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Roku and Alphabet Are at Loggerheads: Here's What Investors Need to Know

By Rachel Warren, Jason Hall, and Toby Bordelon – Nov 2, 2021 at 6:45AM

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The YouTube app was recently pulled from Roku's platform after the companies failed to reach an amicable agreement.

Will Roku's (ROKU 0.83%) battle with Alphabet (GOOGL 2.42%) (GOOG 2.51%) ever come to a resolution? In this segment of Backstage Pass, recorded on Oct. 22, Fool.com contributors Jason Hall, Rachel Warren, and Toby Bordelon discuss. 

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Jason Hall: Guys, we're going to move on to our second topic here, and it's basically just [laughs] another version of the first one, it's very related. News came out today that Roku and Alphabet have come to loggerheads over YouTube. YouTube is getting pulled from the Roku store for new downloads.

If you have a Roku device and you already have YouTube installed, you're fine. But I think it may be a month or so from now, you're not going to able to find it in their Roku store and download it. From what I was able to read, Roku is saying Alphabet asks for special treatment like special privilege based on the search data, and Alphabet said, no, we didn't say that but The Wall Street Journal said, "We have emails that say you did."

Anyway, they haven't reached an agreement. The question I want to ask you guys, Rachel, if you can kick us off here, who stands to lose the most from this, and maybe more accurately, when will there be a resolution?

Rachel Warren: Personally, I think Roku is the company right now that stands to lose most from this [laughs] unfortunately. Alphabet is literally big tech defined, and Roku is essentially saying that Alphabet is trying to flex its market power and bully it into doing X, Y, and Z, is what Roku is alleging.

I think the reality is that whether or not Roku, what they're saying happened here actually happened, seems like The Wall Street Journal shared those emails, Alphabet and these other big tech companies, I think it raises a bigger question about the power that companies like Alphabet have. This monopoly in the tech space where smaller players, like Roku, they just can't compete on the same level. I think that's why there are lawmakers right now that are working on legislation to try to reign in Big Tech and whether or not that comes to fruition, I think is a whole [laughs] other conversation.

Jason Hall: Yeah

Rachel Warren: You look at Alphabet, it's got so many platforms that feature the YouTube app, and of course, YouTube is just one very small slice of its overall business, it has such a diversified business. I don't think this is going to touch its revenues all that much. I think for Roku, it's definitely going to be much more of a loss. As to when there will be a resolution, [laughs] I don't know exactly when that could be. I think that this could be something where they come to an impasse, but there might also be a way to come to resolution.

It was interesting, I found there was this statement that Roku had released to this website called 9to5Google, and they said that "We have only asked Google for four simple commitments. First, not to manipulate consumer search results. Second, not to require access to data not available to anyone else. Third, not to leverage their YouTube monopoly to force Roku to accept hardware requirements that would increase consumer costs, and fourth not to act in a discriminatory and anti-competitive manner against Roku."

Those are the concerns that Roku is citing. If they can't come to some agreement on that, I don't see that being something that happens overnight.

Jason Hall: I think it's telling the first two that they led with. I think it was very much with intent, there was definitely some trolling going on there. [laughs]

Rachel Warren: Right.

Jason Hall: Toby?

Rachel Warren: Standing up.

Toby Bordelon: No, I don't know. Asking Alphabet to not act in anti-competitive manner, that might be a big ask. [laughs]

Rachel Warren: True.

Toby Bordelon: What you do is not break the law. [laughs] Interesting. I definitely think Roku has the most to lose here. My thesis on them as a long-term investment, it revolves around their ability to be a neutral platform. A neutral platform that can tie together all these streaming services we have. It can maybe be the single platform a consumer can use to get everything they want in one place.

To make life a little simpler. If they can't do that, that becomes a problem, I think, for them. Not having YouTube is an issue. I don't know how big it really is for them though when you really think about it. Because what is YouTube? I don't know if it's a service you really need on your living room TV. I think it's more most of what they do, and I'd take YouTube TV out of there because that's a separate thing, but their broadcasting is not exclusive to YouTube, you can get that elsewhere.

But for the YouTube service itself, that tends to more be optimized for phone, tablet, PC-type stuff. Unless the thing I'm going to make a bag of popcorn and sit on my couch and watch a movie.

Jason Hall: That's trying to change that though. That's one of the things that makes them so surprising.

Toby Bordelon: They are, but historically that hasn't really been where they've been. But I think the danger here is you look at it, so if Alphabet is doing this. What if Netflix were to do it? What about Disney? What about Amazon? That starts to matter a lot more. If it starts snowballing, where is Roku? If they can't get access to these searches people want, I think they start to have a problem. As to when this gets resolved, I don't know.

I remember back when Amazon and Alphabet were fighting with each other and wouldn't put their apps and give us devices, that went on for a while. That lasted quite a bit. I think it depends on what Alphabet's endgame is here. Are they just trying to get some concessions or they may be trying to just prioritize their own devices, who knows?

Jason Hall: You hit on something right there that I wanted to mention. Their Chromecast device is big. It's one of the probably third now I'm guessing probably behind Amazon Firesticks, they actually may place more units than Amazon does.

But behind Roku, it certainly is the leader here. Maybe is that the endgame? Because you think about looking for Roku thinking about how its content partners, relationships, and negotiations have played out over the past couple of years, Roku is the one that's emerged as the one with the leverage, the one with the strength.

It had some negotiations, I think it was with NBC and with, was it HBO? I can't remember if it's HBO. But there were two big traditional media houses that they had some pretty aggressive negotiations with. Roku ended up, by all intents and purposes, winning those deals. It just says a lot about how the transition away from linear TV to streaming has put Roku in a position of strength. But this is the first time where it's really come down to a company that also makes a competing piece of hardware. I'm really curious as to how much that's the calculus. The other thing too is YouTube TV was pulled off the Roku store earlier this year, maybe even last year.

That's their cable, that's YouTube's cable programming that's streaming-based. I think eventually there's going to be a resolution, but it could definitely take a long time. I remember one of just a weird thing in Los Angeles there was a cable network that couldn't strike a deal with the sports channel that carried the Dodgers. You've got a cable provider in out the biggest city in the country, one of the biggest cities in the country, biggest metropolitan area, it's just huge sprawl, that won't carry the local Major League Baseball teams network. These things can play out for a very long time. I knew people that actually had to cable companies, [laughs] just it's crazy.

We'll see, and at the end of the day, I think it's going to be largely neutral for Roku. I really do, I think at the end of the day, a product like YouTube is maybe a loss leader for them. It's really good to have. But I'm not sure how much of a deal they had with YouTube to get revenue sharing anyway. At the end of the day, YouTube really needs to be on all the platforms.

We'll see what happens. I just think the big loser probably is anybody that buys a new Roku-enabled device for the holidays and can't have YouTube on it, that wants to have YouTube on it, because it's December 13th, something like that, they're cutting it off. Go ahead, Toby.

Toby Bordelon: No, I'm not sure when that is out.

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. Toby Bordelon owns shares of Alphabet (A shares), Amazon, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Netflix, Roku, and Walt Disney. The Motley Fool 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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