Roku (NASDAQ:ROKU) users hoping to stream Super Bowl LIV on Fox's (NASDAQ:FOX) (NASDAQ:FOXA) streaming apps might be out of luck. The two have failed to renew a distribution contract for seven Fox channels on Roku's platform.
The blackout of Fox's channels -- set to begin sometime on Jan. 31 -- is somewhat unprecedented and runs parallel to the challenges smaller media companies have had in negotiating carriage deals with traditional pay-TV providers in recent years. While users of Amazon.com's (NASDAQ:AMZN) Fire TV couldn't stream YouTube for several months, that stemmed from a much broader spat between the retail giant and YouTube's parent company, Alphabet's Google.
Roku's hardball tactics with Fox despite Sunday's Super Bowl indicates relative strength for the streaming platform. And while it could cause some short-term pain as a portion of Roku users are turned off by the inconvenience of the situation, Roku ought to come out ahead in the long run. Moreover, renegotiating distribution with other media companies and leveraging its sizable audience could lead to additional growth in revenue per user.
Roku: The largest TV distributor in the U.S.
Roku used to compare its active account number to the subscriber base of pay-TV providers. In the fourth quarter last year, management wrote, "In the U.S. alone, our active account base would make the Roku platform equivalent to the No. 2 traditional pay-TV/cable company." And after substantial cord-cutting at the two biggest providers in 2019, Roku's audience is probably big enough to call itself No. 1.
Roku is also substantially larger than Amazon's Fire TV in the United States. While Amazon counts over 40 million Fire TV users globally, it seems to be far less popular than Roku in the U.S. Roku users streamed more than twice as many hours as Fire TV users in the third quarter, according to data from Conviva.
The carriage dispute with Fox puts Roku's size in perspective. It's hard to imagine many other distributors willing to forego the potential audience provided by the Super Bowl.
The details of the dispute remain unknown, but the blackout likely revolves around ad inventory splits. Amazon had a similar dispute with Disney ahead of the launch of Disney+. Amazon wanted a greater share of ad inventory for Disney's ad-supported streaming apps. The two were able to come to terms before the launch of the new service.
Increasing revenue per account
Demanding a larger share of ad inventory presents a path to accelerate revenue per account for Roku. The streaming company generated $22.58 per account in the 12 months ended in September 2019. But growth is slowing as it gets bigger, despite continued increases in time spent per user and the shift of ad spend from traditional to connected TV.
Taking a bigger share of ad inventory provides another axis for Roku's revenue growth. Combined with increased engagement and increased average ad prices, it would provide a big shot in the arm for Roku's platform business.
But it requires Roku to take tough stances like it's doing with Fox. Roku needs to be aware of its users' switching costs and available substitutes in order to come to the negotiating table with confidence. The more smart-TV users in its customer base, the higher the average switching cost. (Smart TVs are harder to replace than a streaming stick.) Roku's smart-TV user base is growing faster than any other company's, taking one-third of sales in the United States.
Furthermore, the more options for streaming similar -- or even the exact same -- content on Roku's platform, the stronger Roku's stance. In the case of Fox and the Super Bowl, Roku will have lots of alternatives, including the free NFL channel. What's more, Roku can use its marquee display advertising to point its users in the right direction, so the user experience remains pleasant with minimal costs.
That won't be the case with all content providers. Some media companies will have much stronger positions than Fox and bring large, engaged audiences to the table. But as Roku grows its audience and engagement, it becomes more powerful, and it can grow revenue through demanding more from its content partners.