NEW YORK - Walt Disney and Netflix are beginning to look a lot like the other. The Magic Kingdom’s forthcoming video-streaming service is providing a halo effect – helping send its shares near an all-time high. But unlike Reed Hastings’ company, cord cutters will test investor patience in Disney.

Mouseketeer-in-chief Bob Iger has a lot to work with even if he is late to the direct-to-consumer game. A trove of popular movie franchises like Marvel’s Avengers, TV series such as the “The Simpsons” and its recognizable brand gives Iger some runway when he launches Disney Plus later this year. The stock is up nearly 20% since Disney’s April 11 investor day. Netflix, meanwhile, is down some 16%.

Yet it’s worth remembering why Disney is such a video-streaming laggard in the first place. The $250 billion firm is yoked to the money paid by cable distributors to carry Disney’s content and doesn’t want to risk that stable source of income. Operating profit at its cable network division was a bit more than $5 billion during its last fiscal year, representing a third of Disney’s total operating profit haul.

Disney will have to carefully balance people ditching their pricey cable packages. In fact, MoffettNathanson reckons the rate of cable subscriber losses will hit 5.5% in the second quarter this year – the worst rate on record and a trend that will only accelerate.

The trick for Disney is to offset the potential decline in cable network operating income with that from streaming services. Disney is pricing its product at a wallet-friendly $7 per month, half of what Netflix’s most popular package costs. That will put pressure on margins.

Netflix has plenty of red flags as well. It’s spending like a drunken sailor on content, with streaming content obligations approaching $20 billion. A dip in U.S. subscribers sent its shares down in July. But the market is more forgiving. Netflix’s share price at the close yesterday is 34 times estimated 2021 earnings, Eikon shows. Disney’s is 19 times. Ambition is where their similarities stop.

 

CONTEXT NEWS

- Walt Disney will report its fiscal third-quarter earnings on Aug. 6. Shares of the media company hit an all-time high of $146.39 on July 29.

 

(Editing by Rob Cox and Amanda Gomez) ((jennifer.saba@thomsonreuters.com; Reuters Messaging: jennifer.saba.thomsonreuters.com@reuters.net))