Roku (NASDAQ:ROKU) is in talks to buy Quibi's content catalog, according to a report from The Wall Street Journal. Quibi -- a mobile-focused premium video streaming service -- launched in April but shut down by October after failing to draw an audience. Roku may have an opportunity to get a discount on its big budget, short-form productions starring a long list of high-profile names.
Is it worth it?
Putting more pressure on its media partners
Roku was exploring the possibility of developing its own original series for The Roku Channel in early 2020. CFO Steve Louden denied those reports at an investor conference in March, pointing out that there's a lot more value for Roku in partnering with media companies and distributing their content.
But 2020 saw Roku become a bit more demanding of its media partners. And the media companies didn't always see eye to eye with Roku. AT&T's WarnerMedia and Comcast's NBCUniversal had a tough time agreeing to terms with Roku to distribute their new streaming services, HBO Max and Peacock. Roku wanted more content rights for The Roku Channel in exchange for distribution, and the company has had similar disputes with other companies when renegotiating distribution for other streaming apps.
Owning its own content would further change the dynamics of Roku's negotiations. It could push the company to favor owning the rights to content in The Roku Channel, moving it further away from alternative models like revenue sharing. That would allow Roku to keep more of its ad sales, but it could also result in fewer content concessions from media partners. Roku managed to get a lot of content from Comcast in its Peacock negotiations, but it failed to get anything for The Roku Channel from AT&T.
Can Roku afford it?
Roku ended the third quarter with just over $1 billion in cash on its balance sheet. That's after raising about $500 million with an equity distribution during the quarter. While the third-quarter results showed promise, the company isn't consistently producing positive free cash flow.
Making an all-cash deal for Quibi would likely require Roku to raise more capital. The shuttered company invested $1 billion of the $1.75 billion it originally raised with much of that going into content production. Taking that content catalog off Quibi's hands may require a substantial price tag and put a big dent in Roku's balance sheet.
There are reasons for Roku to be confident that it won't need as big a cash buffer going forward, though. Roku's fourth-quarter results could have been just as strong as in its third quarter, though the public won't know for a few more weeks. Additionally, there's lots of optimism surrounding ad spending in 2021 with the industry expected to bounce back while heavily favoring digital platforms like Roku's over traditional TV commercials.
Now's the time to double down on The Roku Channel
Roku saw excellent momentum with The Roku Channel in 2020. The number of active accounts that streamed the free ad-supported service in the third quarter doubled year over year, according to management. That level of growth is more than twice as fast as its overall account growth.
And there are reasons to think Roku will double its Roku Channel viewership again in short order. That means a growing potential for Roku to monetize on its investment in the Quibi content. What's more, adding high-quality exclusives (that most consumers have yet to see) can be extremely valuable in growing interest in the service. Roku has the tools and data to effectively promote the acquired content in The Roku Channel and maximize its value while expanding the overall reach of The Roku Channel and the rest of its library.
As The Roku Channel becomes an increasingly important piece of the company's platform business, making a strategic acquisition of exclusive content is probably worth the investment. It's an opportunity to test the waters of original content without making as big an investment as originals usually require. And that could pave another path for Roku to monetize and grow its audience.