A lot of companies in the streaming video space saw their stocks take a hit after Apple (NASDAQ:AAPL) announced the pricing on its forthcoming Apple TV+ service. The tech giant is charging just $4.99 per month in the U.S., and it's giving a free year to anyone who buys a new Apple device.
Shares of Netflix and Disney (NYSE:DIS), unsurprisingly, took a considerable hit after Apple's aggressive pricing was revealed. What came as a big surprise to some investors, however, was the impact on Roku (NASDAQ:ROKU), whose shares fell 10.5% that day.
There are a few reasons Apple TV+ could have a big negative impact on Roku, but there are also some positives for investors to look forward to from the new service. Let's take a closer look at the good and the bad for Roku when it comes to Apple TV+.
The bad: Fewer opportunities for revenue sharing
There are two main ways the pricing and promotion around Apple TV+ will adversely impact Roku's revenue sharing.
The first is fairly straightforward. If Apple is giving away a year of Apple TV+ with every new Apple device, that means practically all of Apple TV+'s signups will flow directly through Apple. Roku earns a share of subscription revenue from partners when it signs up new users through its platform, but that doesn't seem likely when Apple TV+ subscriptions are closely tied to Apple's hardware.
The second way is less straightforward, but could have a much bigger impact on Roku's distribution revenue. Apple is positioning Apple TV+ as an incentive to use the Apple TV app, which aggregates content from other streaming services into a single app. That's basically Roku's entire business, except in app form.
The Apple TV app will include access to content from users subscriptions regardless of where users signed up for each service, but Apple introduced Apple TV Channels earlier this year. Channels simplifies the user experience, billing, and provides access to over-the-top channels that're otherwise not available directly to consumers such as Cinemax. Roku introduced the same feature in The Roku Channel at the start of the year, and it's also available to Amazon Prime subscribers via Prime Video Channels.
If Apple can get customers engaged in the TV App and to sign up for Channels instead of subscribing via Roku, it could have a much bigger impact on Roku than merely hoarding its own subscriber signups.
There's a third way Apple's promotional pricing could have an unfavorable effect on Roku. Since Apple is bundling a free year of Apple TV+ with each new device it sells, customers who would've signed up for Apple TV+ anyway might see it as a discount on buying a new Apple TV set-top box. The Apple TV starts at $149, but an effective $60 discount brings it down to $89. The number of people who would choose Apple TV over Roku because of this promotion is likely small but still noteworthy.
The good: Promoting more cord-cutting
Investors focusing on the potential negatives caused by Apple's pricing and promotion may be missing the forest for the trees. Apple is bringing tons of high-quality content to consumers for just $5 per month, no cable subscription required. When you add that to Disney's $7-per-month offer for Disney+ or its $13-per-month bundle when you add Hulu and ESPN+, in addition to all the other cheap streaming options already available, it's increasingly easy to get as much video entertainment as you desire for much less than a cable subscription.
Apple TV+'s subscription price is artificially low. It's subsidized by Apple's endeavor to grow device sales and subscription revenue through the Apple TV app. But there will be plenty of consumers who will take advantage of the $5-per-month service and hardly use Apple for anything else.
Apple is not unique in its approach to subsidizing the price of its video service, either. NBC News' Dylan Byers points out. Amazon subsidizes Prime Video by including it as part of its delivery service, which fuels its retail sales growth. AT&T packages its streaming video services with its core wireless phone service. Even Disney could be said to be subsidizing Disney+ with merchandise and theme park ticket sales.
As a result, there's a bevy of cheap over-the-top streaming options. And as the number of quality options continue to grow, consumers are more and more likely to cut the cord. And Roku, not Apple, is best positioned to capitalize on the market of cord-cutters. Apple may have devices in a billion pockets, but people generally like to watch TV on, well, their TV -- and that's where Roku thrives.