Rumors are swirling him Netflix (NFLX -4.96%) is trying to acquire Roku (ROKU -9.34%) after the latter has closed the trading window for employees, prohibiting them from selling accrued shares. Many investors are excited about the possibility of such a takeover, and that has pushed Netflix’s share price up along with the rise in Roku stock from the expected premium an acquisition would require.
There are many good reasons why investors like the prospect of Netflix acquiring Roku, but there are also many good reasons why it doesn’t make sense. Here are three reasons that could dissuade Netflix from buying Roku.
1. It’s an expensive and complex way to get into advertising
Netflix CEO Reed Hastings surprised investors when he said the company is working at an ad-supported level of the streaming service. Roku is one of the largest connected TV advertising companies in the United States and has advertising technology that could be applied to any market in the world.
It could be very valuable for creating an ad-supported layer. But it’s a big bet on advertising. Despite the significant drop in its share price, Roku is currently worth around $ 13 billion. Netflix will likely have to pay a significant premium on top of that. And while it would acquire a business and thus be able to collect 100% of the revenue from the ads shown on Netflix, it’s an expensive way to do it. The company could do better to build its own ad-tech and sales team in-house.
Plus, it complicates things for Netflix. During the company’s first quarter earnings call, Hastings noted that advances in advertising technology and services make it very easy to incorporate advertising into a streaming service. “We can be a direct publisher and have other people do ad matching and integrate all of the people data,” she said. “So we can stay out of it and be really focused on our members creating that great experience.”
Netflix has built a big business by offering consumers great content. This is what it should focus on.
2. Business models don’t match
As mentioned, Netflix is all about creating great content. And it fights other media companies for the rights to redistribute or produce that content. If it acquires Roku, it should also be a partner for those media companies. This is a difficult position for both Netflix and its competitors. Do its competitors want to support the biggest name in streaming?
As LightShed Ventures analyst Rich Greenfield points out, it makes no sense for Netflix to sell ad inventory for its competitors.
Amazon (AMZN -4.15%) managed to make it work as the owner of a streaming service, a connected TV platform, and a cloud computing service. Amazon Web Services powers many streaming services, including Netflix, and its Fire TV platform is capable of making negotiations work with all major streaming services. But Amazon also has a huge retail business that supports consumer adoption of Fire TV devices. While it is certainly possible to play with both sides, it definitely complicates matters.
Additionally, both Netflix and Roku have an interest in remaining platform independent. Netflix wants distribution on as many platforms as possible. And while its popularity will ensure distribution, owning Roku could push it to develop better user experiences on its own platform than others. Likewise, Roku doesn’t want to be seen as favoring one streaming service over any other. It could curb other streaming services’ interest in buying home screen ads, trading revenue shares, and sharing data.
3. Possible Antitrust Concerns
If Netflix makes an offer to acquire Roku, it could be shot down by regulators due to antitrust concerns. Roku is the largest streaming video distributor in the United States; Netflix is the largest streaming service.
While a deal may not be closed entirely, it may require some concessions. And if it gets shut down, Netflix could be hooked for breakup fees.
Plus, Netflix doesn’t need the distraction of defending itself against an antitrust case right now. It is in the midst of some significant changes on the platform as it appears to be returning from the subscriber losses it is facing in the first half of the year.
Netflix and Roku will always be closely linked. After all, Roku has its roots within Netflix and remains one of its most important partners. But Netflix doesn’t need to buy Roku. It makes the business much more complex and the two businesses are full of competing interests.