Photoillustration By TMR Finishing
July 30, 2021

Heaven’s Gate

The keys to the streaming kingdom now reside in Silicon Valley. There, a handful of gatekeepers determine what media companies pay to get their apps on major platforms, and ultimately, what we end up paying to watch the shows we love.

Daniel Frankel

For the past several years, the industry has been focused on the "streaming wars," the quest by legacy media companies to catch up with Netflix.

But another high-stakes competition is being waged among the technology companies that sell the gadgets and software these services run on.

A handful of Silicon Valley giants now control which apps TV lovers can access, both in the living room and on their mobile devices.

Their market power was on full display in 2020, as Comcast and its NBCUniversal subsidiary sought to launch the new streaming service Peacock, and AT&T and its WarnerMedia unit tried to roll out HBO Max, both without the support of the two most popular connected-TV device ecosystems in the American living room: Roku and Amazon Fire TV.

These distribution impasses have been mostly cleared at this point — though you still can't watch Peacock on Fire TV. But the protracted, well-publicized negotiations revealed the growing power of the so-called gatekeepers, which include not just Roku and Amazon in the living room, but Apple and Google on mobile devices.

According to Rich Greenfield, partner and principal analyst for venture capital company LightShed Partners, the "historic battles" between pay-TV distributors and programming networks have morphed into heated competition between platform operators and streaming app suppliers.

"This newly emerging battle is the single most important issue we are focused on in media today," Greenfield says, noting that programmers should be "increasingly concerned with the long-term economic cost of these scaled gatekeepers." The decisions of these giants not only affect what media companies pay to get their apps on the major platforms, but ultimately, what we consumers end up paying to watch the shows we love.

When Wall Street thinks of the streaming business, it most often thinks of Netflix. But Roku has had a quiet yet explosive rise since its IPO in October 2017, when it opened below $20 a share. Today it is a Silicon Valley giant — at press time, it had a market capitalization of $42 billion and its stock was trading at more than $200 a share.

Netflix itself incubated and launched Roku in 2008. It was meant to be a "neutral" device platform that let consumers play video from the open internet on TV screens instead of computer screens. Roku didn't make content or sell ads; it made over-the-top (OTT) gadgets.

Roku's operating system, or OS, has proliferated quickly in recent years on the streaming players and streaming sticks the company sells, but more notably on devices like smart TVs; many manufacturers license the Roku OS.

Roku saw a 24 percent revenue bump to more than $510 million in 2020 in "player revenue" — that's what it calls the money it gets from selling devices and licensing software. And the company recently reported that worldwide, its OS has more than 50 million active user accounts.

That presence is particularly strong in the U.S., where 43 percent of video streamers use the Roku OS in their living rooms, versus 35 percent for Amazon Fire TV, according to research conducted by Deutsche Bank last year.

Much of Roku's dominance has come through licensing its OS to Chinese smart-TV maker TCL, which only entered the North American market in 2017 and is now the second leading shipper of big-screen sets.

Marketing its LED 4K TVs as "powered by Roku" — and significantly undercutting leading Korean brands such as Samsung and LG on price — TCL has sold millions of TVs in the U.S. to buyers who have made Roku their streaming OS of choice, almost by default.

Besides TCL, Roku's OS also powers smart TVs from Hisense, InFocus, JVC, Polaroid, Philips, Sanyo, Westinghouse and the Walmart brand Atvio. Roku says that one in three smart TVs shipped in the U.S. and Canada features its OS.

With Roku controlling nearly half of U.S. living rooms, backers of streaming services large and small definitely want their apps on its platform. But that's gotten complicated, because Roku isn't the "Switzerland" of the streaming world anymore.

That platform neutrality went away a few years ago, with the rise of the Roku Channel, a sprawling, ad-supported smorgasbord of recent and semi-recent theatrical titles such as Armageddon and Concussion, to name a random few.

It also features cable reality fare like Dog the Bounty Hunter, Hoarders and Army Wives; somewhat newer scripted series like Leverage and White Collar; and older repeats ranging from The Nanny to Barney Miller to Bewitched.

There's a live-linear program guide, which is a traditional cable-TV-like grid that features channels ranging from TMZ to ABC News Live to Newsy. There's kids' content such as Peppa Pig . And there's Roku Channels, through which Roku resells subscription streaming services like Epix, AMC+ and Acorn TV.

Roku now makes far more money by selling ads and sharing subscription dollars via Roku Channels — which it calls "platform" revenue — than it does by selling and licensing device and software technology. In 2020, platform sales grew by a whopping 71 percent and accounted for more than $1.2 billion in revenue.

Roku is so keen on the success of the Roku Channel that it recently paid an undisclosed sum, believed to be in the tens of millions of dollars, for the programming library of Jeffrey Katzenberg and Meg Whitman's failed streaming startup, Quibi. Having a dog in the content hunt has complicated Roku's app partnerships.

Before WarnerMedia launched HBO Max, for example, Roku also resold the legacy streaming app HBO Now through Roku Channels. In fact, those who watched HBO Now via Roku Channels did so through the Roku Channel app, not the HBO Now app. Roku harvested all the viewing data and collected the monthly bill, basically handling the entire customer interaction.

That relationship hit a rocky stretch when WarnerMedia wanted to launch HBO Max as its own dedicated app on Roku outside Roku Channels, truly going "direct to consumer." The negotiations dragged on for months — from when HBO Max launched on May 27 of last year to December 17, when Roku and WarnerMedia finally came to terms.

HBO Max wasn't just blocked from Roku. In fact, Roku got the whole "channels" idea from what has become the most powerful name in American capitalism. Amazon also resold and disaggregated millions of HBO Now subscriptions through its Amazon Prime Video Channels platform.

By some estimates, Amazon controlled nearly half of all HBO Now customer relationships — a large sum, considering Amazon charges its Channels partners 30 percent to 50 percent. Amazon and Roku also get to keep the user data generated through their respective channels' operations.

Ultimately, after sweetening the deal by agreeing to a pricey extension of its Amazon Web Services cloud-computing contract, WarnerMedia was also able to come to terms with Amazon, thus establishing HBO Max on the diverse range of Fire TV–enabled devices.

Those gadgets range from Amazon's Alexa voice-powered smart speakers and automated home devices to inexpensive HDMI streaming sticks to licensed smart TVs. For HBO Max, not being on the top devices took a toll. Plenty of HBO subscribers would have happily upgraded to the new HBO Max service, which delivers more than the legacy HBO channel for the same $14.99 price, but they couldn't get it on their TVs.

Before the HBO Max app became available on Roku and Fire TV at the end of 2020, WarnerMedia was able to convert only around 8.6 million of the 38 million U.S. HBO subscribers to the bigger, far broader HBO Max service. But once it did get that support, subscribers quickly shot up to 17 million.

(Millions of subscribers are still getting traditional TV and experiencing HBO as a linear channel via pay-TV set-top boxes. Unless they decide to go over-the-top and consume HBO Max as an app on an IP device, they'll continue receiving the legacy HBO service.)

For their part, Comcast and its NBCUniversal unit weren't trying to upgrade an existing app in Roku and Amazon's respective channels stores when they sought to launch Peacock nationally last July. But unlike the major SVOD services, a big portion of Peacock's business is advertising-based.

Again, NBCU ran into negotiating complexity, trying to figure out a way to split advertising revenue with two competing companies that themselves have deep roots in ad-supported streaming. While Roku has been aggressively expanding the Roku Channel, Amazon has a fast-growing ad-supported streaming service of its own in IMDb TV.

Peacock was finally able to establish app support on Roku in September, three months after its national launch. However, at press time NBCU still didn't have a deal to include its OTT service on Fire TV. It was recently revealed that Peacock has some 11.3 million active user households in the U.S. — a figure that will have to increase significantly before the service can play in the same sandbox as Netflix.

Roku and Amazon's dominance in the living room pales in comparison to the power Apple and Google wield with their respective app stores in the mobile sector, where the two companies hold sway over a much broader range of industries. Both Google and Apple demand a 30 percent revenue cut from companies that operate subscription apps on their respective Android and iOS mobile platforms.

By one estimate, Apple makes as much as $15 billion annually from these fees. Large streaming companies, including Netflix and Spotify, have been able to avoid this so-called "app tax." Few gadget makers would market a device, phone or OTT player that doesn't support Netflix.

Smaller companies, on the other hand, have had to comply for the most part, but a few are pushing back. In August, online videogame company Epic Games took on both tech giants, initiating a legal conflict by directing players of its hugely popular Fortnite title to purchase in-game trinkets directly from Epic, bypassing Apple's App Store and the Google Play Store.

Both Apple and Google removed Fortnite from their app stores, citing Epic's alleged violation of their terms of service. Epic then sued both titans. Billions of dollars across myriad industries — including streaming — are at stake.

For their part, both Google and Apple have long coveted living-room streaming dominance, and both companies have traction there, too.

"On the device front, the high price of the Apple TV has kept them in perpetual fourth place, way behind their competitors," notes Alan Wolk, principal analyst for research company TV[R]EV. Apple TV only has around 2 percent market share in the U.S. OTT gadget market, according to Strategy Analytics data released last year.

But the Apple TV app (which houses the Apple TV+ subscription streaming service and the reseller operation Apple TV Channels) is an emerging force, largely because the installed base of 100 million U.S. iPhone users has native access to it. In the living room, Apple made the wise decision last year to expand the app beyond its own hardware ecosystem, making it available for Roku, Amazon Fire TV, Samsung TV Plus, Xbox, PlayStation and several other platforms.

Google, meanwhile, established its Android TV operating system several years ago as a low-cost alternative for pay-TV operators around the world; the technology gives subscribers easy access to popular OTT services, plus nifty features like voice control. Android TV also comes with native access to the Google Play Store, which has pretty much any streaming app you can think of. And Google Assistant voice is built in.

Google is now on a quest to compete with Roku and Fire TV in the consumer OTT market. After licensing Android TV to third-party makers of OTT players, including TiVo and Dish Network, as well as smart-TV makers such as TCL, Google is enhancing Android TV with search and recommendation features, rebranding it as Google TV.

It's even selling its own Google TV gadget. According to LightShed's Greenfield, Google is a threat to Roku and Amazon in that it's much easier for app suppliers to work with, at least on the Android TV–Google TV level. While Roku and Amazon have played hardball with app makers recently, Google seems content to make Google TV a loss leader for the sake of expanding the platform's reach.

Google's entry into the living room has been marked by more than a decade of fits and starts, but Greenfield believes that "Google's lack of success in the TV ecosystem is set to change radically" in the near future.

At press time, a skirmish broke out between Roku and Google, with the former removing the app for the latter's virtual pay-TV service, YouTube TV, from its platform. Roku does not want to support a new codec, called AV1, which YouTube maintains will support smoother, more efficient 4K video. Roku objects because it will require the integration of newer, more expensive chips into its devices.

Google responded by updating its flagship YouTube app, which is still on Roku, with a workaround that gives YouTube TV subscribers access to live-streaming service.

Roku further escalated the battle by calling Google an "unchecked monopolist." Catching Roku and Amazon is going to be a challenge similar to the one Disney, WarnerMedia and NBCUniversal currently face in trying to compete with the numbers of Netflix, which has a sizable advantage with 203 million global subscribers.

But companies including Comcast are going to try. Comcast has its own streaming device, Xfinity Flex, which it distributes free to its broadband-only customers. It's based on X1, the video platform the cable company has been developing and offering to TV customers for years. In fact, Flex is also controlled by the same X1 voice remote.

Comcast was particularly intrigued by the advanced advertising experiments it conducted last year with Peacock running on Flex, and it now badly wants to control its own device ecosystem, too. Comcast is talking to companies including Walmart about porting the Flex platform into devices like smart TVs and expanding its current footprint.

But again, time is of the essence. Speaking at a Paley Center event late last year, cable entrepreneur John Malone said Roku and Amazon could soon reach a subscriber count at which competition might be virtually impossible.

"Could 100 million [subscribers] be the magic number?" he posited. "It's unclear, but leverage is clearly growing as their monthly users scale."

This article originally appeared in emmy magazine, Issue No. 6, 2021

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