Market

Roku Suddenly Has a Massive Content Budget | The Motley Fool

Roku (NASDAQ:ROKU) launched The Roku Channel in 2017 as a way to get more free ad-supported content in front of its users. It was primarily seen as a way for Roku to highlight content from media partners with whom it shared ad revenue.

Less than four years later, The Roku Channel is a different beast entirely. The company uses the service as a way of juicing its distribution agreements with premium streaming services by including content licenses as part of the agreements. With the acquisition of Quibi’s content library, Roku’s making a push into developing its own original content. And it has a growing budget to support it.

More than $1 billion

Roku will spend over $1 billion on content next year, according to a person familiar with the matter. Granted, $1 billion might not sound like much when compared to the big streaming video on demand (SVOD) services like Netflix (NASDAQ:NFLX), which will shell out $17 billion on content this year, but for Roku it’s massive. 

Where Netflix generated $25 billion in revenue last year, Roku generated just $1.8 billion. And if you don’t count its low-margin player segment, Roku generated less than $1.3 billion. So, Roku’s content spending relative to its revenue is similar to Netflix’s.

Roku’s budget looks even bigger compared to peers like Fox‘s (NASDAQ:FOXA) Tubi and ViacomCBS‘s (NASDAQ:VIAC) Pluto TV. Tubi said it spent around $100 million on content in 2019. Tubi started exploring original content earlier this year with a reported budget of up to $4 million per episode of an original series, but nothing has come to fruition yet.

ViacomCBS has been more aggressive, laying out plans to double its streaming content expense in 2021. It recently raised $2.7 billion in cash to invest primarily in streaming content, but there are a couple of caveats. First, it’s primarily focused on its premium SVOD, Paramount+, and second, that $2.7 billion is budgeted for multiple years. “We’re obviously not going to spend $2.7 billion overnight,” CFO Naveen Chopra said during ViacomCBS’s first-quarter earnings call

Roku’s very likely outspending its biggest advertising video on demand (AVOD) competitors on content, both of which have big media companies behind them.

The Roku Channel flywheel

Roku CEO Anthony Wood has recently started describing what he calls “The Roku Channel flywheel” to investors. Simply put, as The Roku Channel viewership grows in scale, it attracts more ad dollars, which allows Roku to invest more in content, which, in turn, attracts a bigger audience, and so on. “This flywheel is enabling us to be more creative and expansive in sourcing content,” management wrote in its first-quarter letter to shareholders.

As mentioned, Roku started producing original content this year, and it’s taken to acquiring media properties like This Old House and Quibi’s catalog outright. It’s being far more aggressive in content acquisition than its competitors like Tubi and Pluto TV, despite operating without the backstop of a much larger media company behind it like its competitors.

Roku’s confidence stems from its ability to monetize its users. Roku produced more than $32 per user on its platform over the last 12 months. That number will continue to climb as Roku invests more in its ad technology and more advertising moves to streaming services from linear television. Meanwhile, competitors like Tubi and Pluto TV are often at a disadvantage in monetizing their viewers compared to Roku because they’re operating with far less data.

With the ability to amortize its content investments over a growing base of viewers — one that’s larger than its competitors — Roku is rightly justified in its massive content budget relative to its peers. Some investors may be worried about the climbing content budget, but look at the success of Netflix for a guide on how this strategy can play out.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.



Most Related Links :
usnewsmail Governmental News Finance News

Source link

Back to top button