Netflix Netix's Early Days Founded in August 1997 by Reed Hastings and Marc Randolph, Netflix started as a distributor of DVDs by mail.4 Initially, Netflix perhaps most stood out from traditional movie-rental companies like Blockbuster for not imposing due dates by which consumers needed to return the DVDs and for not charging late fees. While the company first charged customers a few dollars per DVD borrowed, it later switched to a monthly subscription fee that came with unlimited rentals. Hastings had a vision for an online streaming service from the very beginning. Ted Sarandos, who became Netflix's chief content officer in 2000, recalled, \"Back then, [Hastings] said that postage rates were going to keep going up and the internet was going to get twice as fast at half the price every eighteen months. At some point those lines would cross, and it would become more cost-efficient to stream a movie rather than to mail a video. And that's when we get in."5 In fact, Hastings brought that idea to Blockbuster, offering to build a streaming service under the brand name of the video rental giant (Blockbuster.com) and sell a 49% stake in Netflix for $50 million. At the time, Blockbuster had 7,700 stores, millions of customers, and a gross profit of $3 billion, while Netflix's proposed technology was still a couple of years away from being market ready, had 300,000 subscribers, and was losing money (see Exhibit 2a for trends in Netflix subscribers and Exhibit 2b for revenues). Blockbuster declined the offer. (It would file for bankruptcy in 2010)" Continuing without a partner, Netflix filed for its IPO in 2002 (see Exhibit 2c for trends in its stock price). Around the time the company delivered its one billionth DVD in early 2007, Netflix launched its streaming service. While it had 70,000 DVD titles in its catalog, its streaming offering started with around 1,000 movies and television shows.7 The assortment it could offer was severely limited by the long-term rights agreements that the studios that produced the content had negotiated with the television networks that aired itin some cases, broadcast and cable networks had tied up rights for as long as nine years after a piece of content made its debut. Pursuing Content Licensing Deals with Film and Television Companies To expand Netflix's catalog, its executives soon turned to negotiating licensing deals with film and television companies. As its first major deal, Netix in 2008 signed a $30-milliona-year contract with premium cable network Starz for 2,500 movies and television shows as well as first-run rights to films from Disney and Sony Pictures.8 Under the deal, Netflix could offer the content on its online service as soon as Starz did on television. Although Sarandos protested at the time that the deal was \"about three times [his] bud get," Netflix was only just beginning its spending spree (see Exhibit 3 for early content deals).9 The 'big four' major broadcast networks, ABC, NBC, FOX, and CBS, and their production studios all began licensing content to Netflix. CBS sold rights to older content that was no longer airing on CBS network\") N BC offered Netix 200 movies and older seasons of its television shows.\"11 Fox also licensed past seasons of current shows airing on FOX network. ABC allowed Netflix to offer past seasons of its television shows, along with episodes from current seasons, sometimes as soon as two weeks after their original broadcast date.\"- Netflix cut big checks for hit shows on cable networks, too: it paid an estimated $1 million per episode for 91 episodes of AMC's Mad Men, and purchased three previous and three upcoming seasons of Breaking Bad.13 To get fresher film content for the library, Netflix also made deals with Epix, Lionsgate, MGM, Paramount, and Relativity Media, among other firms. By 2010, Netflix had secured streaming rights to films that collectively brought in nearly half of the domestic box office for that year.\"1 Signing Talent Deals Not content to just buy shows, Netflix soon started signing up the creators behind those shows as well (see Exhibit 5). In the first of these megadeals, Shonda Rhimes, known for hits such as Grey's Anatomy, Scandal, and How to Get Away with Murder that made up much of ABC's Thursday nights, left ABC's production studio for a multi-year deal, rumored to be worth well over $100 million, to produce eight new series exclusively for Netflix.24 As part of the deal, Netix committed a significant amount of overhead to Rhimes' company ShondaLand. Netflix was also thought to pay a higher up-front amount to Rhimes herself, compared with her agreement at ABC. To accommodate for the lack of syndication opportunities for programs produced for Netflix, the deal also included what were described as "innovative backend profit terms\" for Rhimes.25 Rhimes, who secured an early release from ABC, agreed to continue to oversee her current shows at ABC. Commenting on the publicity the move generated, she tweeted, \"Why do reporters always say writers were 'lured'? Like we're children following a trail of candy. I created a $2B+ revenue stream for a major [corporation] with my imagination. I do not follow trails of candy. I am the candy."26 A short while later, Netflix signed Ryan Murphy, creator of Glee and Nip/Tuck, from 21st Century Fox in a five-year deal reportedly worth $300 million.\" It also convinced Kenya Barris, creator of Black- isli, to agree to a three-year deal thought to be worth close to $100 million. Barris reportedly negotiated an early release from ABC partly due to \"creative differences\" after the network refused to air a controversial episode of his show.28 "If I was going to step out, I wanted to do something where I could take off all the straps and really hang out of the plane,\" he said. \"I want to be Netflix with attitude loud, bold and unapologetic.\"29 Netix in 2019 By early 2019, Netflix had amassed close to 140 million subscribers, nearly 60% of whom came from international markets.30 The streaming service, which was available in 190 countries, consumed 15% of total downstream volume of internet traffic globally and close to 20% in the US.31 Netflix's production and programming expenses, once a mere fraction of the industry total, now outpaced those of the traditional broadcasters and had grown to $10 billion (see Exhibit 6). Including content produced for certain regions across the world, its original programming catalog counted over 15,400 titles.32 Netflix's annual revenues rose to nearly $16 billion, a 35% increase from the previous year, and its market capitalization reached $155 billion.33 Disney Disney was one of the world's leading entertainment conglomerates in 2019. Under the leadership of lger, the company's market capitalization value increased from $46 billion when he became chief executive officer in 2005 to more than $230 billion in 2019.34 Throughout that period, the company had made several significant acquisitions, of computer-animation studio Pixar in 2006 for $7.4 billion, Marvel Entertainment, which had its roots in comic books in 2009 for $4 billion, filmmaker George Lucas' Lucasfilm in 2012 for $4.05 billion and, most recently, 21st Century Fox in March 2019 for $71.3 billion.35 In 2019, Disney operated four business units36: 0 Studio Entertainment: Generating roughly $10 billion in 2018, this unit produced films through Disney Studios, Pixar, Marvel, Lucasfilm, and, since the merger, also Twentieth Century Fox, Fox Searchlight Pictures, Twentieth Century Fox Animation, and Fox Family. It also produced live stage plays through Disney Theatrical Group and produced and acquired musical recordings through the Disney Music Group. 0 Media Networks: Generating $24.5 billion in revenues in 2018, this business unit contained Disney's television networks (including ABC), cable channels (including ESPN), radio As time went on, licensing became more expensive. NBC renewed a $25-million-dollar deal struck in 2010 for a reported $300 million in 2011.15 \"The kind of money that online video providers are paying for content is significantly greater than it was eighteen months ago," said NBC's chief executive officer Steve Burke at the time. \"Content is more valuable, and the outlook, particularly for broadcast television, is much rosier than it was eighteen months ago."'5 Time Warner chief executive officer Jeff Bewkes seemed to agree, remarking, \"[Services] like Netix are welcome additions to the infrastructure. They can monetize value for companies like Warner that maybe there wasn'tin terms of efficiency for older productas available before.\"17 When a journalist asked if Netflix was a threat, Bewkes responded, \"It's a little bit like, is the Albanian army going to take over the world?" adding, \"I don't think so.\"13 (Hastings reportedly considered Bewkes' comment \"a badge of honor,\" adding, \"For the next year, I wore Albanian army dog tags around my neck. It was my rosary beads of motivationfq") Not every executive was keen to renew. \"Starz made a terrible deal with Netix. You could argue that Netflix built its business on the back of Starz programming for pennies," Starz chief executive officer Chris Albrecht said when he ended his company's licensing agreement after three years. \"I think it's really shortrsighted for all these folks to be selling their shows to Netflix,\" he later clarified, adding: \"If they didn't, what would be on Netix? A lot of old movies, some Disney movies in a couple of years and a few shows that they make... [But] it's hard [for content owners] to turn down the drug, the immediate high of the money that [Netix is] paying."ZU Moving into Original Programming Netix next started pursuing its own original content alongside licensing deals (see Exhibit 4). In February 2013, it released its first original series, House of Cards, a show about the dark and cunning politician Francis Underwood and his relentless pursuit of power. The production company behind the show, Media Rights Capital (MRC), had pitched the series to each of the major premium cable networks in the U5. and approached Netix only for a possible second window, but to their surprise, Netix executives replied with an offer for exclusive, instant streaming rights that was reportedly worth $100 million for two seasons of thirteen episodes each.21 The show impressed critics and went on to secure nine primetime Emmy (the television industry's most prestigious award) nominations in its first season, and a victory in the Best Actress category (for Robin Wright). Netflix would air six seasons. Netflix's next big bet was a show set in a female prison, Orange is the New Black, produced with Lionsgate and released in July 2013. \"I took it to HBO and Showtime and Netflix,\" said creator Jenji Kohan. \"And the greatest thing about going to Netflix was that I pitched it in the room, and they ordered thirteen episodes without a pilot. That's miraculous. That is every showrunner's dream, to just 'go to series' and have that faith put in your work. They paid full freight. They were new, they were streamlined, they were lovely, they were enthusiastic about it. And I love being on the new frontier.\"22 Orange is the New Black became one of Netflix's most watched original series, and by 2019 had been renewed for a seventh season. Netflix's first moves into original programming were structured as 'deficitfinancing' deals in which Netix paid a share (usually two thirds) of a show's production costs and the production company retained ownership (so it could make up the 'deficit' by negotiating deals for subsequent windows and international markets). Later, Netflix switched to a 'cost~plus' model that required the company to pay more money upfront but also enabled it to secure ownership rights, thereby putting itself in a position to exploit subsequent revenue windows. By 2018, Netix had an $8billionayear content budget, and it directed 85% of its new content spending towards original productions. Sarandos disclosed that Netflix planned to produce 1,000 original shows and debut close to 500 of those in the next year. Netflix rarely released viewership data, but he indicated that over 90% of Netflix's customers regularly watched original programming. 23 over 50 channels. Hulu generated $1.5 billion in advertising revenues annually, up 45% from the previous year.45 However, the service was also expected to incur an operating loss of approximately $1.5 billion in 2019.46 Moving into Streaming in a Big Way with ESPN+ and Disney+ In 2016, lger acquired a 75% stake in BAMTech, a technology platform developed by Major League Baseball's Advanced Media arm that powered many video streaming services, including those by HBO, CBS Sports, and the National Hockey League, for a total of $2.58 billion.47 "In today's world, it's almost not enough to have all that [content] unless you have access to your consumer whobecause of technologyis providing you with incredible data, [which in turn allows you] to provide the consumer with a more customized personalized experience and to basically monetize the whole thing better,\" he had earlier stated.48 Putting his new acquisition to immediate use, Iger enlisted the BAMTech team to help build and launch the subscription streaming service ESPN+ in April 2018. Offering users access to thousands of live sports events across MLB, NHL, MLS, tennis, cricket, boxing, college sports, and more, ESPN+ was available for $4.99 per month or $49.99 per year. The service was off to a flying start: ESPN+ hit one million subscribers five months after its launch, faster than any other streaming service.\" By early 2019, it had two million paying subscribers and operating losses in the range of $650 million. 5\" Iger focused on launching a Disney-branded streaming service next. \"I declared [directto consumer] our number-one priority as a company," he said, adding: "That also led to some changes in our compensation approach. We're now at a point where the buyin is complete, there is no resistance. There are no pockets of traditionalism here that are in any way getting in the way of what we need to do."51 After declining to renew Disney's licensing deals with Netflix and making the deal to acquire additional intellectual property through the 21st Century Fox acquisition, he created the new 'Direct "Io-Consumer and International' business unit.52 Seeking to avoid what he described as \"park[ing] the cost of innovation in a traditional business," Iger explained that, formally, the 'Studio Entertainment' unit would license content to the 'Direct-ToConsumer and International' business unit, making ows of money apparent for investors.53 Launching Disney+ During its Investor Day in April 2019, Iger and his team of senior executives disclosed important details about the Disney+ service. They shared that the plan was to launch the service in the US. on November 12, 2019, for $6.99 per month or $69.99 per year substantially lower than Netflix's standard plan, which had recently increased in price from $10.99 to $12.99. On launch day, Disney planned to offer more than 25 new original episodic series and more than 10 new original films, documentaries, and specials, along with around 7,500 past television episodes and more than 500 films from the Disney library.54 \"Disney+ marks a bold step forward in an exciting new era for our companyone in which consumers will have a direct connection to the incredible array of creative content that is The Walt Disney Company's hallmark,\" Iger pronounced. "We are confident that the combination of our unrivaled storytelling, beloved brands, iconic franchises, and cutting-edge technology will make Disney+ a standout in the marketplace and deliver significant value for consumers and shareholders alike.\"55 Iger and his team of senior executives revealed that they expected Disney+ to have anywhere between 60 million and 90 million subscribers by the fiscal year 2024, two thirds of whom would be based in markets outside the US. Committed to spending more than $1 billion on original content for the service in its first year of operation, they anticipated that number would increase to well over $2 billion annually by 2024. Original content amortization expenses were expected to be under $500 million in year one, and increase to $2 billion by 2024, while licensed content expenses were thought to networks, associated production and distribution companies, and owned-andoperated television stations. - Parks, Experiences and Products: Accounting for $24.9 billion in revenues in 2018, this segment encompassed Disney's theme parks and resorts, cruise and vacation experiences, and consumer products such as toys, apparel, books, and video games that were sold in Disney stores and elsewhere. - Direct-to-Consumer and International: Formed in March 2018, this newest segment comprised Disney's international business in global content and advertising sales, its streaming-technology subsidiary BAMTech and its streaming services Hulu, ESPN+, and now Disney+. Pursuing and then Pulling Back on Content Licensing Deals Disney had licensed its content to technology companies ever since those firms first developed online video offerings. For instance, it contributed episodes of several of its hit shows when Apple released its video iPod in 2005, allowing users to buy individual episodes from the Apple iTunes Store for a couple of dollars.\" And when Apple announced its online movie service the following year, its lineup included over 75 of Disney's movies.38 Deals with Amazon (and its Prime Video streaming service), FandangoNow, Google Play, Microsoft Movies and TV, and Vudu, followed. In 2014, Disney launched Disney Movies Anywhere, a service that allowed users who purchased any of the 450 titles Disney made available on each of those platforms to transfer those titles to a digital \"locker' where they could stream or download their Disney content in one central location?'9 Over the years, Disney had entered into several agreements with Netix. By the time Netflix's deal with Starz (which had included rights to some Disney films, also see Exhibit 3) expired in 2012, Disney had granted Netflix access to television episodes from its ABC and Disney Channel networks, and licensed classic film titles such as Alice in Wonderland, Dumbo, and Pocahontas. In 2013, Disney signed over the exclusive US. rights to its direct-tovideo films.4D Three years later, it licensed new theatrical releases to Netflix during the pay-television window.41 As a result, Netix was able to offer some of the film industry's biggest hits in the 2016-2018 period shortly after those appeared in theaters, including Black Panther, Captain America: Civil War, Finding Dory, Pirates of the Caribbean: Dead Men Tell No Tales, and Thor: Ragnarok.42 In 2018, lger announced that Disney would end its agreement with Netflix and build its own streaming service. Starting with Captain Marvel, new films released in 2019 and beyond would appear exclusively on Disney's own subscription service. Increasing its Stake in Hula Hulu was a U.S-based streaming service that offered a wide assortment of television and film content. Originally established as a joint venture between media giants NBCUniversal and News Corp. in 2007 to which Disney signed on as a third equity partner, by 2019 Disney had become a majority owner after its acquisition of 215' Century Fox (with a 60% stake), while Comcast via NBCUniversal (with a 30% stake) and AT&T via WarnerMedia (with a 10% stake) continued hold an interest as well.'L3 Compared with Amazon Prime Video and Netflix, Hulu stood out for offering users early access to popular broadcast television series, sometimes offering those as soon as 24 hours after they first aired on television. Hulu had also invested in original content, scoring a hit with its dystopian drama series The Handmaid's Tale. By early 2019, Hulu's catalogue consisted of around 85,000 titles, and it had amassed 25 million users in the U.S., 92% of whom were paying subscribers (also see Exhibit 7).\" Subscribers could choose between a $5.99~a~month offering with advertisements, a $11.99~a-month package without advertisements, and a $44.99-a-month service that included live television. The latter option allowed users to, in addition to streaming content, watch live and ondemand television programming from increase from $1.5 billion to well over $2 billion in that same period. They expected to reach profitability in 2024.5\"5 Meanwhile, Disney's goals also encompassed growing ESPN+'s subscriber base to anywhere between 8 million and 12 million subscribers by 2024 and reaching profitability by 2023, and growing Hulu's base to 40 million to 60 million paid subscribers by 2024 and reaching profitability either that year or the year before.57 Who Will Win? Disney was not the only entertainment conglomerate venturing into the videostreaming space in a big way. NBCUniversal's Burke had announced that in 2020 his company would launch an advertising supported streaming service that would be free to its paytelevision subscribers and $12 per month for other users.58 John Stankey, WarnerMedia's chief executive officer, oversaw an effort to launch a streaming service in late 2019 that would combine the company's CNN, DC Comics, HBO, Looney Tunes, The CW, and Turner brands.59 It had hinted at pulling its evergreen hit show Friends from Netflix in favor of its own branded service.60 And Warner Media's film and television studio Warner Bros. made several eyepopping talent deals itself, for instance bringing on board television producer Greg Berlanti (responsible for hit franchises such as Dawson's Creek, Brothers ('5 Sisters, and Everwood) in a $300million, sixyear deal.\" Disney, however, was making what looked to be the most aggressive moves to challenge Netflix's market leadership in video streaming. Kids content, or more generally, familyfriendly programming was shaping up to be one especially competitive arena. Long Disney's sweet spot, this genre also was popular on Netflix. An estimated 60% of Netflix users watched kids and family content.62 Since hiring Melissa Cobb, known for being the producer of the animated movie Kimg Fu Panda, as head of its kids and family content in September 2010, Netflix had entered into content deals with DreamWorks (to produce six animated originals) and the Roald Dahl Story Company (known for children's movie hits such as Matilda and The BFG), and had made a push to hire animators.63 Meanwhile, other technology giants were also ramping up investments. Amazon, which served 40 million subscribers with its Prime Video service in the US. alone (also see Exhibit 7), continued to invest heavily in original and other content. Apple was ramping up for the launch of its subscription video service, AppleTV+. Scheduled to debut in the fall of 2019, AppleTV+ was expected to feature a significant amount of original contentcommissioned for an estimated $1 billionthat included new shows from top directors and actors such as JJ. Abrams, Jennifer Aniston, Octavia Spencer, Steven Spielberg, and Oprah Winfrey. Apple planned to offer AppleTV+ alongside content from partners such as Amazon Prime, HBO, Hulu, and Showtime via the Apple TV app. Did Netflix have the right approach to avert Disney's threat? Should Hastings be worried about losing his market dominance in video streaming in the first place? Did Iger have a compelling formula for success, or should he be worried about taking Disney into the wrong direction after having made so many right decisions during his tenure as chief executive officer? And was this a market in which multiple subscription services could coexist and be profitableor would there ultimately be only one winner? The Video-Streaming Wars in 2019: Can Disney Catch Netflix? After Bob Iger, chief executive officer of The Walt Disney Company (hereafter 'Disney'), one of the world's leading entertainment companies, thrilled investors with details about Disney's upcoming foray into video streaming during its annual Investor Day on April 11, 2019, he saw his firm's stock price soar to an all-time high of over $130 per share. Meanwhile Netflix, the dominant incumbent in the video-streaming-subscription space, led by chief exeCutive officer Reed Hastings, ended the next day with its share price down nearly 5% (see Exhibit 1 for key financial information for the two companies).1 Disney's move was only the latest in a series of actions taken by new and established entertainment companies in a fight for dominance in video streaming. Netflix had established an early foothold in that market after entering in early 2007. En route to amassing 140 million subscribers worldwide by early 2019 and spending $10 billion on COntent annually, it had evolved from a company that relied on coritent licensing deals to one that also had significant success with its own original programming and that had signed some of the television's world most highprofile creators to longterm deals.2 New, Disney was joining the fray with its signature service, after first collaborating with other broadcasters in establishing Hulu, later buying up a majOrity stake in that service, and launching sports-content subscription service ESPN+ in 2018. Disney planned to launch its subscription service, Disney+, in November 2019 at price of $6.99 per month just a little over half of N etflix's standard $13 a-month planand was planning to spend $1 billion on original programming for the service in its first year alone. Disney executives projected Disney+ to reach 60 to 90 million subscribers by 2024 and reach its breakeven point in that same year. \"Disney is approaching streaming offerings with guns blazing, looking to take share and quickly ramp up subscriber growth,\" said one director at a credit- rating firm, pointing out that \"Disney+ will be loaded on day one with attractive [intellectual property] and franchises.\"3 The battle for what many industry observers regarded as the future of the television business was truly on. Had lger and his team of executives found the right formula to unseat Netflix as the leader in video streaming? Was there room for both players in the marketplace? Or would Hastings and his team at Netflix need to respond in some way to the looming threat posed by Disney