How Big a Threat Will Amazon’s Free Dive Be to the Roku Channel?

On the list of Things No Executive Wants to Hear, the phrase "Amazon (AMZN -1.65%) is about to make a play for our key niche" ranks pretty high.

In this segment from the Market Foolery podcast, host Mac Greer and senior analysts Matt Argersinger and Aaron Bush weigh the news that Amazon plans to launch a free, ad-supported video service for the approximately 48 million people using its Fire TV hardware. Free Dive will be distinct from the ad-free Prime Video service, but it sure sounds a lot like what Roku (ROKU 1.58%) is building with the Roku Channel that it offers on its devices.

A full transcript follows the video.

This video was recorded on Aug. 29, 2018.

Mac Greer: Guys, let's talk some Amazon. According to a report from The Information, Amazon is planning to launch a free ad-supported video service for the estimated 48 million people using its Fire TV streaming video devices, including HDMI dongles made by Amazon or its Alexa-powered Fire Cubes. Now, this Amazon service -- if reports are correct -- would be very similar to one that Roku recently launched, the Roku Channel, which airs old movies and reruns. Shares of Roku down on the news. What do we make of this?

Aaron Bush: I think what Amazon is doing is very similar to what Roku is doing. As I've mentioned in the past, in past episodes, I think the strategies-versus-tactics lens is great to use in situations like this. What that means is that for Roku, this is the company's entire strategy, or a huge piece of the company's entire strategy. For Amazon, this is just one tactic to a broader strategy. When you are the company with the strategy going up against a larger company who's entering your market just as one smaller tactic, oftentimes there are reasons to be concerned. That larger company probably has a larger war chest to put to use. Also, they can afford to be irrational, in some ways. They're willing to lose money, for example, in order to make money elsewhere in the business.

I think a little bit of that is going on here. There aren't a lot of details on what exactly the content is going to be. I could totally see them coming up with some slimmed-down Prime Video-type offering that they make free but ad-supported. And if you look at what Amazon is doing across their entire business, ads are ramping up incredibly fast, more than doubling year over year. I think that's going to become a new pillar for the business. This is them flexing their muscle to ramp up ad revenue and to expand into audiences that maybe don't want to pay for all of these video subscriptions. It's not great for Roku, either.

Greer: So, Matt, how nervous should Roku be?

Matt Argersinger: I think they should be pretty nervous. I love the way Aaron framed this. A small tactic for Amazon can be an entire company's margin. We've seen that. Roku right now is struggling to remain relevant. I mean, they are relevant to millions of people right now, but I think as the hardware goes away and people tend to understand that either their TV or some small device is aggregating all of their content choices, is Roku still a value add in that situation? If it doesn't have, say, this channel, this content that Amazon's not competing with them against. Is it just a commodity that people take for granted when they buy a new TV? I worry a lot about Roku. Here's just another salvo from Amazon that eventually might be a nail in a coffin.