Roku and Disney have more to lose than they think

Roku and Disney have more to lose than they think

It’s another standoff in the streaming wars. Roku (ROKU -1.08%) and Walt Disney (HAZE 0.66%) lining up in a battle for revenue sharing and who knows what else this month. It is a battle that neither side can afford to lose. If the impasse continues, both companies will suffer.

The first public shots were fired late last week when Disney+ launched a discounted ad-supported streaming plan for the original service free of commercial interruptions on Thursday. The new tier is priced at $7.99 a month, launching at the same time as the ad-free version saw the monthly price rise 38% to $10.99.

The problem here is that you can’t stream the new Disney+ format with ads on Roku’s operating system. The streaming video pioneer and media giant failed to strike a distribution deal ahead of launch. It’s a big deal now, but the snowball is going to get even bigger if a solution isn’t negotiated soon.

Three people jump over the back of the sofa.

Image source: Getty Images.

A stream is a desire from your heart

Both sides may think they have influence here. Roku is the country’s leading streaming platform through its distribution of dongles and smart TVs that come with the operating system from the factory installed. Roku has almost a third of the streaming market in the US, almost double the share of its nearest competitor. Roku has more than 65 million active accounts, and those homes stream an average of nearly four hours a day. If you’re not on Roku, you’re not reaching a chunk of your potential streaming audience.

This isn’t the first time Roku has played hardball with a giant service. A year ago, Roku traded blows with YouTube and YouTube TV. The year before, Peacock and HBO Max were unavailable for months on Roku after their respective product launches. Peacock and HBO Max couldn’t hit the ground running without Roku support, and that’s when Roku only served 43 million accounts.

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Naturally, Disney believes it has a strong hand here. The streaming service has exploded in popularity since its debut just three years ago. It is a cornerstone of content for young families, as well as new series that appeal to older audiences. Switching costs aren’t necessarily high with Roku rivals pricing their dongles as low as $20 during the holiday season.

An interesting twist here is that the ad-free Disney plan remains available to Roku users. You don’t have to give up Disney+ on Roku. You just don’t have the ability to save $3 a month by figuring out ad blocks while streaming. Many existing Disney+ users will likely stick with the more expensive option to save time when streaming and spare their kids from marketing messages.

That doesn’t mean Roku and Disney can win if the conflict continues. Disney fans watching on smart TVs or streaming devices during this holiday shopping season may opt for a smaller rival’s platform. The financial outlook remains unclear, and the inability of some Roku families to trade down to the cheaper Disney+ plan may lead them to cancel the service instead.

Both stocks have been hit hard since hitting all-time highs last year. Disney is down 53% from its peak, and Roku is down a bruising 89%. As little as this could make investors in both stocks more than a little worried. The appeal of Roku is its agnosticism, its ability to play nice with more than 5,000 apps available on the platform. Disney’s streaming business just clocked in with an operating loss of nearly $1.5 billion in its latest report.

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There is a lot to lose if the disagreement continues between two leading streaming service stocks. Fortunately for both depressed entities, there’s still time for a Disney fairytale ending.

Rick Munarriz holds positions at Roku and Walt Disney. The Motley Fool has positions in and recommends Roku and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

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