Netflix faces ‘fundamental challenge’ from Disney and WarnerMedia streaming services in 2019

Netflix will start to go head-to-head with two media giants when they launch rival video streaming services late next year, Los Angeles Times’ Stephen Battaglio told CNBC on Monday.

“The test will begin in 2019, when you have Disney launching an over-the-top streaming service and WarnerMedia launching an over-the-top streaming service,” the media reporter said on “Power Lunch.”

Mark Mahaney, lead internet analyst at RBC Capital Markets, argued later on “Power Lunch” that while the competition will be a “fundamental challenge” for Netflix, it will also create an opportunity for the stock, one of his firm’s top picks for 2019.

“We think … that Netflix’s fundamentals will power through this,” Mahaney said. “Its global presence, … the scale of its offering and exclusivity of its offering — I think all of that allows Netflix to power through.”

WarnerMedia, formerly known as Time Warner before AT&T’s acquisition of the company, plans to release a streaming service in the fourth quarter of 2019 that carries movies and TV series from its Warner Bros. studio. The company owns blockbuster franchises like “Batman” and “Harry Potter,” and popular shows like “Friends” and “The Big Bang Theory.”

Disney promises to launch Disney+ next year and pull its content from Netflix. Additionally, Apple could be dropping a video streaming program in next year, and Amazon already has a presence in the on-demand video sector with Amazon Prime.

“The question is what happens when these studios decide to take their content and run them on their own streaming sites?” Battaglio said. “That gives them a lot of leverage going forward when negotiations come up again for these programs.”

After picking up $2 billion in new debt last October, Netflix said it would plan to spend on more content, production, and other acquisitions. RBC’s Mahaney noted that the company has a “pretty good track record” in funding productions.

But the streaming giant will have to answer questions about its growing debt, which Mahaney said wasn’t a major concern. Netflix reported negative free cash flow of $859 million in its third-quarter earnings release.

“We think the leverage ratios here are very reasonable by traditional media standards,” he said, adding that his firm didn’t see “anything unusual” in Netflix’s financials as it related to debt.

Porter Bibb of Mediatech Capital Partners told CNBC that Netflix will have to either build an advertisement revenue stream or, in what would likely be an unpopular move, raise its prices in order to continue financing strong programming like its latest hit “Bird Box.”

“When they have to go out and continue to pay huge amounts for top talent, they’re going to soon hit the wall,” he said, appearing on “Power Lunch” alongside LA Times’ Battaglio.

Netflix could, however, find protection in the short term because major media companies “have become accustomed” to selling their content to the streaming pioneer, Battaglio argued. Netflix has paid top dollar for rights to stream TV shows and movies from various television networks and studios, which in part propelled the company to grow a large subscriber base and reach more than $116 billion in market cap as of Monday.

“It is keeping a lot of TV programs on the air and profitable … [and] extracting a lot of value out of the libraries of TV studios,” Battaglio said. “Look at how Netflix paid $100 million for the rights to stream Friends, which you can watch free on television several times a day on a number of channels.”

Netflix’s stock has performed well in 2018, trading nearly 40 percent higher than it did at the start of the year. Shares of Disney are up more than 1 percent on the year, while AT&T has lost more than 26 percent.

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