The Streaming Video Wars have officially started. Disney is on the offensive. Netflix is down 3% this week. HBO's corporate parent AT&T is too large to notice. And while Roku remains the winner either way, its latest gains raise questions of how long it survives as an independent entity when Big Tech has money to burn.
Roku (ROKU: $142, up 17% this week) is once again riding high as more investors catch onto what we've been saying all along. While channel operators like Apple, Amazon, Disney, Netflix, YouTube and HBO will ultimately succeed or fail when it comes to capturing a big enough audience to monetize their programming costs, only Roku provides the technology that moves ALL the shows up from the computer to the living room TV. Apple tries, but the other channel operators don't trust it. There's no other neutral platform they can align with, so they're all here.
And what that means is that no matter which channels U.S. households try out, they won't get the full experience unless they also buy a Roku device to run the shows through the company's ad network. To put it as simply as possible, every minute of programming people watch on the streaming-only channels is a revenue opportunity for Roku. It doesn't matter which shows are more popular. If people stream, this company wins.
This is an especially hard truth for people who wrote Roku off over the summer when Cable TV carriers started to hand out their own versions of the computer-to-TV device. Remember when short sellers said this stock was at best worth $60? That was barely 60 days ago . . . and all the negativity did was give the true bulls a chance to grab more shares below $100. Here above $140, that conviction has already paid off big. We're halfway back to the all time $177 peak Roku briefly hit back in September.
It's great news, but the volatility reflects the fact that Roku is still only an $18 billion stock and the ride will be a lot wilder than any of the trillion-dollar behemoths that compete for space on its menu. Netflix is by far the smallest. At $125 billion, it's one of the 100 biggest U.S. corporations, 7 times as big as Roku with enough cash to grab a 25% strategic stake by buying Roku outright if management was willing to consider the lateral move from streaming Content to streaming Delivery. (We think it would be smart.)
Moving up the food chain, Facebook (FB: $193, up 1%) has stayed out of the Streaming arena to focus on smaller screens and user-generated videos. But imagine what adding Roku's advertising capabilities to its own . . . or deploying the technology to take Instagram and other digital photo albums to the wall TV. And of course, if Mark Zuckerberg wakes up and decides he wants to run his own TV studio, Roku becomes a natural acquisition prospect. With $52 billion to burn and another $26 billion coming in next year, Facebook could buy the company outright and pay shareholders a healthy premium to agree to the deal. (Pleasing Washington regulators is another story.)
From here, the combinations make even more sense as the cash pools expand. Alphabet (GOOG: $1,298, down 1%) could benefit from a way to push YouTube up to the big home screen and stream on-demand videos in a more professional context. YouTube has wanted to become Netflix for years, shifting to a subscription model for original content and movie rentals. Better placement on Roku will help, and owning Roku would go a long way toward moving YouTube up the menu.
Alphabet has $121 billion to spend either way, even after a massive investment in Artificial Intelligence. Even if it showered Roku shareholders with $30 billion in cash, the Search giant is so profitable that the balance sheet would only need a year to fill up again. At this scale, it isn't even about whether to buy an interesting $18 billion company. It's about which ones to buy and how to time the acquisitions. (And not raise the hackles of the regulators in Washington.)
Amazon (AMZN: $1,753, down 2%) has $43 billion on hand, so could easily pull it off. Bezos could fold Roku systems into his overall architecture . . . imagine a voice-activated Streaming interface as a Prime perk or a version of the Kindle reader that moves video up to the big screen to entice new viewers. However, he'd probably build it himself. Maybe he'll buy something else, or simply keep rolling the funds back into his eternal expansion program.
Microsoft (MSFT: $147, up 1%) would be an interesting fit, if a little outside the trillion-dollar giant's normal territory. Admittedly, there's $140 billion here to burn and Roku would make an interesting "tuck in" addition to the existing Gaming or Hardware businesses. (And Microsoft has already been through the Washington ringer, having survived it in the early 2000's.)
But it's really Apple (AAPL: $264, up 2%) that makes the best fit. While there's already an Apple TV device, it's clearly peripheral to Tim Cook's vision . . . otherwise, he wouldn't have opened up Apple programming to the Roku system in the first place. Cook wants to sell shows. He could easily spend some of his $205 billion cash hoard to buy Roku rather than keep throwing money at generation after generation of Apple TV.
Whoever wakes up first and realizes this will make Roku shareholders very happy. We'll be here in the meantime.