June 16, 2022
A much-speculated possible acquisition of Roku by Netflix continues to polarize some Wall Street analysts, with LightShed Partners’ Rich Greenfield calling the idea “absurd,” while others ponder the cost-saving synergies.
In a note, Toby Holleran, research manager, Ampere Analysis, outlined how the deal could positively impact Netflix, despite the likely exorbitant purchase price and its impact on the streamer’s existing debt load.
“While a large-scale acquisition would add significantly to this [debt], with Netflix already planning to launch an ad-supported tier, a purchase of Roku would bring benefits in multiple areas of the business,” Holleran wrote.
Specifically, the analyst says Roku has a content catalog of about 14,500 movies and TV shows, compared to about 7,300 largely original titles at Netflix.
Ampere says Netflix could see hundreds millions of dollars annually in the licensing and sales of Roku operating software and hardware. Roku has a big lead on Netflix in advertising through The Roku Channel, which is entirely ad-supported.
In the most-recent fiscal quarter, Roku saw net revenue increase 28% year-over-year to $734 million, platform revenue increased 39% to $647 million, and gross profit increased 12% to $365 million.
Roku also added 1.1 million incremental active accounts to reach 61.3 million. Streaming Hours increased by 1.4 billion hours over the last quarter to 20.9 billion, and more importantly, average revenue per user grew to $42.91, up 34% from last year.
“Were Netflix to go ahead with such a deal it may choose to keep the Roku branding for a while, positioning its ‘free with ads’’ service as either ‘Netflix Roku’ or ‘Netflix Roku (free)’ given that both brands are well-established,” Holleran said.
Ampere contends Roku would give Netflix options as it embraces advertising. The London-based research firm believes Roku would help Netflix determine which subscribers and/or markets could sustain higher ad CPMs, while offering ads to its premium subscribers at the same price as standard subs pay.
“Ultimately, 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 certainly fits the bill from that perspective,” Holleran said.
Regardless, Ampere says acquiring Roku is difficult decision for Netflix when considering just the increased debt required for the purchase price. The firm wonders if partnering, rather than acquiring, a third-party would be more advantageous in the short-term.
“This is not a no-brainer for Netflix as there is lots of competition within the device space,” Holleran said. “As such, whatever the potential benefits of any such deal, its feasibility, alongside whether a Roku acquisition makes sense overall, remains unclear for now.”