Why Comcast/NBCU may be overplaying their hand with Peacock on Roku

hbo max and roku

I am not sold NBCU, nor Comcast, should still be in a standoff with Roku – in digital it is always better to be in front of consumers and quickly iterating. As I wrote in in July on NBCU’s Peacock launch day,  Peacock Chairman Matt Strauss’s freemium rollout strategy has been “free drives scale and learnings, and originals will drive engagement (“consumption”) and deeper audience learnings.”

I also wrote, then:

…Peacock is not yet clear on who their target customers are, or the types of offerings which will convert and retain those customers to paying subscribers. An emphasis on “free” helps them to reach the type of scale where they can learn a lot about who their target customers are.

Today, we learned:

Roku, a major streaming gatekeeper, has reached an impasse with NBCUniversal over its nascent Peacock service and a swath of NBCU apps is about to go dark as a result.

As soon as overnight Friday into Saturday, 11 national “TV Everywhere” apps, which are available to pay-TV subscribers, will disappear due to the dispute. Dozens of other local apps from NBC and Telemundo stations, which are available only to Roku viewers in those local markets, are also hanging in the balance.

Negotiations between the companies over the past few weeks have gone south, multiple sources confirm. With ad-supported services, Roku typically takes 30% of ad inventory, but ads are the bedrock of Peacock, which is designed to tap into the existing ad expertise of NBCU. Peacock has limited ad breaks to five minutes per hour. The streaming effort is the strategic centerpiece at NBCU and has driven a large-scale reorganization of the company in recent months.

This means, NBCU’s freemium strategy for Peacock and its TVE apps has hit a wall with Roku, despite ongoing negotiations. We will not know why anytime, so here are few key competitive dynamics we can focus on based on available evidence:

  1. Roku as Competitor to Comcast: Ad Sales
  2. Roku as Competitor to Comcast: Platform
  3. Roku as Competitor to Comcast: Strategy (Fat Tail vs. Long Tail)

(1) Ad Sales

Back in July I wrote about how “Competing Advertising Models Create Conflict in the “Last Mile” of Connected TV” (click to purchase, Members can download for free).

I concluded:

To reach 80MM+ households across both Roku and Amazon, both HBO Max and Peacock must compete within those UIs/UXs against lesser, free versions of their content library. Without an established ad tech platform, like Hulu’s, or Roku’s, or Amazon’s, HBO Max and Peacock will also risk offering rates lower than Roku or Amazon can sell with the same content and within the same UI/UX, for free.

What reasonable, self-interested WarnerMedia or NBCU executive is going to bet the rest of their career on this outcome?

Peacock’s big pitch has been ad sales: NBCU ad chief Linda Yaccarino has been everywhere selling NBCU’s new ad innovations since Peacock was debuted in January. I wrote about it then (click to purchase, Members can download for free)) .

Peacock is certainly innovating within Comcast’s ecosystem:

NBCUniversal’s new Peacock streaming service has begun serving voice-activated, interactive ads to some Comcast subscribers, with Unilever, Target and Coors among the first users.

The “On Command” ads connect viewers with brand promotions through the TV screen, using the voice-activation functionality built into the remote for Comcast’s Xfinity X1 and Flex platforms.

An onscreen message prompts the viewer to speak a specific voice command to unlock a special offer from the advertiser. Speaking the command activates an on-screen overlay where the user enters a mobile number to receive the offer via text message.

The format is available in all Peacock video content, according to NBCUniversal’s Together site for marketers.

An innovation like that is probably higher CPM and ARPU, but it only works within the Comcast Xfinity ecosystem (where Peacock is now in 15MM homes). Outside of the Comcast ecosystem, NBCU has been telling us they expect $6 to $7 ARPU. On Roku, 30% rev share that means Roku is taking $1.80 to $2.10, per user per month.

[UPDATED: It’s not just ARPU, as Jeff Baumgartner of LightReading points out: “The advertising demands are a “major sticking point” for Peacock, which, at just five minutes of advertising time per hour, doesn’t have gobs of ad time to share, the person said.”]

But outside its own Comcast ecosystem, there is an interesting question about ad fill: Peacock is still a new product, so the inventory it is running outside of Xfinity is likely standard, repurposed TV ads targeted using NBCU’s new One Platform ad targeted back-end. Those are higher CPM (let’s assume $25), so one way to frame the standoff is either:

  1. NBCU giving up the equivalent $7.50 per User per month Roku – the equivalent of its expected ARPU – and does not want to (understandably); or,
  2. Ad fill outside the Comcast Xfinity ecosystem may be low for new AVOD products like Peacock, making the eCPM lower for NBCU on platforms like Roku and Amazon Fire.

Low ad fill on a third-party platform is not unusual. But, as I wrote back in July:

…as less robust versions of Hulu, ad-supported versions of HBO Max and Peacock are closer as value propositions to IMDb TV and Roku Channel. Which means, their competition is free, and so ad-supported versions of HBO Max and Peacock arguably face more competition than Hulu does within either the Amazon Fire ecosystem or the Roku OS ecosystem.

Low ad fill on a third-party platform with whom Comcast/NBCU ad sales team is competing is a bad story for the same advertiser pool.

(2) Platform

I also wrote back in July:

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, two of which are mentioned above:

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 think the third issue is the most fascinating and relates to what I wrote to Brandon Katz, above: by controlling both real estate in the living room AND on the television screen, Roku and Amazon deliver the best answers to the consumer question, “what should I watch next?”

Compare this to what Comcast CEO Brian Roberts had to say at the Goldman Sachs 29th Annual Communacopia Conference:

That today with 35 million devices that aggregate content for customers and it’s a – we now have a global IP video platform that we’re building that, we’re going to try to standardize the hardware across the world and as well have a common tech stack that utilizes the best of the aggregation platforms at Comcast at Sky, and also at NBCUniversal.

We’ve added and simplified our global voice remote based on the Xfinity technology, the X1 technology. And we’re now handling 14 billion voice commands and 3.4 million hours of audio seamlessly across five major geographies in four languages by the end of this year. And we’ve extended all of our video-based R&D now to our broadband-only customers with the launch of Flex, which is unique in that it’s only given to broadband customers.

So, I think about maybe what might be next and we’re early days, but we’re looking at smart TVs on a global basis. And we’re wondering, can we bring our same tech stack or certain capabilities in aggregation to consumers who are relying more and more on smart TVs. We’ve done that with X1 when we syndicated it to Canada and to other operators in the United States. And we see a similar road map possibly for that.

In this light, Roku and Amazon currently deliver the best answers to the consumer question, “what should I watch next?”, and Comcast foresees its X1 software delivering its own Peacock and Sky-focused answers to that question on Smart TVs worldwide. Comcast is an emerging platform competitor to Roku – its scale for X1 puts it at around 80% of Roku’s 43MM users -so both Roku and Comcast may see the negotiations in those broader terms.

(3) Strategy (Fat Tail vs. Long Tail)

This dynamic reflects how NBCU and Peacock is an aggregator of fat-tail, legacy media type brands and content (The Office, Universal Studios movie library, Yellowstone, SNL, The Olympics), but Roku is an aggregator of  thousands of OTT channels. Those are two entirely different business models on the Roku platform.

For Comcast/NBCU, there are only two revenue streams on the Roku platform:

  1. Subscription (NBCU would have to share 20% of any subscription fee it charged)
  2. Ad Revenue (Roku asks for 30% of that ad inventory)

Its bet is that there is enough demand from Roku audiences to drive adoption that would put it in the most viewed apps (Roberts says on the Flex device, Peacock is the number two watched app behind Netflix, and on an X1 box it’s the number three device behind Netflix and YouTube). The challenge is, unlike on Comcast X1 devices, Peacock is competing with thousands of apps and therefore thousands of options for streaming alternative content. NBCU/Peacock needs to stand out on Roku, because otherwise it will not.

It needs Roku’s assistance for that (Roku has been playing up how it helped Disney drive views for Hamilton (“Roku was the No. 1 connected device based on hours streamed for Disney+ in the week following the release of Hamilton, according to Comscore, OTT Intelligence, July 2020”). If Comcast/NBCU is misunderstanding or overestimating the power of its own brand on Roku, it would opt for a standoff over a deal with Roku.

Conclusion

As I wrote above, I am not sold NBCU, nor Comcast, should still be in a standoff with Roku. I think these three dynamics offer a helpful lens into why it is continuing:

  1. Roku as Competitor to Comcast: Ad Sales
  2. Roku as Competitor to Comcast: Platform
  3. Roku as Competitor to Comcast: Strategy (Fat Tail vs. Long Tail)

Peacock Chairman has bet on freemium because “free drives scale and learnings, and originals will drive engagement (“consumption”) and deeper audience learnings.” Without Roku, that does not happen. And without Roku as an invested partner, Peacock does not scale on Roku.

Based on all available evidence, Comcast/NBCU needs Roku more than Roku needs Comcast/NBCU, even as its competitive X1 platform continues to scale.

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