Does Acquiring Roku Make Sense For Netflix?

Rumors are swirling that NetflixNFLX
is contemplating a big move to acquire popular OTT platform Roku as a way to jumpstart a potential ad-supported strategy and recapture lapsed subscribers. Business Insider reported today that Roku has informed employees of a deadline for selling vested stock, a possible prelude to acquisition talks with the streamer heating up.

With its stock price down more than 67% on the year so far on news of subscription declines, and budget cuts impacting upcoming productions, Netflix seems poorly positioned to contemplate a major buy at this time. But on the other hand, sometimes the best defense is a good offense. In the midst of a spate of bad news, Netflix needs to reassure the markets that it still has a plan to win the streaming wars. Roku, which first emerged as a main gatekeeper to the over-the-top universe and is now a dominant player in ad-supported streaming with The Roku Channel, might be just the ticket to help Netflix get its swagger back.

Netflix pioneered the streaming model in the 2010s with a potent combination of first-mover advantage, affordable subscriptions, ad-free content, and original programming powered by data analytics. Eventually, major competitors like Disney, Warner Bros, ParamountPARA
, ComcastCMCSA
Universal and AmazonAMZN
started making stronger bids for consumer dollars and attention, while Netflix subscription fees continued to creep up. This year, the trend lines finally crossed, saddling Netflix with its first-ever subscriber declines: over 200,000 in Q1 of 2022, projected to pass 2 million by the end of the year, and market reaction was swift.

It hasn’t been a smooth ride for Roku either. The company became a consumer darling with its simple, convenient, affordable devices and software that bring the whole universe of subscription-based and ad-supported OTT services into viewers’ living rooms. That built the company into the most popular streaming platform in North America and propelled the stock to explosive growth over the past several years.

The past six months have seen that growth level off, with Q1 2022 revenue expected to increase just 25% year over year, down significantly from previous trends. So as much as the market has taken a bite out of Netflix’s buying power, it’s taken just as large a chunk out of Roku’s share price and market cap, down 60% to around $13 billion prior to today’s spike.

So what would combining the diminished forces of these two companies bring to the party? Some analysts believe The Roku Channel could be an easy way to test-drive an ad-supported model for Netflix content. Roku has already built its platform for ad-supported video on demand (AVOD), with a robust back end to measure, report and target advertising for its video content based on rich cross-platform user data. It is now the biggest AVOD channel in the US, with a prohibitive lead on other competitors.

By piggybacking on The Roku Channel, Netflix could avoid diluting its premium subscription video (SVOD) service brand – something that Netflix CEO Reed Hastings seems especially reluctant to do – while still tapping into an ad-supported revenue stream and exposing Netflix content to a wider audience. It could be a much easier upsell to win, or win back, subscribers by tempting viewers with new seasons and ad-free content after they’ve already become fans.

Bringing together these two shiny names in the video space could also serve as a hedge against vertically-integrated competitors like Amazon, AppleAAPL
and Comcast, which both offer streaming hardware and streaming services, while stealing a march on Disney, HBO Max, Paramount and other SVOD streamers reportedly contemplating AVOD offerings.

Early trading on Wednesday shows the market also grasps the logic behind this deal, as shares of Roku are trading higher on reports of the employee share lockup. As they used to say in the broadcast TV industry, stay tuned…