Thursday's launch of Roku Originals on Roku (ROKU 5.74%) may not have generated a lot of fanfare. It didn't cost much for Roku to buy the more than 75 shows from the shuttered Quibi service. Because Quibi failed so spectacularly it's easy to dismiss the transaction that birthed a new platform on Roku this week, but that would be a mistake.
Quibi didn't fail because of content. It was a toxic cocktail of bad decisions on pricing and distribution -- with more than a splash of arrogance -- that doomed the failed streaming service. You have probably never seen a single piece of Quibi content so far, and that's a good thing in Roku's eyes. This deal is the equivalent of winning an abandoned self-storage unit sight unseen at a lightly attended auction.
There's a lot to like in this move. Let's see why the May 20 launch of Roku Originals will be a much bigger deal as time passes.
1. It's a treasure trove of content
Quibi failed because it launched as a premium service limited to mobile devices. It may have amassed millions of app downloads by dangling a free trial through a costly marketing campaign, but the moment it came time to pay up the platform was reportedly left with just tens of thousands of premium subscribers. Roku has 53.6 million -- and rising -- engaged viewers. The content is now playable on the biggest screen in your house in a free ad-supported platform.
You don't have to look far to see what a larger audience can do to largely ignored content. One of the most popular shows on Netflix (NFLX 0.56%) this month is StartUp, a crypto-fueled drama that ran for three nondescript seasons on the obscure Crackle streaming service. Filmed on a shoestring budget so low that its Miami setting is clearly Puerto Rico, you probably wouldn't know that the show ran from 2016 to 2018. Netflix picked up the series on May 4, and an obscure property is now the talk of the virtual water cooler.
All it takes is a couple of Quibi shows to catapult in popularity on Roku to make a difference. Do you want to see a show where infamous murder homes get a makeover? Care to see Chrissy Teigen as a judge? Have you ever wondered about what was behind the rise and fall of American Apparel? It's all there in the Roku remote you're cradling right now.
2. Quibi is tailored for Roku's ad model
Quibi is short for "quick bites." The shows, documentaries, and even movies on its platform were broken up into 8-to-12 minute episodes. It was chopped up that way so folks on smartphones and tablets watch content in small installments.
Quibi would still be around today if it had slipped ad breaks between episodes as a free service instead of expecting people to pay $4.99 a month (or $7.99 a month for an ad-free version). Roku is a free service. It feasts on ad revenue to support the platform. It may not seem like a lot. Average revenue per user at Roku is $28.76 over the trailing 12 months (or less than a dime a day). Roku shares ad revenue with its partners, and it also leans on them as advertisers promote their apps to stand out among the thousands of available applications on Roku. As long as other content creators don't view Roku Originals as a conflict of interest -- and they won't, because at the end of the day they need to get noticed on the platform shipping on 38% of the smart TVs sold in this country -- everything will be fine.
I would argue that Roku Originals will even help increase ad engagement throughout the platform. A lot of Roku users have never clicked on ads. They may see them, sure, but have they ever clicked on the play button on the remote to go beyond the display ad? You have to click on the play button when Roku Originals pitches show up on the home page to launch them, and that will condition this growing audience to be more receptive to turning low-paying views into more lucrative pay-per-action leads.
3. Let's get sticky with it
Roku is a small player battling against three of the country's four most valuable companies in this market. Tech and e-commerce behemoths have their own Roku copycats on the market, wooing captive audiences that spend hours a day streaming video from their TVs.
Roku has stood out for its agnosticism in the past, playing nice with thousands of third-party app developers. It's starting to bump up against some resistance on that front lately, even if its battles with Peacock, HBO Max, and eventually YouTube TV will subside.
The Roku Channel launch has been a way for the platform to stand out with free ad-supported content, and lately it's been picking up the pace of the deals it brokers to have unique content on its hub that you can't find elsewhere. The Quibi deal is the cherry on top of that strategy for now, and keep in mind that on Thursday it just rolled out 30 of the more than 75 shows it acquired.
Proprietary or exclusive content is a difference maker. Netflix wrote the book on that, and now it's the standard for any new streaming service. Roku realizes that it's also a game that the streaming hubs themselves can now play. This low-key move on Thursday makes Roku stand out among the better-financed competition. Roku is a better media stock after Thursday's launch of Roku Originals. Investors will realize this in time.