Why Do Analysts Say Roku Is on a ‘Dangerous’ Path? 3 Very Good Reasons

Rut-roh, Roku. The streaming-device manufacturer and gatekeeper, and home to the Roku Channel, is in a spot of trouble.

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.

According to data from market-research company Antenna, 64 percent of all streaming subscriptions come directly through the respective companies’ sites. Another 15 percent sign up through iTunes, with nine percent through Amazon channels. For Roku, it’s a relatively measly five percent. (Amazon Fire TV, Hulu, and Google Play each get 2 percent.)

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.

“Zoey’s Extraordinary Christmas” on Roku

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 bad for Roku.

It is good for the major U.S. smart-TV manufacturers like Samsung, LG, and Vizio. It’s more like not-great for Amazon, which competes with Roku on the device front with its Fire products (and in streaming with Prime Video and the soon-to-be-renamed Freevee). In the fall, the online-retail giant began selling its own internet-enabled televisions at Amazon.com and Best Buy. And they are cheap.

Currently on sale, Amazon Fire TVs start at $279.99; the Omni Series is only $20 more. Both price points are for 43-inch TVs. Reviews of the initial Amazon Fire TVs have been fairly tepid, but Amazon states its TVs are “always getting smarter.” With the fourth-largest company in the U.S. as their manufacturer, that’s likely true.

Roku also leans on Amazon for its device sales, which may be a bit worrying; Roku device placement in Walmart and Best Buy stores is less concerning. Speaking of Walmart, Roku does have its own smart TVs, sort of. One example is dubbed “onn. Roku TVs” (GREAT name, guys; Amazon, you now get a pass on “Freevee”), an even-cheaper option made by Walmart private label Durabrand. Currently at $248 for the 43-inch option, they’re probably among the reasons why the Amazon Fire TVs are on sale. Reviews are about the same, which probably also explains the sale prices. The Roku brand and functionality is also a part of certain Westinghouse, TCL, Philips, Hisense, RCA, and Element televisions, to name a few more.

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.

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