Millions of households are unable to stream the new Disney+ with ads. Here’s why.

If you registered or switched to Walt Disney‘s (HAZE 0.04%) new ad-level Disney+, you may face major disadvantages when it comes to streaming on your favorite device.

Disney could not enter into a new distribution agreement with Roku (ROKU 1.92%) in time for the launch of the new ad-supported Disney+ tier. Roku’s 65 million active users must subscribe to the premium tier, which now costs $10.99 per month.

It is not the first time Roku has stood up to the big media companies and demanded more favorable terms before they distribute their streaming services. And it’s a sign of strength that Roku can negotiate with one of the biggest streaming companies in the US

Who has the upper hand?

Roku is in an excellent position to challenge Disney for distribution on its connected TV devices.

Disney just released an earnings report that showed a huge amount of loss for its direct-to-consumer business. Over the past year, the streaming services have had operating losses of over 4 billion dollars. Investors expect things to turn around quickly, and management says Disney+ will be profitable on a quarterly basis by the end of fiscal 2024.

Meanwhile, Disney can’t afford to leave Roku users out in the cold when it comes to giving them all subscription options. Roku has the most popular connected TV platform in the US, and the leading smart TV operating system by sales.

Roku users can currently subscribe to just about every other streaming service and every other option they offer. It includes Netflixits new ad-supported tier, which debuted last month. With a lot of competition, Disney could miss out on subscribers willing to accept ads to the competition that has played ball with Roku.

That said, Roku came under pressure from investors this year as well. While management remained upbeat after a tough start to the year, it ultimately failed to meet revenue growth expectations. Its fourth-quarter guidance calls for a year-over-year decline in revenue, which management blames on a weakened advertising market. Any ad-sharing agreement with Disney, regardless of the terms, could be a boost to the business.

Still, Roku seems to have the upper hand in the negotiations. Streaming subscribers tend to have lower switching costs than connected TV platform users. If a user can’t get a streaming service they want on the device they like to use, they’re much more likely to explore different streaming options than buy a whole new device for streaming.

A big opportunity for Roku

Developing a new distribution deal with Disney is a big long-term opportunity for Roku.

The ad-supported Disney+ streaming option can be huge. Almost one in four Disney+ subscribers can downgrade to the ad-supported tier, according to an analysis by Kantar. There are millions of high-value streaming subscribers – not to mention the new subscribers the low-end might attract in the future.

Also, Roku may be negotiating for more ad sales on the home screen. Disney is already a major advertiser, taking advantage of home screen takeovers and promoting its original series and movies with Roku’s display advertising products. Roku is a much bigger distribution platform than it was in 2019, when it negotiated its original deal with Disney, so its ad inventory is much more valuable for converting new subscribers.

Roku is chasing the long-term opportunity by holding firm in negotiations with Disney, and it has the strength to make reasonable demands on the media company. Investors should take that as a positive sign, despite the recent decline in financial results for Roku.