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Marketing Future of TV Netflix

For its ad-based model to succeed, Netflix needs to buy Roku

By Vikrant Mathur | Cofounder

May 11, 2022 | 7 min read

Netflix has signaled that it plans to introduce an ad-based tier in the near future. But without the in-house adtech capabilities and privacy know-how, it faces a slew of challenges. The simplest, most cost-effective and scalable solution? According to Future Today cofounder Vikrant Mathur, it's acquiring its old friend Roku.

Roku and Netflix signs on a building in Los Gatos, California

/ Adobe Stock

The media industry has been buzzing since Netflix co-chief exec Reed Hastings signaled in an April quarterly earnings call that the company is interested in pursuing an ad-supported alternative to its subscription service.

The announcement indicates a reversal of Netflix’s long-held stance on advertising, but it makes sense. The platform aimed to gain 2.5 million subscribers in Q1 of 2022, but instead it lost around 200,000. Netflix is in enough of a revenue crunch to clamp down on common password-sharing, and competitors with ad-supported options are breathing down its neck.

For a leading video content service to enter the ad space for the first time, the implications to the industry could be broad and meaningful. The question remains how Netflix would implement an ad-supported model. Hastings said on the earnings call that Netflix wants to focus on publishing, and to have “other people do all the fancy ad-matching.” He’s also cited the complexity of the ad ecosystem as a core reason why Netflix has avoided entering the advertising-based video on-demand (AVOD) space in the past. So, Netflix could dive right into the complexity of it all, and build out an adtech stack that has a significant dependency on third-party providers. Or it could do something more straightforward and more intuitive: acquire a company with a well-tested video adtech stack of its own. Specifically, Netflix should acquire Roku.

Let’s highlight five reasons why it would be sensible, and mutually beneficial for both companies, for Netflix to buy Roku.

1. Roku’s tech can meet Netflix’s scale

An ad-supported option would open up the Netflix platform to new users who are drawn in by a lower price point. But there’s the chance that a cheaper ad-supported model would cannibalize its existing subscriber base. Any subscription model in media banks partially on the assumption that a large portion of the subscriber base will consume less content than a subscription is essentially worth. The ad model monetizes the user’s engagement in pace with consumption.

Netflix will need adtech that can manage all demand for optimal monetization, that limits inefficiencies and intermediary fees in the supply chain and that can scale its AVOD audience. Roku has spent years investing in its in-house tech stack, which would help Netflix’s ad business hit the ground running. In addition, Netflix would inherit Roku’s existing and sizeable ad business, which gives Netflix immediate scale as it tries to enter this marketplace.

2. Roku’s in-house tech will help Netflix uphold its standards for data privacy

Netflix has historically been very protective of the user data it holds, including viewers’ consumption habits. So why would the company turn around and give a slew of third-party ad partners access to that valuable data? That’s the kind of complexity that Hastings and Netflix have wanted to avoid, and it puts its proprietary data at risk of being scraped and shared.

The most effective long-term strategy to avoid data poaching and to uphold data privacy consistently with government regulations, industry protocol and audience expectations is for Netflix to bring its adtech functions under its own roof. But if the company were to build out its own infrastructure, the process would take major capital investment and years to get up-and-running. Netflix needs solutions more urgently. Plugging into Roku’s existing ad infrastructure would solve that problem.

3. A vertically-integrated content and ad platform would help both Netflix and Roku better compete with Amazon

Amazon is already becoming a wholly vertically-integrated media company — one that owns its own content (via Amazon’s production studios, the MGM library it recently purchased), content distribution (Amazon Prime Video, FireTV, Amazon Freevee) and ad platform (Amazon DSP).

Netflix has the content in order. Roku’s platform would immediately give Netflix a foothold in the device market and the distribution that it needs to go head-to-head with Amazon. Roku would provide Netflix with a ready-to-go ad sales team. And of course Roku brings the necessary tech stack. With those assets, a combined Netflix-Roku entity would enter the same heavy-hitting league as Amazon, overnight.

4. Netflix would provide Roku not only the content production capabilities but also the off-platform distribution that it wants for TRC

Roku has been bulking up on original content for The Roku Channel (TRC), which also involves the 2021 purchase of the Quibi library. Being acquired by Netflix would be an immediate content windfall for Roku. Not only would Netflix provide its voluminous original content library; it would also provide access to an in-house production studio that could start developing content specifically for TRC.

An alliance with Netflix helps Roku with its international aspirations too, which demand content localized for any of its target international markets. Netflix has that content — and in multiple languages. That international content would address the needs that Roku has in expanding globally and providing audiences with suitable, desirable content. Netflix eliminates Roku’s need to make deals with third-party content providers in order to take TRC international.

Finally, Netflix’s off-Roku audience immediately gives the Roku sales team the multi-platform inventory that TRC and all streaming services — including services owned by Roku’s competitors — have been trying to build over the years.

5. The acquisition would bring Netflix and Roku’s overlapping history and culture full-circle

Remember that Roku, as a product, began as a set-top box division of Netflix. When Netflix decided not to build its own player, Roku was spun off as its own company, with founder and chief executive Andrew Wood at the helm. And Netflix was its first investor. Netflix went on to lease office space to Roku for years. There are familiarities between the respective companies’ teams and an existing spirit of collaboration. If Roku were to sell to any other company, Netflix is the only player that makes sense. It’s very difficult to imagine Roku aligning with any of the other big tech contenders, any of which would necessitate costly technological, operational and cultural alignment.

Netflix and Roku both know where they want to take their business in the future, and in order to stay competitive, they know they need to get on their way quickly. And the two companies are going in very compatible directions. Netflix's acquisition of Roku would check all the boxes for both parties and would ensure a sustainable, fruitful path forward. There’s mutual benefit and support in such a deal, which is exactly what Netflix needs to consider as it moves toward an ad-supported model.

Vikrant Mathur is cofounder at Future Today.

Marketing Future of TV Netflix

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