Want to get people’s attention? Suggest, as a Business Insider report did this week, that Giant Tech Company might buy Another Really Big Tech Company. It might be a stretch to say that Netflix (221.6 million subscribers) and Roku (61.3 million users) are beloved, but household names tend to vest the public in the narrative of multi-billion-dollar deals.
Wall Street is less inclined to flights of fancy. Sure, it would be exciting if Giant Tech Company with Giant Problem (that’s Netflix) could resolve some issues by purchasing Another Really Big Tech Company With Smaller Problems — but in a Wednesday newsletter note, Wells Fargo analysts called a potential Roku acquisition by Netflix “highly unlikely at this point.”
Our stable of Wall Street media analysts only got more sour from there. Michael Nathanson of MoffettNathanson told IndieWire he gives Netflix zero chance of buying Roku. Rich Greenfield of LightShed Partners was more animated in his own thumbs-down opinion posted to Twitter, which included a literal “Looney Tunes” animation.
“ANYONE who thinks Netflix is buying Roku does NOT understand Roku’s biz model & how it cannot work inside Netflix,” he tweeted Wednesday.
Roku is in the ad business with content providers of all stripes. Earlier this year, it launched a program that replaces linear ads on AMC Networks, Crown Media, Paramount, and Discovery channels with ones targeted to the user.
That’s not the only “tricky” conflict with competitors, Blair Harrison, the CEO and founder of FAST software company Frequency Networks, told IndieWire. “Now you’d have Netflix selling Paramount and Disney and HBO Max subscriptions,” he said. “That gets a little hairy.”
All that pessimism is making Roku a more-attractive (read: cheaper) acquisition. When the June 8 report boosted Roku’s market cap toward $14 billion, Motley Fool estimated it would cost Netflix “less than $17 billion” to buy Roku. As of June 10, Roku is worth about $11.3 billion.
The reason anyone might think of the world’s leading SVOD company buying a streaming-TV device maker (one recently entered the realms of originals and free, ad-supported streaming television), of course, is Netflix is hemorrhaging subscribers and announced plans to introduce an ad-supported tier — just like its streaming competitors.
A cheaper alternative is partnering with an ad-tech firm, which is what Netflix founder and co-CEO Reed Hastings has suggested they’d do. Cheaper, but not cheap. A recent Wells Fargo report estimates that ad serving and verification tools and data account for 10 percent of advertiser spend, while the cost of a supply-side platform to coordinate and manage the ads accounts for an average of 14 percent of publisher’s revenues.
Renting is usually more expensive than buying long term. If that doesn’t make Netflix warm up to the notion, perhaps this pep talk will. “If ever there’s a good reason to do something, it’s to jumpstart your entrance into a business that you’ve already overtly told the world you’re about to get into,” Harrison said. “You could start from scratch, or you could go and buy something really good and valuable with a great brand name.”
OK Blair, you’ve got us listening. Greenfield, not so much.
Netflix and Roku have deep ties. Millions of Netflix users access the SVOD service through a Roku device; a Netflix button is prominently featured on the Roku remote (a privilege for which Netflix and its competitors pay handsomely).
“There are definitely potential synergies between the two businesses,” Toby Holleran of Ampere Analysis told IndieWire. “If Netflix wants to offer a viable ad-supported tier without building a new platform from scratch, it will either need to partner with (or acquire) a company with expertise, scale and traction in the space.”
Roku’s library would be a nice bonus for Netflix. In April, Roku boasted 14,500 titles, nearly twice what Netflix carries (though Netflix’s are mostly originals or exclusives). The overlap is tiny — 166 titles. There’s also a modest overlap between Roku users and Netflix subscribers. According to a recent consumer survey conducted by Ampere, around 30 percent of Roku device owners in the U.S. do not currently subscribe to Netflix.
Still, the real reason for Netflix would want Roku lies within its advertising tech dilemma. Netflix needs an ad sales team, but first it needs the technological capabilities to program and deliver streaming commercials.
Buying something like Roku and its advertising infrastructure is Netflix’s “fastest way to scale” said Sarah Henschel of technology research firm Omdia. “Others that have entered the AVOD space recently like HBO Max, Discovery+, and Disney+ have other ad-based businesses under their corporate umbrellas to draw information and experience from.”
A Roku remote with a Netflix button.
AP Photo/Jenny Kane
Count Henshel among those who believe it makes “a lot of sense for Netflix to buy Roku,” but the dollars and cents may be another matter. “It would need to raise the cash to fund such an acquisition,” Holleran said. “Netflix already carries $15 billion of long-term debt, and total liabilities of close to $30 billion. A large-scale acquisition would add significantly to this.”
Roku’s devices segment generated about half-a-billion-dollars last year, which might make a deal easier to swallow. However, that also means entering the hardware business, which may be too much for the world’s largest streamer while also making an accelerated entrance into the ad-sales space.
Still, Henschel said that new revenue stream could add intrigue. Netflix could spin off Roku’s hardware business or make the leap itself and “bring Netflix to the business-model equivalence of Apple, Amazon, Google, and Microsoft, which may be enticing.”
A Netflix rep declined to comment on the acquisition rumors. Roku replied, “We don’t comment on rumor and speculation.”
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