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How Media Consolidation Impacts Roku

By Adam Levy - May 29, 2021 at 7:57AM

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There's some good and some bad for Roku behind the big media mergers.

The media industry has become increasingly consolidated over the last few years. The recent deal between AT&T and Discovery Communications and Amazon's acquisition of MGM indicate that the trend isn't slowing down. What's more, all of these mergers and acquisitions highlight the potential for the deal to grow video streaming businesses.

That puts Roku (ROKU -0.53%), the leader in streaming video distribution in the United States, in a weird position as a key partner to media companies. Here's how the ongoing industry consolidation affects the company.

A TV displaying the Roku home screen.

Image source: Roku.

Validating Roku's underlying thesis

Roku has built its business around the idea that all TV is moving to streaming. That includes everything from live content, to on-demand, to advertising. As more media companies buy up assets to improve their streaming capabilities and expand their direct-to-consumer services, it supports that idea.

When streaming options improve relative to linear TV or other entertainment choices, that works well for Roku. We saw that last year, when linear TV declined in usage and streaming options came to the forefront. Roku grew its active accounts 35% year over year in the first quarter, and streaming hours continued to grow even faster (up 49%).

While many expect live television to bounce back in 2021 with full sports seasons and production studios running at 100%, the focus of most media companies is shifting toward streaming. That's further supported by the ongoing consolidation. As a result, Roku should see increasing user counts and engagement for the foreseeable future.

A potential reduction in negotiating power

An important factor for Roku's continued growth in the United States is improving its average revenue per user. Some of the key inputs into that calculation are the percentage of revenue Roku collects from new subscription sign-ups on its platform, audience development advertisements on its home screen, and Roku's share of ad inventory in ad-supported streaming services.

So far, Roku has seen improved economics nearly every time it's renegotiated its contracts with media companies. That's in large part because Roku's grown its audience and importance in the streaming ecosystem faster than media companies have grown their own businesses. And Roku hasn't been afraid to stand its ground when it knows it has the upper hand in negotiations.

But more consolidation threatens to tip the balances back in the bigger media companies' favor. No longer is Roku negotiating for one new app with a few million subscribers. It's forced to negotiate the distribution for a whole suite of streaming services with tens or hundreds of millions of combined viewers.

Ultimately, however, Roku is focused on creating win-win deals with media companies. They're usually partners, not competitors. So, if media companies are bringing more to the table with their streaming businesses, Roku may be able to afford to give them better economics while still growing its overall revenue and income.

For example, Roku may be willing to take a smaller share of ad inventory from a streaming service because that streaming service attracts more viewers from linear TV to Roku's platform. And as eyeballs shift from linear to streaming, Roku can charge more for its advertisements. Thus it offsets a decrease in inventory with an increase in ad prices.

While consolidation in the media industry will pose some challenges for Roku when it comes to negotiating distribution agreements, the underlying trend and reason for these mergers will benefit Roku over the long run.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Roku. The Motley Fool recommends Discovery (C shares) and recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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