Roku (NASDAQ: ROKU) saw its platform revenue surpass its player revenue at the start of the year, and it’s no surprise the platform continued to outperform its devices in the second quarter. Platform revenue increased 96% year over year in the second quarter compared to 24% growth in player revenue.
A significant contributor to platform growth has been The Roku Channel, the company’s free, long-form streaming video channel. The company launched The Roku Channel last year, and it’s already a top five channel in terms of reach on the Roku platform.
Continue Reading Below
Along with its earnings report, Roku announced it’s opening up access to The Roku Channel to all devices through the web. While the move might have just a small impact on its financials in the near term, it represents a major shift in the company’s long-term strategy — one that should excite investors.
Not just another streaming service
There are a bevy of Netflix (NASDAQ: NFLX) knockoffs popping up every month. Most small streaming start-ups are just putting content out there and hoping for the best. It’s not just Netflix’s $8 billion content budget that makes it hard to compete with, it’s the data its 130 million subscribing households are producing. That data feeds everything about the user interface, the content recommendation algorithm, and even what content Netflix licenses and produces. Most smaller services can’t compete.
But Roku already has 22 million active users. And it’s gathering tons of data on them, while they spend an average of nearly three hours per day streaming video on its devices. While management can’t see exactly what content users are streaming on big apps like Netflix, it can see how much time they spend in each app, the apps users have installed, how often they engage with each, and all sorts of other user data. If a user has a Roku TV, Roku can collect data about what live television content users watch. That’s data even Netflix doesn’t have.
All of that means Roku can make content licensing and partnering decisions with much greater efficiency than most streaming start-ups. It also means Roku is better able to get the right content in front of the right people at the right time, which is particularly appealing to the smaller streaming content providers that are struggling to compete with Netflix. In fact, Roku ultimately wants to position The Roku Channel as an alternative to Netflix for big content producers, offering a share of ad revenue instead of an upfront license agreement.
Advertisement
Getting over itself
As The Roku Channel becomes a more compelling offering with better content and recommendations, it doesn’t make sense to limit the product to Roku devices. The company already made a move earlier this year to put The Roku Channel on Samsung smart TVs. Expanding to all internet-enabled devices with a web browser was a logical step.
Roku has seen margin pressure on its player business for several years now as bigger tech companies move into the space in an effort to collect data to fuel their core businesses. It’s hard to make a profit on hardware when your competitors are selling devices below cost. Roku’s efforts are to simply break even on its device sales and make a profit on the high-margin platform business.
The Roku Channel allows the company to take some of its highest-margin revenue and reach beyond its core user base on its devices. It can still use the data from its core device users to support The Roku Channel, but it can reach a bigger audience and maximize revenue by offering the service to as many people as possible.
The launch of The Roku Channel on the web is a major step for the company to move beyond its player business and further grow the high-margin advertising business that drives its profits. The player business is quickly becoming a holdover from a company that’s now 10 years old.
10 stocks we like better than Roku, IncWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Roku, Inc wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 6, 2018
Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.
