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Here’s what it really means if Netflix tries to buy Roku

Video streaming service Netflix (NFLKS 1.25%) may be trying to acquire a connected television (CTV) platform Roku (ROCU 4.89%)according to rumors that have surfaced in recent weeks.

It’s just a rumor for now, but Netflix has good reason to make such a deal. Video content is becoming commercialized, and Netflix’s recent moves suggest it’s recognizing the need for a quick turnaround.

Here’s what’s happening on KTV

Something monumental recently happened in the CTV space. According to Roku’s Q1 letter to shareholders, 65% of U.S. adults aged 18 to 49 watched video content in March, compared to 63% in that age group watching traditional pay TV such as cable and DVR. For the first time, there were more streamers than non-streamers.

The switch to CTV is a great long-term uptrend that investors should look out for. But there are two types of streaming: paid subscriptions and ad-supported channels. While streaming in general is the future of the industry, paid streaming services like Netflix are facing some very serious headwinds.

According to a recent report by research firm Parks Associates, 32 million households in the US can be described as auto repair shops. They frequently switch between services and re-subscribe to services they previously opted out of.

This suggests that there was already a cap on how much consumers would pay for streaming in the aggregate. And now, discretionary income is further squeezed by inflation. According to Yardeni Research, the average consumer spends about $180 a month on gasoline alone this year compared to the same period last year. So consumers have to cut costs somewhere, and perhaps it’s the money that goes to paid streaming services.

Indeed, the OnePoll research team conducted a survey for the ad-supported streaming service Tubi. The survey showed that the average consumer has five streaming services but plans to retire three of them soon. Around 70% of those surveyed said changes in their personal finances were the main reason for the change.

Challenge for Netflix

Netflix started the streaming revolution and shareholders enjoyed life-changing profits while it was the only show in town. But with more competition, it’s harder to attract subscribers. And in the last quarter, Netflix lost subscribers for the first time in more than a decade.

You need more compelling content than the other guy if you want to get and keep followers. But creating quality content comes at a price; the company is already spending billions annually on original films and series. Like an 800-pound gorilla in space, Netflix may spend more than most competitors, but it may have to spend even more to stay on top.

Spending more strains the bottom line. It’s okay if the company can raise prices at the same time, but it’s fair to wonder how much pricing influence Netflix has left to maintain margins. It should be noted that the company announced a price increase in January, shortly before a slight decrease in the subscriber base. For service lovers, it might be time to jump ship Netflix.

This is what happens when something is commodified: Price power is reduced and profits end up decreasing. This is the challenge Netflix faces right now.

Why I (still) love Roku stock

Again, the transition to CTV is real and still happening. But making a profit from switching to paid services is becoming increasingly difficult. Netflix acknowledges this, which explains why it suddenly announced plans to look into the level of ad support for its service. Discussing the financial results for the first quarter of 2022, management said it plans to add an advertising tier over the next year or two, despite previous resistance to the idea.

Having an ad tier will help you retain more subscribers and monetize your original content that has already spent billions of dollars to create. After all, Netflix subscribers who use the service frequently are more likely to upgrade to a cheaper version than cancel their subscription entirely.

But this model still requires Netflix to attract subscribers first. On the contrary, Roku can profit from CTV growth through better monetization. distribution content, not the content itself. There are over 61 million active Roku accounts streaming from various services. And Roku can make at least a small profit from all this rather than relying on original content.

If Netflix is ​​seriously considering acquiring Roku, it’s because distribution can be more valuable than content – which is why I love my Roku stock.

At the time of this writing, Roku has a market capitalization of around $11.2 billion while Netflix only has $6 billion in cash, suggesting the deal is more than feasible. I think that would be a great move for Netflix shareholders.

However, as a Roku shareholder, I hope this doesn’t happen. As a standalone company, Roku has a huge potential to maximize profits in the market and I hope to use it for many years to come.

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