And, Why Deals with Peacock and HBO Max Are Looking Less Likely

hbo max and roku

Earnings reports from both Amazon and Roku showed each had enormous quarters in Q2 2020 with their free AVOD services IMDb TV and The Roku Channel, respectively. They were so successful that if we see a deal anytime soon, it will be because both Comcast and WarnerMedia will realize they have lost more negotiating leverage than they had before. Here is why.

The Problem in the Negotiations

As I tweeted exactly one month ago:

I also wrote last month:

There is the argument to be made that, but for their ad-supported services, HBO Max and Peacock would be on both Amazon Fire devices and Roku devices by now. Instead, conflict is emerging in the last mile between streamers and the distributors they need to partner with to reach connected TV audiences. There are three areas of conflict…:

  1. Control of user information and user experience (Amazon Fire and HBO Max)
  2. Share of ad inventory (Roku and Peacock)
  3. Competition between the interface and the app

I believe the impasses of both Roku and Amazon with both Comcast and WarnerMedia fall into this third bucket: two legacy media businesses (WarnerMedia, NBCU) believe they can launch new, free, ad-supported services on platforms which offer competing free, ad-supported services, and secure favorable deal terms when doing so.

Roku and Amazon, seeing their market positions in AVOD exponentially grow in their Q2 earnings, are doing what any reasonable negotiator will do with a competitor seeking to compete on their turf: seek a deal that reflects their growing market position.

Amazon’s Q2 Growth in AVOD

Amazon’s “Other Services” is defined by Amazon in its earnings news release as “Primarily includ[ing] sales of advertising services, as well as sales related to our other service offerings”, grew 41% Year Over Year in Q2 2020 to $4.2B, and up 8% from Q1 revenues of $3.91B. But, that was not the big news.

The big news, as Ben Munson of FierceVideo reported, is that Amazon’s AVOD audience had doubled in the first half of 2020 (news notably not shared in its Q2 earnings report or call):

Amazon said that its monthly ad-supported OTT streaming audience reach has grown from 20 million in January to more than 40 million today.

Chris Bodkin, head of U.S. OTT and audio advertising for Amazon Advertising, said Wednesday during FierceVideo’s OTT Blitz Week that the growth is being driven by IMDb TV and a “growing list” of integrations with third-party publishers through Amazon Publisher Services.

He said that Amazon Advertising has been able to provide more than 3% incremental reach over linear TV with adults 18-49 and that 74% of that reach was exclusive to Amazon Advertising and not duplicated on linear TV.

At somewhere below 40MM (because that number includes integrations with third-party publishers), IMDb TV is around 3x the size of Peacock’s announced 10MM sign-ups since April. It is also 40x the size of Wholesale activations of HBO Max by existing AT&T customers, and 10-13x the size of Retail Activations of HBO Max.

At Amazon’s Q2 earnings were a real statement of presence in the AVOD marketplace, with IMDB TV going from smaller than Pluto TV‘s 26.5M to leaving Pluto at two-thirds its size in only six months.

Roku’s Monster Q2 Earnings

I will let Roku’s Letter to Shareholders speak for how well it did in Q2:

According to Magna Global, Q2 U.S. TV advertising spend is expected to decline 24% and U.S. digital advertising spend is expected to decline 5% year-over-year. In contrast to this decline, our ability to deliver value and incremental reach drove continued growth in Roku’s ad business. For example, monetized video ad impressions grew roughly 50% YoY in Q2, lifted in part by the launch of our own DSP following our acquisition of dataxu in Q4 2019. Moreover, first time Roku ad clients were up 40% year-on-year in the quarter. From 1H 2019 to 1H 2020, our retention rate among advertisers that spent $1 million or more in 1H 2019 was a resilient 92%. Our performance advertising business, a newer category catering to direct response advertisers, grew 346% year-over-year, aided in part by marketers reevaluating their social media spending.

It also added 3.2MM incremental active accounts to reach 43M. So, if we take that number as the size of its monthly ad supported audience, its AVOD market size is around 10% larger than Amazon’s. At this larger scale, Roku arguably has more negotiating leverage against WarnerMedia and Comcast than Amazon. Roku also has a better story for the ” win-win-win relationship” they want to establish with services like HBO Max and Peacock. With its performance advertising business growing at 346% Year-over-Year, it can now effectively say to Comcast and WarnerMedia something along the lines of”

“It is silly to hold out like this now. We have momentum with inventory that advertisers increasingly want in Connected TV. We are going to be unusually successful with how we monetize the inventory you share with us because advertisers increasingly like working with us and we have an audience at a scale you are likely will not reach until two years from now. We can both learn how advertiser demand is evolving with the same inventory. It’s win-win-win for us, you, and your customers”.

This is effectively a longer version of “partners that embrace Roku are winning” line from Scott Rosenberg, Senior Vice President and General Manager, Platform Business at Roku on the Q2 earnings call.

Conclusion

Amazon CEO Jeff Bezos sounded cautiously optimistic about the negotiations with Peacock and HBO Max during last week’s House Committee on the Judiciary, Subcommittee on Antitrust, Commercial, and Administrative Law Hearings. Roku’s Rosenberg said on the earnings call he thinks a deal is “achievable”, but as he said to CNBC’s Alex Sherman, that Roku’s “most important job, after serving the consumer [is] helping these services launch and be successful.”

Both with this conciliatory language and because they now face an objectively enormous scale disadvantage in AVOD, the burden, clearly, is on Comcast and AT&T’s WarnerMedia to figure out what a good deal looks like. And now, because the optics are working against them, it will be very much about saving face with the marketplace, too.

Of course, both Comcast and WarnerMedia could try to make Roku and Amazon out to be the bad cops here, as I wrote back in mid-July:

Roku and Amazon are gatekeepers of the “last mile” to 80MM+ homes in the U.S., and there will be little reason for them to cooperate. To date, they have reached agreements with every SVOD service except for those which are also offering free tiers (Peacock), or are planning ad-supported tiers (HBO Max).

Meaning, until or unless a service’s business model threatens the economics of their existing gatekeeper model, Roku and Amazon are friendly partners. When that service’s business model does threaten them, Roku and Amazon will act ruthlessly to protect their model. As an unnamed media executive told Variety’s Todd Spangler, “It’s the classic ‘Get everybody on the platform’ and then change the game.”

I think these Q2 earnings have shifted the momentum of the negotiations in the favor of Roku and Amazon. If a deal is not reached anytime soon, there will be a simple answer for it on the parts of AT&T’s WarnerMedia and Comcast’s NBCU: hubris.

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