Potential Deal Between Netflix and Roku

The shares of both Netflix (NFLX)  and Roku (ROKU) rose in response to a potential partnership between the two businesses. This is likely because investors recognize the similarities between the two firms — Netflix creates content, while Roku delivers it — yet this merger would actually deprive Roku of its greatest competitive advantage.

The rumored deal has boosted the stocks of the streaming giant and the device manufacturer, but this is only a small portion of how this deal may affect the market.

Presently, Roku does not produce meaningful content. It intends to do so on a small scale, but will not generate content that competes with the several firms whose television shows and films it streams.

Roku and, to a lesser extent, Alphabet (GOOGL) – Get Alphabet Inc., report they have benefited greatly from their absence from the content game. It is easier to create deals to disseminate content when you do it on the basis of equal merit. Once you begin producing your own content, like Apple and Amazon do, every potential partner will wonder if you would favor your series and movies over theirs.

A Minor Obstacle for Apple and Amazon Could Be Significant for Roku
Apple and Amazon produce material in modest volumes. Both firms have seen a few shows reach a huge audience, but none is likely to dissuade someone from subscribing to one of the numerous streaming services available on their platforms.

Netflix cannot affirm this. It’s impossible to imagine that it wouldn’t exploit its ownership of Roku to attract more viewers to its series and movies, given the sheer volume of content it generates.

This could make it more difficult for the combined company’s hardware division to negotiate favorable terms with content providers. Why would Walt Disney (DIS) , for instance, want Disney+ to play second fiddle to Netflix’s original content unless it could negotiate a better deal? The same reasoning applies to numerous other content producers, who may see Amazon’s Fire line of streaming players and Apple TV more favorably due to the fact that they offer significantly less material than their partners.

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What Implications Does This Have for Netflix and Amazon Stock?
The question for Netflix is whether it could earn more money by pushing its programming to Roku customers than it would lose by being compelled to negotiate less advantageous deals with content providers. No large content company can afford to not be on the Roku platform, but the streaming behemoth may lose leverage.

The acquisition of Roku by Netflix would undoubtedly provide a minor advantage, if not a substantial one, for Amazon’s Fire devices. Amazon and Roku provide very comparable products, but a Roku device that is dominated by Netflix content may be less appealing to consumers.

Roku has around 60 million active user accounts, so Netflix’s acquisition of Roku would certainly be favorable (with many of those customers having more than one device). The firm would have to be careful not to convert Roku players into Netflix players, but if it managed the transition successfully, the benefits of attracting and maintaining users should outweigh any unfavorable brand perceptions resulting from Netflix’s ownership.

Some consumers will likely find Amazon Fire devices more appealing, but this is unlikely to have a material impact on the company’s stock price. Apple and Google may gain customers as well, but the same rationale applies when considering the influence on stock prices.