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Roku's deal with Peacock offers ad tailwind: Needham

With NBCUniversal recently joining Roku's platform, Needham analyst Laura Martin highlights a number of reasons Roku could see upside revenue potential from the deal with any new viewers to its home page ad inventory. The Final Round discusses.

Video Transcript

MYLES UDLAND: All right, welcome back to The Final Round, here on Yahoo Finance. Time for our call of the day. Today we are talking about Needham's latest note on shares of Roku. And the hook here is that Roku has finally reached a deal with Comcast to get their new streaming service, Peacock, onto Roku's platform. And basically, the view here taken by Laura Martin and the team over at Needham's.

It shows the way the balance of power within the streaming space continues really to tip in favor of Roku. This platform type aggregator, Roku wants to-- I'm not sure if Switzerland's a great example, but something akin to Switzerland within the streaming space. Everybody come onto our platform. We have the most users. It will benefit you, Comcast, to be on our platform, even though we have our own ad network.

Now, Dan Roberts, this does mean that you can start watching Yellowstone, which I have started and is, it's totally fine. It's totally fine. But I think it also shows here how these players, even a company as large and an incumbent like a Comcast, still doesn't really have the juice to get Peacock in front of as many people as it wants to, if it doesn't have the help of a company like Roku.

DAN ROBERTS: Well, in many ways, this felt like the carriage disputes that we see for live sports. And sometimes there are blackouts and the customers complain. And both sides try to say, well, it's the other side that's being unreasonable. They're making unreasonable demands. That's what Roku said Comcast was doing. Comcast threatened to pull its 40 different apps that are on Roku systems.

That includes mostly NBC stuff, but obviously, the Comcast family has a lot of different sub brands and sub networks. So in terms of leverage, you have to see this as a win for. Roku you have to see this as Comcast giving up ground. And in fact according reports, what Roku had wanted was really two-fold.

More content from Comcast for its Roku channel. And we know that Roku's own Roku channel is a lot of how it makes money. Of course, it's not something personally that I as an owner of Roku have ever sort of consciously clicked over to. But they get ad revenue from that. And Roku also wanted to be able to sell some of the ads on those Comcast owned NBC apps.

And Comcast is saying, no, no. Now Comcast has caved. Not only is it a win for Roku, But I think this is also bad for HBO Max. Both Roku and HBO Max, I'm sorry. Peacock and HBO Max, which launched within each other. I think were pretty close timing wise, both amid the pandemic. Both were not on Roku devices at lunch. And people kind of said, What? How can you not be on? What you just mentioned is the number one device.

45% percent of households that have connected streaming TV devices have Roku. And you know, as a person who has Roku, I was like, well wait a minute, that's it. I can't watch Peacock. I'm not going to do it on my laptop and then, you know, stream it to my TV. I don't even think my TV is able to do that. I could do it with an HDMI cord, I guess. But I'm not going to do that.

I'm not going to watch it on my phone. Although I downloaded the mobile app on my phone, just to see what it was like Peacock first launched. And I found it interesting that there's a channel on Peacock that is just clips of The Office 24 hours a day with occasional ads. I think it's a great little. Channel but you know, it's a problem that it wasn't on Roku. Now that Peacock finally is, pressure's on HBO Max. And I think AT&T, which of course is reportedly in negotiations now with Roku. Now the pressure is on because you're sort of alone.

Before it was like, well, clearly Roku is asking for something unreasonable because both of us, these two big prominent new TV apps are not on Roku. Otherwise, this note, the bullishness, it's just kind of more of what we've heard about Roku. Right? I mean, the idea of being the king, being the pipes. As you said, Switzerland. Being able to sell ad inventory. All that is fine and dandy, except with one dark cloud on the horizon, potentially.

This space is changing so rapidly. I mean the rules are changing. The offerings are changing. Everyone seems willing, for now, still, to keep paying for news subscriptions. How long? Soon we're going to hit that ceiling and people will start cutting. And not to mention, the technology is changing. So more and more now, if you buy a new TV, I probably need to buy a new TV. It's like eight years. You don't need the physical device that's connected to your TV. All the apps come preloaded.

That might run for Roku too. Now it has to make deals directly with the TV manufacturers. So, all that is just to say that, so many analysts are bullish on Roku. But, there's no guarantee that it'll just be, you know, sunny times for Roku forever. And that's why still I think it's a potential acquisition target for someone who has the money.

- Well Dan, a couple of things here. Now that Roku did reach that deal with Peacock , the pressure's on Peacock. Right? I mean what's most interesting about this note it's not actually Roku. It's the fact that, I love that Laura Martin never minces her words. Right? She says, "Peacocks adoption has been anemic for a DTC service that requires reach for its ad driven business model."

Guys, let's remember, Peacock is free. You go to Peacock.com. The whole branding of it, I see billboards on my drives and here in Los Angeles. They are pouring money into this endeavor that basically is already a negative business. Right? If you think about it. So I know there are some Parks and Rec fans. I am one of them. But I have not even signed up for this free service. What does that say about the offerings?

That really, it's so prohibitive. Right? Even without the discovery, the sell should have been that it's zero dollars and zero cents to be able to be on this platform. So unfortunately, I do feel like yes, the Roku story is old. But the Peacock sort of development and only 15 million people who have signed up for a free service. I don't know, just because they've reached this deal on Roku, if that will change the trajectory. Right?

We haven't talked at length about Quibi sort of, you know, predicted demise, I suppose you could say. And the fact that it is looking for potential buyers, just basically a year after really launching in earnest. So, I do feel like Peacock may fall in that category. Right? Because it doesn't seem to be a destination at all, regardless of its ubiquity.

MYLES UDLAND: I mean, I know that I'm very skeptical of any kind of suggestion. That there are too many streaming services and so on and so forth. And I know, you know, Dan and Melody, we've had this conversation a million times almost every day. It seems like we, we argue about this.

But I do think, Melody, when you know, those points that Laura Martin raises in the note about Peacock's inability to really get to the level of an audience that a Comcast would find acceptable, shows how much of a challenge it is to be an incumbent player trying to bolt on this part of your business, where you have seeded a massive advantage to Netflix and Hulu. I have a stake in Hulu, I guess. But you know, and other players in the space.

And then you're just trying to sort of bludgeon your way into the market and make it work. And it's just not as easy a process, I think, as a lot of these legacy players may have believed or may have told themselves three years ago when it became inevitable that they'd have to go into this space.

DAN ROBERTS: And just a quick note on Peacock. I appreciate Melody pointing out how slow the adoption has been. That's absolutely, legitimately true. I do think that now that it's available on Roku devices, I mean, I'm an example. I'm going to go fire it up right after the show and make sure that we have it on our device.

I'm not necessarily super bullish on Peacock overall, but I do think that the numbers are going to dramatically improve now over the next few weeks and months, now that it's on Roku. Maybe it will still be an unimpressive number overall, but some number of millions of people are now going to download it because, well now it's on my Roku on my TV. I'll also say, I've been the biggest bear and most negative on Apple TV+ and some of these new-- and Quibi. Some of these new services that there's just no reason to subscribe. And if that's still the case for Peacock, fine. But I will admit, I know is Dan Howley's take on Apple TV+.

Most of them have time. These companies are big enough, they have time to get there. And all it takes is one must see show that is exclusive to that platform. You know? So eventually Peacock, which right now is just a library of existing shows.

Some of them are exclusive, but they're old shows. Peacock, Apple TV+, they all just need their Handmaid's Tale for Hulu, or they're Transparent or Marvelous Mrs. Maisel for Amazon Prime. And they need that show, that Stranger Things for Netflix. That House of Cards that's going to make people finally pay and say, all right, I got to see this show and it's only on Peacock . Eventually that will happen.

- It's just such a curious moment. Right? Because, if you think about The Office, Parks and Rec, even for HBO Max, Friends. It was seen as such a threat, right? As an existential threat to Netflix. Because Netflix had been the library, had been the home for that content that it was licensing. But now that there are services that are offering that OG content, no one is particularly excited to have those services. You can't run on old content from 20 years ago alone. Right? As much as that can be a nostalgia play. So, it's interesting to see how the conversation has really changed. When, oh, the demise of Netflix potentially losing all these gems. Clearly not the case here.

DAN ROBERTS: Even though we know Miles Udland favorite quote, is that he believes watching a rerun of The Office is better than any new episode of any new show.

MYLES UDLAND: Sure. We don't-- I was-- All I'm going to say is, we'll pick this up another time and we can kind of go through whether Peacock can ever get a hit like the other services you rattled off, Dan. Because, it's just, getting that hit is a completely different animal than saying, oh, we have this lineup on NBC and we'll just see which one sticks. Because it has a built in audience in the hundreds of millions. Not like, two million people or whatever.