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Netflix Is Talking to Roku for All the Wrong Reasons

Last week, the rumor mill floated the idea that Netflix (NASDAQ: NFLX) might want to buy longtime streaming-tech partner Roku (NASDAQ: ROKU). Now, another report from anonymous sources says that the companies are holding high-level talks — about a tighter partnership in video-based advertising.

Netflix is getting serious about launching an ad-supported subscription plan at a lower price, if this report is accurate. I’m still not sure that it’s a good idea, though.

Image source: Getty Images.

What’s new?

Netflix executives have been talking to their counterparts at streaming technology veteran Roku and media powerhouse Comcast (NASDAQ: CMCSA) in recent weeks, according to The Information’s unnamed insider sources. These high-level chats were reportedly about tapping into the expertise of Comcast and Roku when it comes to serving ads around Netflix’s video streams, and finding ad buyers with an interest in this as-yet imaginary marketing platform.

The idea is reasonable enough. If you’re planning to launch a new service in a field where you have no experience at all, it makes sense to lean on established experts in the field.

Roku offers the free-to-watch Roku Channel to anyone using its media-streaming hardware and/or software, supported by a successful advertising program.
Comcast has decades of experience in the ad-selling market, and its Peacock+ streaming service comes in three tiers with varied blends between subscription fees and advertising.

Netflix swore off the ad-supported viewing idea for years, but management announced their turn-on-a-dime interest in video ads during the latest earnings call. Elsewhere, Walt Disney (NYSE: DIS) has tons of experience with ad-based streaming plans through its Hulu service, and since the House of Mouse is introducing an advertising-based subscription plan to the Disney+ flagship too, it can’t be the worst idea in the world.

So there are reasons to believe that Netflix will come up with a splashy advertising system, and the company could learn a lot from Roku and Comcast.

What’s wrong with this idea?

Last I checked, Netflix didn’t think that ad-supported subscriptions would fit its long-term business plan. As it turns out, nothing has changed. The company’s official long-term view still offers this vision of Netflix’s place in the entertainment industry (emphasis added):

Netflix is a focused passion brand, not a do-everything brand: Starbucks, not 7-Eleven; Southwest, not United; HBO, not Dish. We don’t offer pay-per-view or free ad-supported content. Those are fine business models that other firms do well. We are about flat-fee unlimited viewing commercial-free.

Further down, Netflix claims to be all about simplicity. “We strive to be extremely straightforward.” Adding another service tier with lower monthly fees could make sense, but adding advertising to the mix seems to undermine the company’s focus on simplicity and a hassle-free user experience.

Moreover, the new plan could be bad news for Netflix’s revenue mix. Sure, a lower-priced plan will add millions of cost-sensitive names to a subscriber base that is experiencing a slowdown right now. But it is also guaranteed to draw in a few million subscribers from today’s higher-priced subscriptions — maybe not right away but over time.

The company is currently shifting its focus from pedal-to-the-metal subscriber growth to beefier bottom-line profits and cash flows. It will be difficult to keep that focus while also introducing a cheaper plan with skinny profit margins.

So Netflix seems to be leaning into a so-called opportunity that doesn’t fit the company’s long-term goals and stated vision. I still think it’s a fantastic buy at today’s deeply discounted share prices, but I’d be a happier shareholder if co-CEOs Reed Hastings and Ted Sarandos dropped this counterproductive plan. This is not what Netflix is about.

Anders Bylund has positions in Netflix, Roku, and Walt Disney. The Motley Fool has positions in and recommends Netflix, Roku, Starbucks, and Walt Disney. The Motley Fool recommends Comcast, Southwest Airlines, and Warner Bros. Discovery and recommends the following options: long January 2024 $145 calls on Walt Disney, short January 2024 $155 calls on Walt Disney, and short July 2022 $85 calls on Starbucks. The Motley Fool has a disclosure policy.

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