Please ensure Javascript is enabled for purposes of website accessibility

Can Roku Survive an Incursion by Amazon?

By Danny Vena - Sep 1, 2018 at 8:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Word of Amazon's latest venture caused Roku stock to drop on the news, but are the fears justified?

While Amazon (AMZN -1.98%) already is one of the leaders in streaming video -- second only to Netflix -- the e-commerce leader isn't content to stop there. Reports have emerged that the company has plans to launch a free, ad-supported video platform supported by its Fire TV devices.

News that it might compete in the same space as Roku (ROKU -4.68%) drove fear into the hearts of some investors concerned about the dreaded "Amazon Effect," and Roku's stock fell 5% in the wake of the reports. The company has carved out a successful niche for itself in the ad-supported streaming market, so if Amazon becomes a player in the space, how much of a threat is it to Roku?

The Roku Channel shown on a laptop, showing various programming choices.

Image source: Roku.

Another crack at streaming

Amazon is planning to launch a new service, reportedly called Free Drive, and is currently in talks with a number of studios to license older content for the platform, according to a report in The Information (subscription required). Amazon will launch the service via its IMDb subsidiary, which currently displays ad-supported shows. The report notes that the company already hosts advertising on its video-game streaming platform Twitch, as well as on NFL games shown on Amazon's Prime Video.

Fire TV is a streaming media player that connects with high-definition televisions and allows users to stream movies, television shows, and music from major providers like Netflix, Hulu, HBO, Spotify, and Amazon Prime Video -- as well as hundreds of individual channels and services. Fire TV comes in a variety of form factors and competes with devices like Apple TV, Chromecast, and Roku.

This combination of devices and platforms would put the company in direct competition with the streaming services provided by Roku and give Amazon another way to leverage the 48 million users of its Fire TV devices.

Will Roku suffer the "Amazon Effect?"

Not everyone believes the threat to Roku is particularly grave. Analyst Jeff Johnston of Arthur Wood believes investors may be overreacting, citing Roku's competitive advantages. He said:

We see minimal risk in the near-term for Roku. We believe Roku's agnostic approach to vMVPDs and their best-in-class user experience will continue to fuel subscriber and advertising growth for the next several years. The fact that Roku is agnostic cannot be overstated. 

Virtual Multichannel Video Programming Distributors (or vMVPDs) aggregate content from on-demand and linear television and deliver that programming over the internet. Roku acts as a conduit for a variety of these providers, including Sling, Hulu, and DirecTV. This agnostic approach may help insulate the company from some of the risks posed by Amazon.

Johnston added: "We simply don't see a situation where advertisers abandon Roku in favor of Amazon. We could see advertisers use both platforms, but choosing one over the other seems unlikely."

The Roku channel displayed on a smartphone.

Image source: Roku.

The trend is undeniable

In its most recent quarter, Roku's revenue grew by 57% year over year, driven by 96% growth in its platform revenue, and advertising was the biggest driver. 

It's important to remember the reason Roku is thriving in the first place -- advertising is increasingly moving away from linear TV and into the digital realm. The TV ad market is expected to be nearly $70 billion this year but is in a secular decline due to the popularity of streaming and over-the-top services. Ad spending on linear TV will continue to decline, with a greater percentage of those ad budgets being allocated to digitally delivered content.

The ongoing migration of ad dollars from linear to digital television will result in a market that will be capable of supporting more than one player -- even if one of those players is Amazon. Roku's position as a leader in the ad-supported streaming market and the growing opportunity in the space show why Roku will continue to thrive for years to come.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Roku Stock Quote
$93.26 (-4.68%) $-4.58, Inc. Stock Quote, Inc.
$2,216.21 (-1.98%) $-44.89

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.