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Roku Has Upended the Cable TV Power Dynamic

By Evan Niu, CFA – Jul 10, 2020 at 10:40AM

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Despite being far smaller, the streaming TV platform has tons of leverage over Comcast.

Comcast (CMCSA -0.81%) is about 10 times as large as Roku (ROKU -4.33%) in terms of market cap. The telecommunications and media conglomerate has generated nearly 90 times more revenue than the smaller streaming TV company over the past year. Yet, despite those vast differences in fundamentals, Roku appears to have the upper hand as Comcast's NBCUniversal prepares to launch its Peacock streaming services in a matter of days.

That's a significant change in the underlying power dynamic, one that has been created by massive differences in each company's trajectory.

The Roku Channel displayed on a wall-mounted TV with some modern furniture nearby

Image source: Roku.

Deal or no deal

CNBC (owned by NBCUniversal) reported yesterday that NBCUniversal has been unable to finalize a distribution deal with Roku or for Peacock, which launches on July 15. The chances of the companies reaching an accord in less than a week is less than 10%, according to the outlet's sources.

At issue are user data and how ad inventory is shared. Amazon wants tight control over the customer relationships and underlying user data, while Roku wants to keep more ad inventory for itself. Roku's platform business is predominantly advertising and the company has long reserved the right to keep 30% of video ad inventory from ad-supported channels, in addition to 20% of revenue from subscriptions and a la carte transactions.

However, Roku doesn't always take 30% of ad inventory, particularly for smaller channels that don't have large audiences. Prominent channels with more viewers have more leverage in trying to negotiate a lower percentage, and NBCUniversal is reportedly trying to get Roku to agree to a 15% share of ad inventory.

On top of that, NBCUniversal doesn't want to give Roku too much control by using its underlying advertising technology, according to the report. Roku has spent years investing heavily in making its advertising increasingly sophisticated with targeting capabilities that aren't available in linear TV.

Roku has twice as many video customers as Comcast

To be clear, a distribution deal is mutually beneficial for both Roku and NBCUniversal, but Roku is clearly flexing its muscles at the bargaining table despite being a vastly smaller company overall. Roku has become the No. 1 streaming platform in the U.S. and continues to benefit from the yearslong shift from traditional TV to streaming platforms.

Meanwhile, ongoing cord-cutting is steadily chipping away at Comcast's residential video customer base, which is precisely why it's launching Peacock in the first place. The contrast between the two companies' trajectories is stark.

Chart comparing Roku active accounts to Comcast residential video customers

Data source: SEC filings. Chart by author.

In fact, Roku had exactly twice as many active accounts (39.8 million) as Comcast has residential video customers (19.9 million) at the end of the first quarter. Comcast has a small number of business services video customers, which has now dipped below 1 million. Roku knows just how critical its platform is for any third-party streaming service, and isn't afraid to use that strength at the negotiating table.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Amazon and Roku. The Motley Fool owns shares of and recommends Amazon and Roku. The Motley Fool recommends Comcast and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

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