost not enough to have all that stuff unless you have access to the consumer."
Iger made clear on Disney's earnings call that BAMTech gives Disney the option of making ESPN available direct-to-consumer -- if it so chooses.
"We have the technology now through BAMTech to accomplish exactly what we would need to accomplish," he said. "We're probably more likely to be aggressive about it than non-aggressive, but the need doesn't exist at the moment."
BAMTech arguably gives Disney some breathing room.
For the moment, Disney is licensing ESPN and its other networks to new multi-channel streaming services such as Dish Network's (DISH) SlingTV. ESPN will also be a part of AT&T's DirecTV Now, Iger confirmed last week, and Hulu's multichannel platform expected to go live early neat year. By including ESPN in such services, Disney can help offset subscriber declines on pay-TV and learn more about what consumers want.
As for a Netflix deal, nothing happens unless CEO Reed Hastings wants to sell. If he would sell, acquiring Netflix would require a financial outlay that would dwarf anything Iger has done since taking over as CEO in 2004.
Netflix's market capitalization stands at almost $50 billion. A 25% premium would value the company at roughly $62 billion. But it's unlikely Hastings would even sell at that price point, Huber said. So would Iger agree to a transaction valued at more than one-third of Disney's own $158 billion market capitalization to own an established straight line to 63 million subscribers worldwide?
"What's the positive for Netflix to be bought by one of the large guys other than being taken out at a big premium?," Huber said. "If they execute, they can get to that big premium on their own over time. There's an argument to be made for Disney buying Netflix, it just comes down to the absolute price level."