Rumors are swirling that Netflix (NFLX 1.74%) is looking to acquire Roku (ROKU 1.58%) after the latter closed the trading window for employees, prohibiting them from selling vested shares. Many investors are excited about the possibility of such an acquisition, and that sent the share price of Netflix higher alongside the bump in Roku shares from the expected premium an acquisition would require.
There are several good reasons for investors to like the prospect of Netflix acquiring Roku, but there are also a lot of good reasons it doesn't make sense. Here are three reasons that might deter Netflix from buying Roku.
1. It's an expensive and complex way to get into advertising
Netflix CEO Reed Hastings surprised investors when he said the company is working on an ad-supported tier of the streaming service. Roku is one of the biggest connected-TV advertising businesses in the United States and has the advertising technology that could be applied to any market in the world.
That could be very valuable for creating an ad-supported tier. But it's a big bet on advertising. Despite the significant drop in its stock price, Roku is currently valued around $13 billion. Netflix will likely have to pay a significant premium on top of that. And while it would be acquiring a business and thus able to collect 100% of revenue from ads shown in Netflix, it's an expensive way to go about it. The company may be better off building its own ad-tech and sales team internally.
Moreover, it complicates things for Netflix. On the company's first-quarter earnings call, Hastings noted that advancements in ad technology and services make it very easy to incorporate advertising into a streaming service. "We can be a straight publisher and have other people do all of the fancy ad-matching and integrate all the data about people," he said. "So we can stay out of that and really be focused on our members creating that great experience."
Netflix built a great business by giving consumers great content. That's what it should focus on.
2. The business models aren't a match
As mentioned, Netflix is all about making great content. And it battles other media companies for the rights to redistribute or produce that content. If it acquired Roku, it would also have to be a partner for those media companies. This is a tough position for both Netflix and its competitors. Do its competitors want to support the biggest name in streaming?
As LightShed Ventures analyst Rich Greenfield points out, it makes no sense for Netflix to sell ad inventory for its competitors.
Amazon (AMZN -1.65%) has managed to make it work as the owner of a streaming service, a connected-TV platform, and a cloud computing service. Amazon Web Services powers many streaming services, including Netflix, and its Fire TV platform is able to make negotiations work with all the major streaming services. But Amazon also has a massive retail business that supports consumer adoption of Fire TV devices. While it's certainly possible to play both sides, it definitely complicates things.
What's more, both Netflix and Roku have an interest in remaining platform agnostic. Netflix wants distribution on as many platforms as possible. And while its popularity will ensure distribution, owning Roku could bias it to develop better user experiences on its own platform over others. Likewise, Roku doesn't want to be seen as favoring one streaming service over any other. It could curb interest from other streaming services in buying home-screen ads, negotiating revenue shares, and sharing data.
3. Possible antitrust concerns
If Netflix does make an offer to acquire Roku, it could get shot down by regulators because of antitrust concerns. Roku is the biggest distributor of streaming video in the United States; Netflix is the biggest streaming service.
While a deal might not get shut down entirely, it could require certain concessions. And if it does get shut down, Netflix could be on the hook for breakup fees.
What's more, Netflix doesn't need the distraction of defending against an antitrust case right now. It's in the midst of some significant changes on the platform as it looks to come back from the subscriber losses it's facing in the first half of the year.
Netflix and Roku will always be tightly connected. After all, Roku has its roots within Netflix, and it remains one of its most important partners. But Netflix doesn't need to buy Roku. It makes the business much more complex, and the two businesses are rife with competing interests.
