Roku has been on a rugged roller coaster ride in recent months as it faces the limits of its dominant U.S. market position amid an ebbing pandemic. Now, the streaming company is partnering with “alternative investment”giant Apollo Global Management to acquire a slice of Starz, the Lionsgate-owned premium cable service.
The deal promises to expand Roku’s modest library of original programming (Quibi leftovers won’t do it by themselves), and entree into legacy cable and subscription streaming.
The real question is whether such a deal, for one-fifth or less of a decidedly niche content and streaming service provider, can make Wall Street care. There are reasons for skepticism, but also the possibility that this is the beginning of something much bigger.
Like so many tech companies, Roku was an early-pandemic darling of the Street, supremely positioned to benefit from locked-down customers with little to do but play games, learn TikTok and guitar, and watch lots of streamed video. Just as the lockdown hit the United States, Roku shares sold for $76 apiece, substantially down from the previous fall.
Fast forward to February, 2021, in the pandemic’s winter resurgence, and shares had leapt nearly 500%, to $468. They would crest even that vertiginous level a few months later, amid the summer virus comeback. These days, shares are around $96, notably above 26 months ago, but still far below even the fall of 2019.
More problematically, Roku’s fall from Wall Street grace is about more than a rapidly evolving virus and how we’re responding to it.
Also read: Roku Reports Q1 Net Loss, Decelerated Revenue Growth of Just 28%, But Beats Forecasts
Roku indeed owns an admirable chunk of the streaming video universe, adding another 1.2 million active accounts, bringing to 61.3 million the worldwide users of its streaming devices and smart TV interfaces. The other part of its business, ad revenues on the Roku Channel and elsewhere, is up 39% year over year (to $233 million). Hours streamed is up 14%.
Nice. But also, complicated.
Turns out that around 90% of Roku accounts are in North America. That’s a problem when just about everyone in North America already seems to have a streaming setup, and many are dropping dongles such as the classic Roku pucks and sticks to buy connected TVs with built-in interfaces.
Just like Netflix, Roku faces home-market saturation amid growing competition from deep-pocketed, diversified competitors such as (we’ve heard this before) Apple, Amazon and Alphabet, plus that new Comcast-Charter tie-up.
Yes, Roku CEO Anthony Wood talked a good game at Morgan Stanley’s investor conference in March, saying “Once Roku enters a market outside the U.S., our share starts to grow.”
And yes, long-time Roku bear and Guggenheim analyst Michael Morris recently upped his target price by $10, saying the company’s international expansion is in its "early innings.”
That’s all true. But is it enough to substantively displace Google/Android TV, Samsung, LG, Sony, Amazon, and endless cheap Android-based knockoffs around the planet? Probably not.
Targeting consumers in Europe and Latin America is a potential opportunity for more hardware sales, but what about India, the rest of Asia and Africa, where much of streaming video’s growth will come in the future? Even Roku’s cheap devices might face pricing pressure.
Supply chain headaches apply here too, as with any hardware maker. Smart TV shipments will drop 13% in the United States this year, so it’s getting more expensive and slow to make and ship devices around the planet. That will pinch margins.
Meanwhile, Lionsgate has been trying to sell itself, or just Starz (as of last November), for what seems like eons, with no takers. That muted response in an overheated era says something about the market’s regard for Lionsgate’s assets and asking price.
This past week, during the SeriesFest in Denver, long-time Lionsgate CEO Jon Feltheimer suggested other ways for Lionsgate to make itself more relevant, like resuscitating a proposed partnership with Netflix over three Knives Out movies.
Lionsgate would theatrically distribute the two sequels (still in production) and Netflix would get to stream the hugely popular original. Netflix turned down Felt’s original proposal, but with Big Red suddenly in a different frame of mind, he said he’ll pitch the deal again.
Lionsgate, like Sony, has been an “arms dealer,” profitably producing numerous shows for Netflix, HBO, Discovery and others.
Starz, which Lionsgate acquired in 2016, has been equally scrappy, catering to dedicated Black and female audiences with fan-favorite franchises such as Power and its many spinoffs and Outlander. The service attracted some recent buzz with behind-the-scenes Watergate tale Gaslit, starring Julia Roberts as Martha Mitchell. Another promising show, horror-comedy series Shining Vale, featuring Courtney Cox and Greg Kinnear, just debuted.
The key to all this may be Roku’s partner, Apollo. It has $48 billion in available cash for deals, with $513 billion in total assets under management, up 11%, according to last week’s quarterly earnings filings. Just the cash-on-hand total dwarfs any of the other companies involved in this potential deal.
And Apollo is no newcomer to entertainment. It tends to buy into companies with decent balance sheets that are part of declining industries. Previous deals include Cox, Endemol Shine, Gannett, Sirius XM, Redbox and Yahoo. That Starz (and for that matter, Roku) is potentially on that list probably says something important.
Does Apollo become the glue (and money) that binds a couple of smaller streaming players into one, more vertically integrated operation? Way too soon to tell. But the fact that Roku, looking for more reach, and Lionsgate, looking for more cash, are now in conversation with Apollo as backer suggests a much bigger deal may be on the horizon.
