Peacock raising prices and Netflix phasing out a low-priced membership tier bode well for Roku in the second half of this year.
There are signs that things could get better for Roku (ROKU 1.10%). You just need to connect the dots. There are two events on Thursday that bode well for the streaming video pioneer’s future. First, Comcast (CMCSA -0.51%) increased prices for its Peacock Premium streaming service by $2 a month. Then, the market was able to take in Netflix‘s (NFLX -0.97%) second-quarter report.
A platform flexing its pricing elasticity doesn’t immediately seem like a bullish feather in Roku’s cap. Netflix posting mixed financial results also would seem to have no impact on Roku. Press the pause button. Zoom in. Roku stands to gain ground following both events.
Teaching Peacock to fly
Comcast’s Peacock got a little more expensive on Thursday. The ad-supported Peacock Premium plan is now $7.99 a month — just a $2 increase, but a 25% jump. The monthly rate for the largely ad-free Peacock Premium Plus offering is also going up by $2 to $13.99.
This is the second summer in a row that Peacock is fanning the pricing elasticity of its feathers. Monthly subscriptions for Peacock Premium and Peacock Premium Plus rose $1 and $2, respectively, last July. Put another way, Peacock Premium costs 60% more than it did 13 months ago when it set viewers back just $4.99 a month.
Peacock is smart, strategically jacking up its prices ahead of the Summer Olympics that start next week with exclusive coverage on Comcast’s NBC. With essentially every premium streaming service outside of Netflix struggling with profitability, raising prices is one way to get there.
This is bad news for viewers of the service. It’s good news for Roku and its investors. Roku’s operating system generates the lion’s share of its revenue and all of its gross profit, but it’s free to use. Roku makes money through ad-sharing revenue and affiliate bounties on new member signups for the 81.6 million homes spending an average of more than four hours daily on the platform.
Peacock’s ad-supported plan has to justify asking for a lot more money now than it did at the start of last summer. Comcast now has more money to spend on marketing its platform through Roku and other outlets, and it will have to spend it if it wants to stand out and succeed with its pricier offering.
Image source: Getty Images.
Nothing but Netflix
Thursday afternoon’s financial update by Netflix was solid despite the market’s initial ho-hum reaction to the fresh performance numbers. Netflix is the leading premium streaming service, but it hasn’t been a material direct financial contributor to Roku’s business.
As the top dog, Netflix doesn’t really need to advertise through the streaming hubs to get noticed. Netflix is a big reason folks cut the cord from cable and satellite TV services and establish a relationship with Roku or other digital streaming operating systems, but it’s not a material source of platform revenue for Roku.
Netflix still announced something on Thursday that should be interesting to Roku investors. Netflix has a Basic tier that costs $11.99 a month that it stopped offering to new members last summer. It lacks many of the bells and whistles of the Standard service, which sets subscribers back $15.99 a month. The Basic tier allows only one streaming device to run at a time per account, and it lacks full high-definition. The Basic plan has been entirely eliminated in the U.K. and Canada, and on Thursday, Netflix revealed that it’s also being phased out in the U.S. and France.
How does this impact Roku? Well, Netflix wants its stateside Basic viewers to make a choice. They can trade up to the Standard tier and pay $4 more a month, or they can trade down to the ad-supported tier that costs just $6.99 a month. It will be an easy choice for price-conscious consumers, and Netflix did say that ad-tier memberships have surged 34% just between the first and second quarters of this year.
A lot of folks will switch to the cheaper ad tier, once again normalizing the ad-supported tiers that Roku wants to see succeed. It even has its free ad-supported Roku Channel, which has become one of its most popular destinations for its widening user base.
The Netflix move may also force folks who are reluctant to pay $15.99 a month to Netflix or are ad-adverse to consider switching to cheaper premium ad-free platforms that are active financial contributors on Roku. Both roads lead to opportunities for Roku, a pioneer among streaming service stocks that is out of favor right now. The plot thickens and so might interest in Roku itself.
Rick Munarriz has positions in Comcast, Netflix, and Roku. The Motley Fool has positions in and recommends Netflix and Roku. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.