As Netflix (NFLX +0.53%) prepares to launch its ad-supported tier, rumors have swirled that an acquisition could be in the company's future to make the transition easier. One company that analysts have repeatedly mentioned as an option is the hardware and streaming service Roku (ROKU +0.61%). Here's why Netflix would greatly benefit from joining forces with Roku.
Experience with advertising
At the Cannes Lions advertising festival on June 23, Netflix Co-CEO Ted Sarandos confirmed that the company would launch an ad-supported tier soon. Sarandos explained, "We've left a big customer segment off the table, which is people who say: 'Hey, Netflix is too expensive for me, and I don't mind advertising.'"
After losing 200,000 subscribers in the first quarter of 2022, Netflix is looking at new ways to attract members. An ad-supported tier is a potentially lucrative way to do so, and few companies have the relative experience that Roku does. Initially launching in 2008 as a collaboration with Netflix, Roku offers a variety of TV-related devices, software, and The Roku Channel -- the company's streaming service.
The Roku Channel offers a library of more than 100,000 movies and TV shows, as well as over 100 channels, all of which are free and ad-supported. From 2020 to 2021, Roku's platform revenue, which makes up 82% of the company's total revenue and includes digital advertising sales from The Roku Channel, increased by $1 billion -- an 80% rise.
After years of rejecting the idea of ads, Netflix doesn't have the infrastructure or experience it now requires. However, Roku's success with advertising and the fact that the companies were once closely aligned could make for a fruitful reunion.
NASDAQ: NFLX
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A move into hardware
Long before the introduction of the Roku Channel, Roku's main business was hardware. Roku developed its first device in partnership with Netflix, aiming to create a machine that allowed consumers to stream Netflix content. While that project was never fully realized, Roku has gone on to have significant success with its products. In September 2021, the company announced its tenth generation of devices, including two Roku Streaming Sticks and the Roku Ultra LT, a powerful 4K streaming player.
Roku's hardware knowledge could help Netflix expand its venture into gaming. Netflix announced it was adding games to its subscription in November 2021 and has so far stuck primarily to mobile games. However, a move into hardware would allow Netflix to develop a device that perfectly suits its games and give it the opportunity to create more powerful titles.
Comparatively, Apple has steadily grown its gaming division, adding Apple Arcade to its subscription service in September 2019. While the Arcade library has many mobile games, several are also playable on the company's Apple TV streaming device. From 2020 to 2021, Apple's streaming sector, including the Apple TV, had a 25% rise in sales while the company's services sector, which includes Apple Arcade, rose 27%.
Netflix desperately needs an additional revenue stream, and it clearly knows this with its recent ventures into advertising and gaming. While Roku does not have gaming experience, it has the hardware capabilities to aid Netflix's journey into the competitive market. Roku's high-end Ultra streaming machine is a competitive device against the Apple TV, offering similar specs for less money. If Netflix can use Roku's foothold in the market, the company might be able to turn things around.
NASDAQ: ROKU
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Will the acquisition happen?
Netflix released a statement in early June saying: "We are still in the early days of deciding how to launch a lower-priced, ad-supported option, and no decisions have been made. So this is all just speculation at this point."The comment came after persistent rumors that, in addition to Roku, the company had met with Alphabet's Google, NBCUniversal, and Comcast to discuss its future in advertising.
Netflix has plans to introduce its ad-supported tier by the fourth quarter of 2022, so investors might not have long to wait to find out the company's next moves. Additionally, the rumors that Netflix would acquire Roku began at the beginning of June when employees could not sell their stock due to a block, boosting the company's stock price. While it remains up in the air in which direction Netflix will go with advertising, significant fluctuations in Roku stock could signify something interesting happening internally.
