Jun 26, 2018 ยท 5 minutes

Media giants like Disney should have taken note back in 2010, when Blockbuster declared bankruptcy: Netflix was a budding serial killer in the making - and its victims of choice were giant corporate incumbents.

Back then, Blockbuster was in the business of renting DVDs. It started 2010 with 6,500 stores, but by July its stock had been delisted from the NYSE. By late September, Blockbuster had filed for bankruptcy-court protection. The rest is history, of course, but Disney, Comcast, News Corp. and others didn't see that past history as prologue until Netflix had already become a growing threat.

2010 also marked an important turning point for Netflix: It was the first year when the company had more subscribers streaming video than renting DVDs by mail. "Our core strategy is to grow our streaming subscription business," the company said in its 2010 annual report. "Going forward, we expect we will be primarily a global streaming business."

Back then, Netflix had 20 million subscribers. Now it has more than 130 million. Having made its first kill – Blockbuster – Netflix began craving fresh blood. It moved licensing content from the old media giants to financing its own original programming - and in the process morphed from a key customer to a formidable rival. As BTIG analyst Rich Greenfield put it recently, "The success of Netflix in the market is why we're seeing the greatest rearranging of the media industry chessboard in history." 

Other companies like Amazon and, more recently, Apple and Facebook, saw Netflix's success in streaming programs and laid out plans for their own offerings. YouTube, meanwhile, had slowly become its own black hole of online-video attention and a key revenue engine for Google. Even Hulu – set up by the old-school media giants in 2007 – invested modestly in original shows after muddling along for years.

As Blockbuster learned, the damage that Netflix can inflict is gradual at first, too incremental to set off any loud alarms. In late 2015, Disney CEO Bob Iger began to concede that changing viewing patterns among younger audiences were hurting Disney's revenue. In time, the affliction spread to its cash cows like ESPN, leading Iger to get testy when the topic of cord cutting came up on earnings calls. 

Disney's stock lost more than 20% of its value in a little more than a year. Belatedly, Iger took seriously the threat that over-the-top video was posing to Disney's cable-dependent model. He delayed his retirement several times, eventually unveiling plans for Disney to deliver the company's own online, subscription-based offering

While Disney and other media incumbents were in denial about the Netflix threat, Netflix had grown formidable, streaming 700 original programs directly to consumers, all without a cable, for as little as $8 a month. The company is spending at least $8 billion on programs this year, a comparable budget to those at Disney, Time Warner, Fox and NBC Universal. Having joined the video arms race, Amazon is spending $5 billion this year, while Apple will spend $1 billion. 

That led to the typical recourse of the desperate corporation: M&A. Companies that create and distribute video suddenly wanted to merge with each other, and when the AT&T-Time Warner deal finally cleared, it became full-on mating season. Disney, which began talking about a deal with 21st Century Fox late last year, is now engaged in a bidding war for the Fox assets with Comcast. 

In the decision approving the AT&T purchase of Time Warner, the judge summed up the media market dynamics this way:

Integrated entities like Netflix, Hulu, and Amazon have achieved remarkable success in creating and providing affordable, on-demand video content directly to viewers over the internet. As a result of these "tectonic changes" brought on by the proliferation of high-speed internet access, video programmers such as Time Warner and video distributors such as AT&T find themselves facing to stark realities: declining video subscriptions and flatlining television advertising revenues.

By virtue of growing larger, Netflix managed to precipitate a wave of media consolidation. Not so much with its own dealmaking – its rare acquisitions include Millarworld last year (and possibly Seth Rogen) – but by virtue of being Netflix. Now the game in media has become scale up or die. Eat the small and prepared to be eaten. As the Wall Street Journal pointed out, Metro-Goldwyn-Mayer, which bought the Epix cable channel, is being eyed by Sony Pictures Entertainment. And Sony is frequently named as one of the companies likely to be bought next. 

Where does that leave us once the M&A dust settles? Fewer, larger companies controlling the bulk of video assets presents certain challenges, even if those handful of companies are a mix of old-school media, tech, and ISPs. Movies and TV are making a weird kind of full-circle journey back to the early years of Hollywood, when a handful of studios called the shots. That is, 1930s-era Hollywood with a twist: instead of movie stars, media giants snap up showrunners. 

So Apple signs Oprah and Reese Witherspoon, while HBO signs Tiffany Haddish and Ronan Farrow, and Amazon signs Jordan Peele. Netflix's roster includes Shonda Rhimes, Ryan Murphy, and the Obamas. Most of these agreements were inked in the past couple of months – all of them within the past year.

In time, the cable-TV package may go the way of the DVD-by-mail model, becoming a niche form of distribution for a die-hard group while everyone else moves on the new, improved model: over-the-top, direct-to-consumer video. If that means the end of paying too much for dozens of cable channels you never watched, fine. If it means paying for a bunch of monthly subscriptions that, added up, cost just as much as the old cable packages, not so fine.

And if having a few, huge video-content giants means each gets to ratchet up their monthly fees once the consolidation has wiped out smaller players, that's even worse. Netflix has been raising prices by stealth by charging more for certain features, such as hi-def video or viewing on multiple screens. Last month, Amazon Prime, for which its TV programs are a big draw, went from $99 a year to $119 a year.

Such is likely to be the world that Netflix, intentionally or not, set into motion. As for Netflix itself, its stock fell 6.5% Monday, the largest decline in nearly two years. The company lost its communications chief after making racist comments, but the decline is likely a round of profit taking. Even with the decline, Netflix shares are up 91% so far in 2018, valuing the company at $167 billion.

That's still $12 billion more than Disney is worth. Disney, by the way, is down 7% so far this year.