Analysis: Potential Netflix/Roku synergies
June 16, 2022
By Colin Mann
Noting reports that Netflix may be mulling a bid for streaming platform operator Roku, Toby Holleran, Research Manager, Ampere Analysis, identifies one obvious barrier for Netflix in that it would need to raise the cash to fund such an acquisition, given that it already carries $15 billion (€14.4bn) of long-term debt, and total liabilities of close to $30 billion.
“However, while a large-scale acquisition would add significantly to this, with Netflix already planning to launch an ad-supported tier, a purchase of Roku would bring benefits in multiple areas of the business,” he suggests.
- Acquisition of Roku’s content: Although virtually all of its content is licensed, Roku is ramping up its originals plans, and in November 2021 pledged to launch more than 50 original titles within the following two years. (The platform already has the Quibi library, of course.) For reference, the Roku library in the US consisted of around 14,500 titles (Movies or TV Seasons) at the end of April 2022, of which only 166 titles were shared with Netflix. Netflix had around 7,300 titles (of which the majority are Originals or Exclusives).
- Hardware (and software): Taking ownership of Roku hardware (and TV operating systems) could benefit Netflix from both a licensing and EPG prominence perspective. The devices segment of the Roku business is also quite lucrative, generating nearly $500 million in Player Revenue in 2021
- Advertising tech and relationships: Netflix currently lacks ad-tech capabilities, and as flagged by Reed Hastings when the company first announced its shift into advertising, it plans to outsource much of the ad-matching and targeting so it can focus on its own content. With Roku in the mix, existing Roku staffers and technology could be deployed to Netflix’s burgeoning advertising-funded video business and help to minimise third party ad tech and sales costs.
- Billing relationships: Consumers are currently able to pay for subscriptions through their Roku accounts. While Ampere expects those doing so to represent a fairly small portion of the wider Roku base, there may be some consumers who pay for additional services through Roku. Of interest in particular would be those who do not currently subscribe to Netflix. It could also allow Netflix to continue billing for other streaming services through Roku to generate revenue, as long as existing partners are willing to renew distribution arrangements.
- Addressable market: Roku finished Q1 2022 with more than 61.3 million monthly active users who clocked up around 21bn hours of streaming viewing. According to Ampere’s Q1 2022 Consumer survey, around 30 per cent of Roku device owners in the US are not currently Netflix subscribers. Netflix could offer a selection of free, ad-supported content (from its portfolio of Originals) on the Roku Channel. This would not only provide an ad revenue stream, but could also drive subscriptions to the Netflix platform if consumers want more of that content. With very few titles on both platforms, Netflix is well positioned to add content to Roku (and vice versa).
“Were Netflix to go ahead with such a deal it may choose to keep the Roku branding for a while, positioning its ‘free with ads’’ service as either ‘Netflix Roku’ or ‘Netflix Roku (free)’ given that both brands are well-established,” says Holleran, noting that Amazon ultimately brought the Amazon branding back to its free-with-ads platform after moving from Freedive to IMDb TV to Amazon Freevee, which could help reduce potential for consumer confusion. “Such a service could also replace the existing free Roku tier’s placement on Roku devices,” he advises.
He says that Netflix could retain the differentiation between tiers and give consumers a wide selection of prices. Netflix could also tier Premium with ads at the same price as standard without advertisements to essentially offer a ‘free’ tier upgrade as long as a consumer is willing to see advertising. It could even go more aggressive in markets with higher ad CPMs and have Premium with ads cost less than Standard without ads, for example.
“Ultimately, if Netflix wants to offer a viable ad-supported tier without building a new platform from scratch, it will either need to partner with (or acquire) a company with expertise, scale and traction in the space. Roku certainly fits the bill from that perspective,” asserts Holleran.
“That said, this is not a no-brainer for Netflix as there is lots of competition within the device space, and the potential cost (and acquiring funds for such an acquisition when the company is already saddled with debt and liabilities) could be prohibitive for Netflix. Partnering with, rather than buying, a third party would certainly be better for Netflix’s balance sheet in the short term, and could also pose fewer risks than an outright acquisition, particularly after a weak Q1. As such, whatever the potential benefits of any such deal, its feasibility, alongside whether a Roku acquisition makes sense overall, remains unclear for now,” he concludes.