There's no denying Roku's (NASDAQ:ROKU) success in the ad-supported streaming market. The company, which specializes in streaming-media players and digital advertising, has gained more than 325% this year alone. Roku's pivot a couple of years back to focus on advertising was a stroke of genius and is now the most profitable segment of its business. It also made the company a must-own tech stock for 2019.
Some investors abandoned ship on Wednesday when cable giant Comcast (NASDAQ:CMCSA) announced it would make streaming boxes available for free to its broadband customers -- a move that could put it directly on a collision course with Roku -- and driving the streaming-pioneer's stock down more than 14%.
Free is my favorite price
Comcast said in a press release that it would provide one free Xfinity Flex set-top box at no cost to subscribers of Xfinity Internet, which will give users access to more than 10,000 free movies and television shows while providing an easy way to access their premium streaming subscriptions from Netflix (NASDAQ:NFLX), Amazon.com's (NASDAQ:AMZN) Prime Video, HBO, and Showtime. Flex also gives customers a way to rent or purchase digital copies of their favorite shows and movies and provides access to their streaming-music choices like Pandora, iHeartRadio and XITE.
Other benefits of the Flex service include access to available 4K Ultra High Definition (HD), from ad-free shows and movies to subscription streaming. Additionally, customers can use Comcast's voice-activated remote control to search for programs across the platform by simply using voice commands like "weather" or "watch Game of Thrones" into the remote.
Comcast estimates that this will benefit millions of new and existing customers, giving them the ability to easily access all of their favorite streaming content.
The competition is coming
This isn't the first whiff of competition that has come Roku's way in recent weeks. At the IFA 2019 Consumer Electronics Fair in Berlin, Amazon debuted more than 20 new Fire TV Edition devices. This is a major expansion of the Fire TV ecosystem and its first major expansion in Europe. Amazon introduced the next-generation Fire TV Cube and a Fire TV Edition soundbar and is partnering with a number of major manufacturers on Fire TV Edition smart TVs.
This news came at the same time Roku announced a licensing agreement to debut the first Roku TV in the United Kingdom, courtesy of Hisense. The licensing of its smart TV operating system (OS) has been a key part of Roku's strategy to increase the number of active users on its platform -- and signaled the company's aspirations to continue that success in Europe.
Earlier this month, some Roku investors decided to move to the sidelines after Apple (NASDAQ:AAPL) announced that its Apple TV+ streaming service would be priced at just $4.99, about half the price that many expected and free for a year to customers who purchase an Apple device. This illustrates a basic misunderstanding on the part of Roku shareholders, as the Apple TV app will be available on Roku devices, so it doesn't represent a threat.
Understanding the landscape
To understand how Comcast's move will impact Roku, it's important to look back at its recent results. Roku grew revenue by 59% year over year in the most recent quarter, but the star of the show was its platform segment, which increased 86% as the result of increased advertising, a cut of subscriptions made via the platform, and licensing from its OS. Active accounts grew to 30.5 million, up 39% compared to the prior-year quarter. Roku has been leveraging its user base to gradually increase the amount of advertising it shows across its platform, which accounts for much of its surging growth.
Comcast's move to give away set-top boxes for free to its broadband customers could potentially eat into Roku's account growth and stunt its future platform revenue. In the second quarter, Comcast reported about 24.4 million residential broadband and 22.1 million cable TV customers. About 19 million Comcast customers subscribe to two or more of the company's services, so there's a considerable amount of overlap -- meaning there will likely only be a few million potential users of the new Flex box.
Investors' knee-jerk reactions notwithstanding, this is clearly a move by Comcast to tap into Roku's most profitable business. By offering free programming (read "ad-supported"), the company hopes to increase its own advertising revenue by siphoning off some of Roku's current and potential customers. In its most recent quarter, Roku said that 1 in 3 smart TVs sold in the U.S. contained the Roku OS, giving the company a substantial base of user devices.
The most likely outcome of Comcast's move is that ad-supported customers will follow the same path as those who pay for streaming video -- many get their entertainment from multiple providers.
All things considered, I don't think Roku has much to worry about.