Netflix, Inc. (NFLX) and The Walt Disney Company (DIS) Look to Break Away From Cable

Disney’s choosing to partner with Netflix, Inc. (NASDAQ:NFLX) gives them that conduit they were missing. The data for user chosen content when on-demand is so much more powerful than the old passive ratings model. Choosing to watch this show at this time versus the hundreds of choices available on a streaming service versus the handful available on cable or satellite – the “300 channels and still there’s nothing on!” phenomenon – gives the operators a far more direct conduit to customer preference and has a huge potential to improve the economics of content creation.

Obviously, Disney is looking at making a break from cable, which it is currently too reliant on for revenue – ESPN, alone accounts for more than 45% of Disney’s top line. It easily could have sided with its current partner, Starz, which Liberty Media has been actively shopping for more than a year now and just recently spun off in an IPO.  Starz is working the HBO and Showtime model of having original content interspersed with theatrical releases but being tied to the underlying cable subscription model that is in the beginning stages of dying.

Additionally, Netflix will also own Pay-TV rights for new DreamWorks releases, starting from 2013 onwards which will continue to support its content portfolio. While the Quikster deal adversely affected the reputation of Netflix last year, Netflix is still a leader in content distribution with the help of its superior technology and end-user interface, and it made the entire saga of its stock dropping out of line with the underlying story. By keeping its exclusivity deals to a minimum (and Disney is a far bigger partner than Epix) Netflix freed up operating cash and can focus on worldwide expansion rather than shutting competition out of the market which is a losing business model.

Long term I think Netflix is making a lot of the right moves to have a significant first-mover advantage in the post-cable subscription landscape. This is a model that will die slowly as it is propped up by a number of well-connected players, including Disney, but the moves within the industry now are telling us where things are headed.

The article Netflix and Disney Look to Break Away From Cable originally appeared on Fool.com and is written by Peter Pham.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.