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Roku Investors Are Terrified of Amazon's New Deal With Best Buy

Evan Niu, CFA, The Motley Fool

Just the remote notion of competing with Amazon.com (NASDAQ: AMZN) is sometimes enough to send a stock careening. The e-commerce behemoth's reputation precedes it, as Amazon has a unique willingness to absorb incredible losses and ruthlessly compete when entering new arenas. While smart TVs aren't necessarily new territory for Amazon, which first launched its Fire TV platform back in 2014, the company has just announced a major new partnership with big-box retailer and longtime rival Best Buy (NYSE: BBY).

Roku (NASDAQ: ROKU) investors are rightly terrified, with shares closing down 12% today, giving up yesterday's gains and then some.


Keeping your enemies close

Under the new multiyear partnership, Best Buy will sell over 10 new smart TV models made by Insignia and Toshiba. These devices will be Fire TV Edition models that integrate Amazon's video platform by default out of the box.

Amazon's Fire TV Edition program is essentially the same as the Roku TV program, where TV manufacturers incorporate the respective platforms directly into the TV so users don't have to purchase additional hardware like HDMI dongles or set-top boxes. The first TV that was part of the Fire TV Edition program was released about a year ago. Fire TV Edition products also feature Alexa, Amazon's incredibly popular voice assistant.

Roku OS on a licensed Roku TV

Image source: Roku.

Amazon has cut into Best Buy's business in a plethora of ways over the years, as Best Buy (and retail in general) has lost some relevance in the age of e-commerce. But consumers still value being able to see and experience some products in person, particularly physically large devices like TVs. Best Buy is still an important distributor for such product categories.

The new Fire TV Edition models are slated to go on sale this summer.

This risk factor just came to a head

Roku has made meaningful progress transitioning its business away from player hardware and toward its TV platform. Not only has Roku been pricing its hardware aggressively in order to grow active accounts (nearly 20 million at the end of 2017), but third-party Roku TVs are becoming increasingly important. Over half of all new accounts in the fourth quarter came from licensed Roku TVs, which Best Buy also carries.

For Roku specifically, Best Buy remains an important distributor for its first-party hardware. In its 10-K, Roku notes how important Amazon and Best Buy are, in addition to Walmart, when describing its risk factors:

The majority of our players and Roku TVs are sold through traditional brick and mortar retailers, such as Best Buy, Target and Walmart, including their online sales platforms, and online retailers such as Amazon.com. To a lesser extent, we sell players directly through our website and internationally through distributors. In 2016 and 2017, Amazon.com, Best Buy and Walmart each accounted for more than 10% of our player revenue and are expected to each account for more than 10% of our player revenue in fiscal 2018. These three retailers collectively accounted for 61% of our player revenue for the year ended December 31, 2017 and 2016. These retailers and our international distributors also sell products offered by our competitors.

Roku gives a little bit more detail regarding the breakdown of that 61%, without identifying which distributor is which.

Player Segment Revenue

2016

2017

Customer A

18%

15%

Customer B

11%

12%

Customer C

32%

34%

Total

61%

61%

Data source: 10-K.

It's not a good thing when two of your most important distributors are teaming up.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.