The number of over-the-top video streaming services in the U.S. has more than doubled since 2014, according to Parks Associates. The researchers counted nearly 300 different streaming services, with just six ceasing operations this year compared to 19 shutting down in 2018. Not only are there more streaming options than ever before, but media companies are spending more on content and marketing to help stand out from the crowd.
There's one clear winner from the growing number of streaming options: Roku (NASDAQ:ROKU).
New streaming services mean new sources of revenue
Several high-profile streaming services launched in 2020, offering Roku and other connected-TV platforms another potential source of revenue. AT&T's (NYSE:T) HBO Max and Comcast's (NASDAQ:CMCSA) Peacock joined the fray this summer, following launches at the end of 2019 like Disney's (NYSE:DIS) Disney+. All three companies have deep pockets, and that could benefit Roku.
Roku generates revenue on its platform in multiple ways, but the majority comes from advertising. One class of advertisement on Roku's platform is streaming video ads, like those you see during ad breaks in your favorite ad-supported streaming service. Roku takes a percentage of ad inventory for each app on its platform. The second class of ads is those sold to media companies to help them promote their streaming service on Roku's platform and drive installs among its sizable audience.
Roku counted 43 million active accounts as of the end of June. That's more than its biggest competitor Amazon's (NASDAQ:AMZN) last update at the start of the year, 40 million. Combined, the two companies account for the vast majority of connected-TV devices in use and practically operate a duopoly.
So regardless of whether a streaming service is ad-supported like Peacock or subscription-only like Disney+, Roku's advertising business stands to benefit from a growing number of streaming options. As it becomes increasingly difficult to stand out and drive installs and engagement, Roku's display ads become more valuable.
It's worth noting Comcast and AT&T have faced delays launching their new streaming services on Roku's platform. AT&T still doesn't have a deal in place for HBO Max on Roku, and neither company has a deal in place with Amazon.
The lack of urgency from Roku to get these big streaming services on its platform is indicative of its current strength and the demand it's currently seeing from other media companies for its ad products. Roku has also seen strong engagement on its platform without the addition of Peacock or HBO Max. Total streaming hours climbed 65% year over year in the second quarter.
Media companies are spending big
Disney, AT&T, and Comcast are all spending big on their streaming services, which will put more money in Roku's pockets.
Disney recently reorganized its media business to put a greater focus on streaming content. That should come with a bigger marketing budget for its streaming services as well. Heading into Disney+'s launch, Morgan Stanley analysts estimated the company would spend $350 million on marketing the streaming service in 2020, ramping up to $700 million in 2024. But with broader appeal and more content coming to Disney+, those numbers could be well below Disney's actual plans going forward. Disney will spend an estimated $135 million on U.S. TV ads alone this year, according to iSpot.tv.
After striking a deal with Peacock, Roku gains a share of very high-value ad inventory, which ought to provide incremental revenue to the business. Comcast expects the business to generate $2.5 billion in total domestic revenue by 2024, with a large focus on its ad-supported streaming. Even a small slice of that revenue would be a meaningful amount to Roku, which generated about $544 million in platform revenue over the last four quarters.
AT&T is planning to spend hundreds of millions per year on U.S. customer acquisition for HBO Max, and it's also planning to launch an ad-supported version of the streaming service as well. Roku is likely negotiating for guarantees on both sides of the equation (HBO Max's ad spend and its ad sales). It may also be looking to maintain its existing distribution agreement with HBO through a premium subscription option in the Roku Channel. Inking a deal for HBO Max could be quite lucrative for Roku, but AT&T isn't keen on making concessions.
With hundreds of streaming competitors all vying for recognition on Roku's platform, Roku is well-positioned to capitalize on the competition. With a large, highly engaged user base, it has a lot of pricing power over media companies, and it's been exercising that power this year. Despite pressure on the advertising market, Roku's outsized exposure to advertisements for streaming services themselves -- a booming market -- ought to support a strong ad business this year. Continued improvements in streaming content and selection will support long-term ad revenue growth from ad-supported streaming.