An April 13 report from the media analysts at MoffettNathanson doesn’t mince words: “Roku: Three Key Things to Worry About.” Since it’s a major technology equity research firm that came to the conclusion, we might suggest the report itself represents a fourth. First concern: The creation of Warner Bros. Discovery is poised to take a major chunk out of Roku’s bottom line. People signing up for streaming services through Roku make for a very attractive revenue stream (aka “high-margin content distribution revenue growth”). Per Roku’s developer terms, it generally takes a 20 percent share of monthly subscription revenue for users who sign up through its platform. However, analysts say the combined platform of HBO Max and Discovery+ will give WBD leverage at deal-renewal time, which is particularly problematic when you consider that “HBO Max, given its higher monthly price vs. other DTC services, appears to be [Roku’s] largest driver of subscription revenues.” That last point is kind of amazing considering that for its first six months, HBO Max was not available on Roku as the pair battled over terms on user data and ad inventory.
Sifting through that five percent is more revealing: According to Antenna, it’s comprised of “at best, a midteens [percentage] share of subscribers” for services like Peacock, HBO Max, and Discovery+. Utterly AWOL is Netflix, which is a bitter irony: Roku devices launched in 2008 as the first one with access to Netflix. While you can watch Netflix via Roku, an attempt to sign up reroutes you to the Netflix website; the same applies to Hulu. Roku can monetize those platforms with the buttons on its remote, but it does not get a cut of their subscription revenue. (The only partner Roku does not make money from is YouTube.) Researchers also highlighted Roku’s growing competition, particularly in the ad-supported space that “will likely force Roku into creating more and more original content.” That is not a high-margin strategy; it’s incredibly expensive and difficult, and if it doesn’t show returns, the company’s share price will drop. “We believe content spending is a dangerous, yet inevitable, path for Roku to go down,” MoffettNathanson wrote. Already, Roku spent a bit over $22 million on licensing deals and original productions in 2020; in 2021, it was nearly $96 million.
In December, Roku debuted its first original movie with “Zoey’s Extraordinary Christmas,” giving fans of the cancelled NBC series “Zoey’s Extraordinary Playlist” more time with the show’s characters. According to the company, it was the number-one piece of content on the Roku Channel during its opening weekend. The sexually charged “Swimming With Sharks,” an adaptation of the 1994 Kevin Spacey film, debuts Friday on the Roku Channel. The series stars Kiernan Shipka, Finn Jones, Diane Kruger, and Donald Sutherland. When short-form streaming service Quibi crashed and burned after eight months, Roku gobbled up Jeffrey Katzenberg’s library and rebranded them as Roku Originals. Despite the bite-sized nature of Quibi programming, those shows helped Roku double its number of streaming hours between 2020 and 2021.
Roku Those moves are strategic, but it will take much, much more to make the Roku Channel a player. According to Nielsen data, the Roku Channel currently has 5 percent of the streaming minutes that Netflix has in the U.S. Perhaps more alarming: Roku Channel is even less popular than ad-supported competitors Pluto TV (owned by Paramount) and Tubi (owned by Fox). Launched in 2017, Roku Channel began as an on-demand hub for licensed movies and shows that streamed for free with ads. Then it added live FAST (free ad-supported television) channels from providers like Pluto TV and ABC News Live, all housed within the Roku Channel tile. That evolution from on-demand to live, programmed content reflects where the AVOD business is headed. (It’s also pretty consistent with linear TV, but that’s a story for another day.) “For most folks, they want to have something on — I want to laugh, I want to cry, I want to be informed,” Rob Holmes, Roku’s VP of programming, told IndieWire at SXSW. “They’re a little less specific about, ‘I need to watch this thing right now.’ The original founding observation of [the Roku Channel] was that people want easy access to free content.” The third potential problem MoffettNathanson analysts identified is probably Roku’s single-greatest fear. “The data is clear that U.S. consumers appear to be moving away from connected streaming devices… to internet-enabled TVs,” the report reads. Streaming device sales aren’t dying — yet. However, they’re not growing at the same rate as the smart TVs. That’s not ideal for Roku’s traditional busines.
The Roku brand and functionality is also a part of certain Westinghouse, TCL, Philips, Hisense, RCA, and Element televisions, to name a few more. Yeah, it’s a lot. According to Roku’s fourth-quarter 2021 shareholder letter, more than one in three smart TVs sold in the U.S. include Roku’s operating system, so there is a bit of a hardware-for-software trade-off happening here. In November, MoffettNathanson downgraded its rating for Roku stock from “neutral” to “sell” with a target price of $100. At the time, the stock traded at $245 per share, but analysts said it was artificially inflated by the surge in new direct-to-consumer platforms. (Just four months earlier, Roku stock nearly reached $500 per share.) Since the downgrade, shares have more than halved in price (again) and are currently trading around $111 per share. MoffettNathanson analysts maintain their unfavorable November rating and target price. It also significantly slashed the company’s previous financial outlook for Roku in 2025. On the bright side, Roku has three years to prove them wrong. Additional reporting by Chris Lindahl. Sign Up: Stay on top of the latest breaking film and TV news! Sign up for our Email Newsletters here.
