- Roku has a growing advertising business, something Netflix is looking to get into.
- Roku started as a product inside Netflix. It was spun out more than a decade ago.
- A deal makes sense, some insiders say. Others question Netflix’s desire for a hardware company.
At Roku, a video-streaming platform operator that’s suffered a punishing stock plunge, employees are buzzing about the possibility of an acquisition — and their talk and hopes are pinned on Netflix.
Employees at Roku have been discussing the possibility of a
acquisition in recent weeks, according to people familiar with the matter. The chatter comes as Roku’s stock has dropped about 80% since late July on weaker demand for video
and lower set-top-box sales.
Roku competes with Apple, Amazon, Google, and Samsung in the market for streaming devices, and some of those industry titans are battling with the smaller company for lucrative video-ad dollars. The collapse in Roku’s stock made it hard to compete with its larger tech rivals on pay in a tight labor market. The result has been a staggering increase in equity grants to employees, leaving Roku well underwater on stock-based compensation.
Roku has been seen as an acquisition target before — including last year, when, according to The Wall Street Journal, Comcast CEO Brian Roberts considered purchasing the company. In January, the departure of a top Roku executive stoked questions about the company’s future.
In recent weeks, the possibility of a Netflix acquisition has become the focus of internal chatter at Roku. That’s when Roku abruptly closed the trading window for all employees, prohibiting them from selling any of their vested stock at a time when they should normally be able to do so, according to two of the people familiar with the matter.
There may be other reasons for such a trading halt. Companies typically close trading windows for employees before releasing information that will affect their share price to avoid insider trading.
Spokespeople for Roku and Netflix declined to comment.
Netflix wants ads and Roku has them
Some of the people familiar with the matter, along with industry bankers and other experts, told Insider the timing would be advantageous for both parties if they were looking to strike a deal. Roku’s valuation had plunged below $13 billion as of the close of trading on Tuesday, making an acquisition easier to swallow than a year ago when Comcast was reportedly eyeing a deal.
Netflix is looking to introduce advertising to its service for the first time as it faces increased competition and subscriber losses. Roku has built a robust video-advertising platform that generated $647 million in first-quarter revenue. That’s about seven times the sales brought in by Roku’s hardware business, which makes video-streaming boxes and related devices.
“It makes sense with where Netflix wants to go,” a technology investment banker said. “And it makes sense in this current environment. Everyone is looking around thinking, ‘I was worth twice as much last year. What happened?'”
One senior-level Roku employee said a deal between the two companies would “align well in terms of culture, business, and current valuation.” Netflix is trying hard to get into advertising-based video on demand “and Roku has it,” this person added. Everyone who spoke with Insider for this story asked not to be identified discussing private matters.
A long, intertwined history
Netflix has turned to acquisitions in the recent past to help it expand. When the company decided last year to start offering video games, it went on a mini acquisition spree, snapping up several small game developers, including Boss Fight Entertainment in a March deal.
Roku and Netflix have a long, intertwined history. Anthony Wood, Roku’s founder and CEO, developed a set-top box inside Netflix in the early 2000s. For many years, the companies operated their corporate headquarters next door to each other in Los Gatos, California.
Reed Hastings, a Netflix cofounder and co-CEO, decided to spin that business out in 2008 over concerns that owning its own platform would hamper its ability to distribute its streaming app on other devices.
In 2014, Hastings reiterated his lack of interest in hardware. “We’re working with over 1,000 devices now. There’s no value add for us to do a device,” he said during an interview at the Code Conference.
One Roku insider was skeptical of a deal, saying Netflix “never showed an appetite for getting into hardware.” Roku commands a leading share of the connected-TV market in the US, but sales of its players tumbled 19% during the first quarter, resulting in a loss for the division.
That part of the business is now dwarfed by Roku’s advertising operation, though. And Netflix would get immediate scale in advertising by buying Roku.
‘There’s no religion anymore’
Netflix is under siege from other video streamers, sending its stock down about 70% in the past six months. Owning Roku would give it a huge competitive advantage when it comes to knowing what people watch and when they stop watching, not just on Netflix but also across rival streaming channels carried through Roku boxes.
One media-industry executive who has spoken with Netflix in recent weeks told Insider that Hastings’ view of his company’s future was, “Nothing is off the table,” and that he’s open to anything.
“There’s no religion anymore,” this person said.
Roku has more than 61 million active accounts, making it an important strategic weapon in the growing battle for video-streaming-ad dollars between tech and media-industry giants. While its neutral status was a valuable tool in the past, the company’s direct connection to so many consumers and homes could give Netflix more power to negotiate with other platforms and industry titans. Indeed, Apple and Amazon run video-streaming services and sell their own streaming devices. That hasn’t prevented those companies from offering rival services through their hardware.
Yet some industry observers questioned whether it would make sense for Netflix to spend so much on an acquisition at a time when it faced pressure from investors to boost revenue growth and staunch subscriber losses. Despite purchasing several small video game developers recently, the company has eschewed major M&A deals.
One industry analyst also highlighted that Netflix could run afoul of antitrust regulators if it tried to buy Roku. Another industry source said Netflix was early in figuring out what it wants to do in advertising and might not know yet if it needs to go shopping for a business the size of Roku.
Despite recent share declines, Roku would probably cost Netflix at least one-fifth of its $88 billion market valuation.
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