If you signed up or switched to Walt Disney's (DIS -0.45%) new Disney+ with ads tier, you may face a big inconvenience when it comes to streaming on your favorite device.
Disney couldn't ink a new distribution agreement with Roku (ROKU 1.91%) in time for the launch of the new ad-supported Disney+ tier. Roku's 65 million active users will have to subscribe to the premium tier, which now costs $10.99 per month.
It's not the first time Roku's stood up to the big media companies, demanding more favorable terms before distributing their streaming services. And it's a sign of strength that Roku can negotiate with one of the biggest streaming companies in the U.S.
Who holds the upper hand?
Roku is in an excellent position to make demands of Disney for distribution on its connected-TV devices.
Disney just released an earnings report that showed a massive amount of losses for its direct-to-consumer business. Over the last year, its streaming services racked up operating losses in excess of $4 billion. Investors expect things to turn around quickly, with management stating Disney+ will be profitable on a quarterly basis by the end of fiscal 2024.
In the meantime, Disney can't afford to leave Roku users out in the cold when it comes to giving them every subscription option. Roku has the most popular connected-TV platform in the United States, and the leading smart TV operating system by sales.
Roku users can currently subscribe to just about any other streaming service and any other option they offer. That includes Netflix's new ad-supported tier, which debuted last month. With lots of competition, Disney could miss out on subscribers who are willing to accept ads to the competition that successfully played ball with Roku.
That said, Roku came under pressure from investors this year as well. While management remained optimistic after a tough start to the year, it ultimately failed to live up to its expectations for revenue growth. Its fourth-quarter guidance calls for a year-over-year decline in revenue, which management blames on a weakening advertising market. Any ad-sharing deal with Disney, no matter the terms, could be a boost to the business.
Still, Roku appears to have the upper hand in negotiations. Streaming subscribers tend to have lower switching costs than connected-TV platform users. If a user can't get a streaming service they want on the device they like to use, they're much more likely to explore different streaming options than to buy a whole new device for streaming.
A big opportunity for Roku
Developing a new distribution agreement with Disney is a big long-term opportunity for Roku.
The ad-supported Disney+ streaming option could be massive. Nearly one in four Disney+ subscribers might downgrade to the ad-supported tier, according to an analysis from Kantar. That's millions of high-value streaming subscribers up for grabs -- not to mention the new subscribers the low-priced tier could attract in the future.
What's more, Roku may be negotiating for more ad sales on its home screen. Disney is already a big advertiser, taking advantage of home screen takeovers and advertising its original series and films with Roku's display advertising products. Roku is a much larger distribution platform than it was in 2019, when it negotiated its original deal with Disney, so its advertising inventory is much more valuable for converting new subscribers.
Roku's going after the long-term opportunity by holding its ground in negotiations with Disney, and it has the strength to make reasonable demands of the media company. Investors should take it as a positive sign, despite the recent downturn in financial results for Roku.
