In just the past five months (since June 2016), Microsoft announced they would acquire LinkedIn for $26.2 billion, AT&T proposed to buy Time Warner for $85.4 billion, and cash-rich companies including Alphabet, Apple, Salesforce, and Disney have all been mentioned as potential suitors for Twitter. (Which basically everyone assumes will be sold between now and late next year.)
So perhaps in this environment of mega-mergers, it's not surprising that at least one analyst believes entertainment powerhouse Netflix is a takeover target. (Specifically, the argument he makes is that for Alphabet, Apple, or Disney, Netflix makes more sense as a takeover target than Twitter.)
On the surface, it seems like the two companies would be a fit. Both Disney and Netflix are enviable, innovative entertainment companies. Both are exciting, beloved brands. And both create and distribute wonderful content. (Disney has a few decades head-start in the content-creation game, but Netflix has already proven to be a quick study, with originals like House of Cards, Orange is the New Black, Stranger Things, and Marvel's Luke Cage earning high praise from viewers and critics alike.)
But if Disney were to acquire Netflix, it would be a very rare strategic misstep for Disney, because they would find themselves with what I'll call a "Pepsi Problem".
Food and beverage behemoth Pepsico, as you may remember, used to also be in the restaurant business. They initially bought Pizza Hut in 1977, and followed that with the acquisition of Taco Bell in 1978 and KFC in 1986. But they spun-off all three brands as a separate entity in 1997; today that very successful business is known as Yum! Brands. (Disclosure: I worked for Yum! from 2008 to 2010, and for Coca-Cola from 2010 to early 2015, but all of this information is of public record.)
Why would Pepsi sell the restaurant business, which as this Bloomberg article noted, has significantly outperformed their core business over the past 18 years? Bloomberg Intelligence analyst Ken Shea wrote, “The restaurant business of Pepsi was more volatile than the rest of the business -- it was more capital-intensive, harder to predict,” he said. “It didn’t really fit into its wheelhouse, and it was more of a complication." All of that is completely true. But there's another reason too.
If you owned a restaurant at that time, think about your options in deciding which beverage company you would prefer to support. You could choose to serve Pepsi to your customers, but then you'd have to worry about the fact that they might use your hard-earned dollars to subsidize their restaurant business and compete with you. Or you could just choose to serve Coca-Cola, who in addition to offering a terrific portfolio of well-loved consumer brands, wasn't in the restaurant business at all. When you put it that way, it's a fairly easy decision unless Pepsi was significantly less expensive, right?
As it turns out, owning their own restaurants may have significantly hurt Pepsi's ability to secure new business selling to other restaurants, and the decision to spin-off the company may have been a matter of "too little, too late." Last year, Business Insider researched 34 of the top restaurant chains to see if they offered Coke or Pepsi, and Coca-Cola came out as the undisputed winner in terms of the number of restaurant-chains under contract by each company. (Arguably, Coca-Cola also has a greater number of "prestige brands" within its portfolio, speaking from a brand perspective.) Given that large deals of this nature are generally multi-year affairs, and that in any relationship the advantage goes to the incumbent when contracts are up for renewal if all other factors are equal, is it unreasonable to think that Coca-Cola's strength in the restaurant segment began when Pepsi decided to be a restaurateur?
What does this have to do with a potential Disney acquisition of Netflix? Everything. Because there's a significant risk that by acquiring Netflix, Disney would create its own Pepsi Problem.
Disney, first and foremost, is a creator of superb content. Netflix also creates its own content -- and as noted above, a lot of it is fantastic -- but the strength of its current business lies more in its impressive content distribution capabilities; it has over 83 million subscribers that willingly pay a monthly fee to access content created by a large number of sources.
And if you were a content creator that lived outside the House of Mouse, how willing would you be to supply content to a distribution channel owned by your direct competitor? (Or more realistically, how willing would you be able to do so for anything less than an extravagant licensing arrangement?) Netflix's non-Disney content would either become much less available or much more expensive, and in either scenario, would make Netflix less attractive as an acquisition target from a return-on-investment perspective. And let's not ignore the "investment" that would be required, since Netflix currently has a market capitalization of over $54 billion, and Disney would likely have to pay well in excess of that amount in order to acquire it. For context, the largest content acquisition deal Disney has made in its history is the 2009 purchase of Marvel Entertainment for just over $4.2 billion.
Disney and Netflix already have what appears to be a successful distribution and production partnership, so what would be gained by Disney from acquiring Netflix outright?
If Netflix were to be for sale, it would be a very strategic acquisition for Alphabet, assuming they would be willing to introduce advertising to the platform in a smart, differentiated way. (I described how they could do that here.)
But Netflix hasn't stated any desire to sell. And if they did, Disney definitely shouldn't pursue it.
** If you enjoyed this post, please give it a like, comment, or share. To be informed when I write something new, follow me on LinkedIn and Twitter (@pullara) **
So perhaps in this environment of mega-mergers, it's not surprising that at least one analyst believes entertainment powerhouse Netflix is a takeover target. (Specifically, the argument he makes is that for Alphabet, Apple, or Disney, Netflix makes more sense as a takeover target than Twitter.)
On the surface, it seems like the two companies would be a fit. Both Disney and Netflix are enviable, innovative entertainment companies. Both are exciting, beloved brands. And both create and distribute wonderful content. (Disney has a few decades head-start in the content-creation game, but Netflix has already proven to be a quick study, with originals like House of Cards, Orange is the New Black, Stranger Things, and Marvel's Luke Cage earning high praise from viewers and critics alike.)
But if Disney were to acquire Netflix, it would be a very rare strategic misstep for Disney, because they would find themselves with what I'll call a "Pepsi Problem".
Food and beverage behemoth Pepsico, as you may remember, used to also be in the restaurant business. They initially bought Pizza Hut in 1977, and followed that with the acquisition of Taco Bell in 1978 and KFC in 1986. But they spun-off all three brands as a separate entity in 1997; today that very successful business is known as Yum! Brands. (Disclosure: I worked for Yum! from 2008 to 2010, and for Coca-Cola from 2010 to early 2015, but all of this information is of public record.)
Why would Pepsi sell the restaurant business, which as this Bloomberg article noted, has significantly outperformed their core business over the past 18 years? Bloomberg Intelligence analyst Ken Shea wrote, “The restaurant business of Pepsi was more volatile than the rest of the business -- it was more capital-intensive, harder to predict,” he said. “It didn’t really fit into its wheelhouse, and it was more of a complication." All of that is completely true. But there's another reason too.
If you owned a restaurant at that time, think about your options in deciding which beverage company you would prefer to support. You could choose to serve Pepsi to your customers, but then you'd have to worry about the fact that they might use your hard-earned dollars to subsidize their restaurant business and compete with you. Or you could just choose to serve Coca-Cola, who in addition to offering a terrific portfolio of well-loved consumer brands, wasn't in the restaurant business at all. When you put it that way, it's a fairly easy decision unless Pepsi was significantly less expensive, right?
As it turns out, owning their own restaurants may have significantly hurt Pepsi's ability to secure new business selling to other restaurants, and the decision to spin-off the company may have been a matter of "too little, too late." Last year, Business Insider researched 34 of the top restaurant chains to see if they offered Coke or Pepsi, and Coca-Cola came out as the undisputed winner in terms of the number of restaurant-chains under contract by each company. (Arguably, Coca-Cola also has a greater number of "prestige brands" within its portfolio, speaking from a brand perspective.) Given that large deals of this nature are generally multi-year affairs, and that in any relationship the advantage goes to the incumbent when contracts are up for renewal if all other factors are equal, is it unreasonable to think that Coca-Cola's strength in the restaurant segment began when Pepsi decided to be a restaurateur?
What does this have to do with a potential Disney acquisition of Netflix? Everything. Because there's a significant risk that by acquiring Netflix, Disney would create its own Pepsi Problem.
Disney, first and foremost, is a creator of superb content. Netflix also creates its own content -- and as noted above, a lot of it is fantastic -- but the strength of its current business lies more in its impressive content distribution capabilities; it has over 83 million subscribers that willingly pay a monthly fee to access content created by a large number of sources.
And if you were a content creator that lived outside the House of Mouse, how willing would you be to supply content to a distribution channel owned by your direct competitor? (Or more realistically, how willing would you be able to do so for anything less than an extravagant licensing arrangement?) Netflix's non-Disney content would either become much less available or much more expensive, and in either scenario, would make Netflix less attractive as an acquisition target from a return-on-investment perspective. And let's not ignore the "investment" that would be required, since Netflix currently has a market capitalization of over $54 billion, and Disney would likely have to pay well in excess of that amount in order to acquire it. For context, the largest content acquisition deal Disney has made in its history is the 2009 purchase of Marvel Entertainment for just over $4.2 billion.
Disney and Netflix already have what appears to be a successful distribution and production partnership, so what would be gained by Disney from acquiring Netflix outright?
If Netflix were to be for sale, it would be a very strategic acquisition for Alphabet, assuming they would be willing to introduce advertising to the platform in a smart, differentiated way. (I described how they could do that here.)
But Netflix hasn't stated any desire to sell. And if they did, Disney definitely shouldn't pursue it.
** If you enjoyed this post, please give it a like, comment, or share. To be informed when I write something new, follow me on LinkedIn and Twitter (@pullara) **
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