Roku (NASDAQ:ROKU) and Nielsen (NYSE:NLSN) announced a new partnership this week that a lot of investors are excited about. Roku's acquiring Nielsen's ad technology unit and Nielsen will add Roku's platform to its ad and content measurement system.
The main focus from investors has been the potential for Roku to expand its ad business to linear TV through Nielsen's ad tech and existing deals with media companies. But gaining that piece also gives Roku another opening to negotiate content and distribution deals and take a larger share of ad inventory. That's where Roku can truly generate accretive revenue and profits from Nielsen's ad tech.
Heading back to the negotiating table
Nielsen has pre-existing addressable advertising deals with just about every major TV media company. Once Roku takes control of Nielsen's ad business, it plans to have "renewed conversations" with those media partners, Roku's Louqman Parampath told Variety.
Roku has been extremely opportunistic in throwing its weight around when media companies want something from it like distribution of a new streaming service. As Roku's grown its scale -- it now has 51 million active accounts -- it's become an extremely important distribution partner. Roku's used that to its advantage to negotiate bigger cuts of ad inventory and content for its own ad-supported streaming service, The Roku Channel.
Now it has even more value for media companies. Once it closes the deal, it'll be an instrumental partner for growing both linear TV and streaming revenue for media companies.
In its "renewed conversations" with media companies, Roku's sure to look for more ways to increase its share of ad inventory. That can be through expanding Nielsen's old deals, adding more ad inventory on the Roku platform, or winning additional content for The Roku Channel, which indirectly adds inventory through increased engagement.
Bringing more advertisers to the table
The value Roku provides to media companies has increased substantially as consumers shift their time from linear TV to streaming and they increasingly choose Roku as their streaming platform of choice.
Those trends show no signs of slowing down anytime soon. In addition, Roku's now able to go to advertisers with its OneView programmatic ad platform offering ad inventory across its own platform, other digital video services, and now linear TV. That should expand the number of active advertisers on its platform, leading to more intense bidding and higher average ad prices.
That translates into more revenue for Roku and any media partner that sells its inventory on Roku's OneView platform. That should enable Roku's ad business to grow organically, and provide even more leverage in future negotiations when distribution and ad deals come up for renewal.
Grabbing a bigger piece of a bigger pie
Adding Nielsen's ad technology gives Roku a strong position in addressable TV advertising. While still a tiny portion of the $70 billion U.S. marketers spend each year on traditional TV advertising, addressable advertising is expected to grow to $3.6 billion by 2022, according to eMarketer. Meanwhile, Roku's core market, connected-TV advertising, is expected to reach about $14 billion that year. In other words, Roku's expanding its addressable market by about 25%.
More important than that, however, may be the opportunity the deal presents for Roku to gain deeper market penetration of the bigger addressable market by exercising leverage over media companies. That's where the real value of the deal shines, and what should get investors even more excited about the future of Roku.