Please ensure Javascript is enabled for purposes of website accessibility

Is Roku Getting Ready to Challenge Netflix?

By Leo Sun - Jun 24, 2021 at 7:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Roku's new original content is attracting a "record number" of viewers.

Back in January, Roku (ROKU -6.78%) bought Quibi, a short-lived streaming platform that offered short "quick bite" videos for mobile devices, for less than $100 million. The acquisition brought over 75 new shows to The Roku Channel, which provides free movies, programs, and live TV channels.

That was a great deal for Roku, since Quibi had an estimated valuation of $500 million to $1 billion just last year. It had raised $1.75 billion before shutting down its services last October.

Roku didn't start streaming Quibi's content right away. First, it rebranded Quibi's shows as "Roku Originals" in April. In late May, it launched 30 of those shows -- including Die Hart, #FreeRayshawn, Reno 911, Blackballed, and Punk'd -- as its debut streaming lineup in the U.S., Canada, and the U.K.

A person watches a TV in a dim room.

Image source: Getty Images.

Roku recently said a "record number of unique accounts" streamed The Roku Channel between May 20 and June 3 after those shows arrived The top 10 most-watched programs on The Roku Channel were all Roku Originals throughout those two weeks, and over a third of its viewers streamed at least one of its original series. Each viewer also streamed an average of more than nine episodes.

That's a promising debut, and Roku still has plenty of content to add to the platform. Could this expansion spell trouble for Netflix (NFLX -1.85%), the world's largest paid streaming video platform?

How Roku solved Quibi's biggest problems

Quibi flopped in its original form for three reasons. First, it was a subscription-based service that cost $4.99 per month. Second, it was restricted to mobile devices -- and its main gimmick of letting users swap between vertical and horizontal views as shows played seemed pointless.

Third, Quibi's "bite-sized" episodes, which only lasted a few minutes, were mostly diced up versions of a single show or movie. That made it ever tougher to promote Quibi as a paid platform, especially when Snap's Snapchat also provided similar short-form video content for free. Unlike Quibi, Snap simply monetized the gap between its mini-episodes with video ads.

Roku eliminated all three problems. It finally brought Quibi's content to TVs, made it all free, and monetized the gaps between the episodes with ads.

Why Quibi was a great fit for Roku

Roku is best known for its streaming hardware devices, but it actually generates most of its revenue from its software platform business, which sells ads and secures content partnerships on The Roku Channel.

Last year, Roku's platform revenue rose 71% to $1.27 billion and accounted for 71% of its top line. The remaining 29% came from its lower-margin hardware player business -- which faces competition from tech giants like Amazon, Alphabet's Google, and Apple.

The platform business's weight on Roku's top line has increased over the past few years, which boosted its gross margins, locked in more viewers, and enabled it to keep selling its players at competitive prices.

Roku's revenue growth chart.

Image source: Roku.

The Roku Channel more than doubled its viewership across the U.S. to 63 million people at the end of 2020. That number climbed to about 73 million in the first quarter of 2021. That growth indicates that Roku is becoming a major force in the ongoing streaming wars, even though investors frequently focus on paid platforms like Netflix and Disney+ instead of ad-supported ones like The Roku Channel.

However, The Roku Channel already offers over 40,000 free movies and programs, along with more than 165 free live linear TV channels. It also licenses and distributes content from more than 175 media partners. Adding dozens of Roku Originals to that mix will strengthen that portfolio.

Should Netflix watch its back?

Roku probably wouldn't exist without Netflix, since the streaming giant was one of its initial investors. The two companies also have a mutually beneficial relationship, since Netflix's growth sparks more purchases of Roku's streaming devices.

Roku Originals might initially seem like a step toward severing that relationship. After all, we previously saw Amazon and Google block each other's streaming services on their own hardware devices in an ugly feud that eventually ended in a truce -- and Roku could certainly cause headaches for Netflix if it removes the app from its platform to promote The Roku Channel.

But that won't happen, for two reasons. First, removing Netflix would alienate millions of Roku's users and throttle its sales of streaming devices and Roku-powered smart TVs. Second, The Roku Channel is a free ad-supported platform that targets a different audience than Netflix, Disney+, and AT&T's HBO Max.

Instead, The Roku Channel should be considered Roku's best defense against Amazon, Google, and Apple, its top three competitors in the U.S. streaming device market. Roku is likely more focused on differentiating its devices from those competitors' products -- which are all tethered to their own streaming services -- than leveraging the strength of its hardware and software to challenge Netflix.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of AT&T, Amazon, Apple, Snap Inc., and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Netflix, Roku, and Walt Disney. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Roku Stock Quote
Roku
ROKU
$78.42 (-6.78%) $-5.70
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$241.15 (-1.85%) $-4.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
402%
 
S&P 500 Returns
129%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.