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3 Reasons Netflix Should Buy Roku, 1 Reason It Won’t

Shares of Roku (NASDAQ: ROKU) were moving higher on Wednesday morning, following an Insider report claiming that employees are starting to speculate a Netflix (NASDAQ: NFLX) acquisition of the leading smart TV operating system is on the horizon. The catalyst for the buyout buzz is reportedly Roku closing a trading window for its staff to sell vested shares in the company. 
It’s a stretch, of course. There could be many positive or negative reasons for a company to prohibit employees from dumping their company’s stock. Netflix potentially buying Roku is just the sauciest of the possibilities. Let’s break down why a deal makes sense, but also a big reason why this chatter isn’t likely to end with wedding bells. 
Image source: Getty Images.

Three reasons it makes sense
Let’s start with how poetic it would be if Roku founder CEO Anthony Wood found his way back to Netflix. Roku’s helmsman has a pretty colorful origin story. Wood invented the DVR — or digital video recorder — in the late 1990s. Unfortunately his company, ReplayTV, lost out to TiVo as the champion of the niche. He then turned his attention to pioneering the market for streaming through TVs, efforts that eventually found him moonlighting at Netflix roughly 15 years ago.
Netflix was trying to make the transition away from physical rental of DVDs and Blu-ray Discs. It was early in seeing the future of digital delivery, and Wood was leading the efforts for Netflix to put out its own set-top device. When Netflix decided that it didn’t want to get into the hardware end of the upcoming streaming revolution — choosing instead to work with third-party set-top device makers and video game console companies — Wood focused his attention on Roku. Netflix acquiring Roku would bring this amazing story full circle.
A bigger reason why the potential pairing makes sense is that Netflix and Roku could help the other partner grow. Netflix is just starting to dip its toes into the ad model that Roku has been nurturing for years. Netflix would also help Roku grow its reach outside of its current North American stronghold. Roku has an impressive presence with 61.3 million active users, but Netflix serves a global audience that is 221.6 million members strong. Netflix has cracked the country-specific codes, shaving years from Roku’s learning curve to become the planet’s operating system of choice for streaming platforms. 
It’s not just advertising expertise that Netflix would be acquiring with Roku. It would also be inheriting a small but growing catalog of original content that Netflix could broadcast to a wider audience. Netflix would also no longer have all of its chips riding on the success of its namesake streaming service, something that made the market leader vulnerable when it stunned investors with a rare sequential dip in subscribers earlier this year.
The third-biggest reason for the meet cute is that both companies have fallen way out of favor. Netflix and Roku are both trading more than 70% below last year’s highs. Each company can use a game-rattling move to excite Wall Street again, and wedding bells would certainly do that as bulls get a fresh canvas to paint in optimistic hues about what the partnership would bring to the market. 
One reason it doesn’t make sense 
Netflix buying Roku would undo the one thing that makes it great. Roku has stayed on top — even as it competes against three of the world’s most valuable companies — because of its agnosticism. There are thousands of available apps on Roku, because Roku plays nice with all services, for the most part. 
When Roku went public five years ago, its prospectus even said that it generated negligible revenue from Netflix. It was the younger and smaller services sending money Roku’s way to get noticed on the platform. How comfortable would rival streaming services be with a Netflix-owned Roku? How comfortable would smart TV manufacturers be going with Roku as the operating system of choice, factory-installed in their flat screens? 
Roku’s business model needs a competitive climate among streaming services. The most exciting thing about Roku beyond its stellar audience growth and engagement level is the skyward trajectory of its average revenue per user. Any service not named Netflix would start to see Roku as a competitor instead of an ally, and it’s hard to see other streaming service stocks willing to cut checks to fuel the ascent of Netflix. Netflix would capsize Roku’s current business model, and right now neither company can afford to take on more water.
Rick Munarriz has positions in Netflix and Roku. The Motley Fool has positions in and recommends Netflix and Roku. The Motley Fool has a disclosure policy. –

Shares of Roku (NASDAQ: ROKU) were moving higher on Wednesday morning, following an Insider report claiming that employees are starting to speculate a Netflix (NASDAQ: NFLX) acquisition of the leading smart TV operating system is on the horizon. The catalyst for the buyout buzz is reportedly Roku closing a trading window for its staff to sell vested shares in the company. 

It’s a stretch, of course. There could be many positive or negative reasons for a company to prohibit employees from dumping their company’s stock. Netflix potentially buying Roku is just the sauciest of the possibilities. Let’s break down why a deal makes sense, but also a big reason why this chatter isn’t likely to end with wedding bells. 

Image source: Getty Images.

Three reasons it makes sense

Let’s start with how poetic it would be if Roku founder CEO Anthony Wood found his way back to Netflix. Roku’s helmsman has a pretty colorful origin story. Wood invented the DVR — or digital video recorder — in the late 1990s. Unfortunately his company, ReplayTV, lost out to TiVo as the champion of the niche. He then turned his attention to pioneering the market for streaming through TVs, efforts that eventually found him moonlighting at Netflix roughly 15 years ago.

Netflix was trying to make the transition away from physical rental of DVDs and Blu-ray Discs. It was early in seeing the future of digital delivery, and Wood was leading the efforts for Netflix to put out its own set-top device. When Netflix decided that it didn’t want to get into the hardware end of the upcoming streaming revolution — choosing instead to work with third-party set-top device makers and video game console companies — Wood focused his attention on Roku. Netflix acquiring Roku would bring this amazing story full circle.

A bigger reason why the potential pairing makes sense is that Netflix and Roku could help the other partner grow. Netflix is just starting to dip its toes into the ad model that Roku has been nurturing for years. Netflix would also help Roku grow its reach outside of its current North American stronghold. Roku has an impressive presence with 61.3 million active users, but Netflix serves a global audience that is 221.6 million members strong. Netflix has cracked the country-specific codes, shaving years from Roku’s learning curve to become the planet’s operating system of choice for streaming platforms. 

It’s not just advertising expertise that Netflix would be acquiring with Roku. It would also be inheriting a small but growing catalog of original content that Netflix could broadcast to a wider audience. Netflix would also no longer have all of its chips riding on the success of its namesake streaming service, something that made the market leader vulnerable when it stunned investors with a rare sequential dip in subscribers earlier this year.

The third-biggest reason for the meet cute is that both companies have fallen way out of favor. Netflix and Roku are both trading more than 70% below last year’s highs. Each company can use a game-rattling move to excite Wall Street again, and wedding bells would certainly do that as bulls get a fresh canvas to paint in optimistic hues about what the partnership would bring to the market. 

One reason it doesn’t make sense 

Netflix buying Roku would undo the one thing that makes it great. Roku has stayed on top — even as it competes against three of the world’s most valuable companies — because of its agnosticism. There are thousands of available apps on Roku, because Roku plays nice with all services, for the most part. 

When Roku went public five years ago, its prospectus even said that it generated negligible revenue from Netflix. It was the younger and smaller services sending money Roku’s way to get noticed on the platform. How comfortable would rival streaming services be with a Netflix-owned Roku? How comfortable would smart TV manufacturers be going with Roku as the operating system of choice, factory-installed in their flat screens? 

Roku’s business model needs a competitive climate among streaming services. The most exciting thing about Roku beyond its stellar audience growth and engagement level is the skyward trajectory of its average revenue per user. Any service not named Netflix would start to see Roku as a competitor instead of an ally, and it’s hard to see other streaming service stocks willing to cut checks to fuel the ascent of Netflix. Netflix would capsize Roku’s current business model, and right now neither company can afford to take on more water.

Rick Munarriz has positions in Netflix and Roku. The Motley Fool has positions in and recommends Netflix and Roku. The Motley Fool has a disclosure policy.

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