Download Roku Business Model Presentation and more Slides Business Strategy in PDF only on Docsity!
Is Roku’s business model ideal in the next era of streaming wars?
May 23, 2019 One of the most rapidly growing trends across today’s consumer landscape is the growth of streaming video, and the Roku business model might be uniquely positioned to continue to take advantage of this trend. The number of people ditching traditional cable and other Pay TV services for streaming services is at all-time highs and compounding. A report on the cord cutting trend released in February of this year noted that the number of Pay TV subscribers dropped 4.1% in the calendar year 2018, its highest rate of decline since 2010. Companies in the streaming industry are luring in customers with an experience characterized by an easy to navigate platform at a significantly lower price than Pay TV providers. But how do all of these companies make money? Three ways typically: SVOD, TVOD, and AVOD. Subscription Video-On-Demand (VOD) is a service in which consumers pay a recurring set amount and watch an unlimited amount of content. Think Netflix. Transactional VOD is a one-time payment service, much like buying a DVD to own. Advertising VOD is a service that is free (or perhaps a reduced fee) to consumers, but includes advertisements. To many industry analysts, AVOD is one of the hottest business models in the streaming space (more on that later). As this industry continues to grow, there are companies that are better positioned than others to capitalize on this shift in consumer culture. Streaming giants like Netflix, Amazon Prime Video, and Hulu (now owned by Disney) are significant players in the space. But one of the most unique companies in streaming media, and perhaps the company with the most upside potential, is Roku, Inc (ROKU). And it all comes down to the Roku business model. For starters, Roku isn’t primarily a “streaming service” like a Netflix or a Hulu. Instead, you can stream Netflix or Hulu from the Roku platform. Roku’s main objective is to provide an easy-to-use platform from which you can stream your favorite videos, TV shows, and media. In fact, if you asked Roku why you should be a customer, their answer would be: “Roku devices are simple to set-up and easy-to- use”. Roku is the platform that connects the “ecosystem” of streaming media. In the past, Roku emphasized hardware. The company sells a variety of products that connect
directly to your TV via HDMI. Their products range in capabilities even including component capabilities for older TVs. Roku also sells a competitor to the Amazon Fire Stick: The Roku Streaming Stick. All but one of Roku’s hardware products and accessories can be purchased for under $ (Roku Ultra). Many televisions now don’t even require the additional hardware and have Roku’s system built in to the television. During the most recent conference call (2019 Q1), management reported that in the first quarter, one in every three smart TV’s sold in the US was a RokuTV, up from one in every four TV’s sold all of last year. This stat makes Roku the #1 Smart TV OS in the United States. Roku player units as a whole were up 21% year-over-year (yoy). Not only has Roku created a platform from which you can access all of your favorite streaming media services, they have their own. On The Roku Channel, you can watch hundreds of free movies and shows. You also have the option to pay for premium subscriptions to streamers like Starz, HBO, or Showtime on top of that. The Roku Channel itself is also a thriving part of Roku’s business as management reported in the 2019 Q1 conference call that The Roku Channel is a “top five channel in terms of reach.” Roku’s not alone in de-emphasizing the low margin hardware business and focusing on attracting as many users as possible to the platform and monetizing the engagement instead. Apple’s made very similar moves with its Apple TV initiative. For the first time, Apple is aiming to open up its platform (very similar to Roku) in that you no longer need an actual Apple TV device. The goal is simple: to get users.
Roku’s unique position
The thing that makes the Roku business model especially unique in the streaming space is their ability to profit from all advances in streaming media. Roku is strategically positioned to make partners out of companies that, at first, look like competitors. When asked if whether or not big name players like Disney entering the streaming space made management nervous about potential partnerships, CEO Anthony Wood reiterated that any player in the streaming space is “absolutely not a competitor.” Wood added, “They are direct-to-consumer services, but they need a platform like Roku to reach consumers in the living room on TVs.” Roku reported 29.1 million subscribers total for 2019 Q1. Streaming media companies are embracing the opportunity to put their services in front of potential new customers. The area of Roku’s business perhaps gaining the most interest from the analyst community is the AVOD piece. After mentioning that monetized ad impressions doubled again in this most recent quarter, management listed monetized ad impressions as not only the biggest driver of the platform segment, but overall as the biggest revenue opportunity for the company. Roku generates revenue through advertisements in unique ways. For ad-supported streaming services that run on Roku, the ads may be sold by Roku or the company that owns the streaming service (e.g. Crackle). When a user watches Crackle through Roku, Roku doesn’t get a cut of the ad revenue if Crackle sold the ads. Management mentioned that this is “very hard to police and enforce.” Rather, Roku gets access to a percentage of the ad inventory on Crackle to sell themselves. When combined with the increasing usage of The Roku Channel, Roku is building a very powerful
develop best in class tools for brands to advertise into streaming video, this business could prove quite lucrative. We’ve already seen how big advertising businesses can get in the cases of Google and Facebook, so Roku management is wise to be giving this area the proper attention and investment. As linear television usage continues its decline, the leader in monetizing AVOD services could stand to become very valuable in the years ahead. Assuming Netflix remains off-limits for ads, if Roku’s capabilities and market position for advertising spend increase dramatically, you might even see Hulu open up some inventory to Roku.
Is Roku a buyout target?
With Roku’s strong strategic position in the space, it would make sense to consider Roku to be a buyout target for a larger company. Over the last year, many have speculated the possibility of a Roku buyout and there have been many different companies named in the M&A speculation. Companies often associated with the talks of a Roku buyout are Walmart (WMT), AT&T (T), and Alphabet (GOOGL). One could make a good case for each of these companies’ interest in Roku. For Walmart, the biggest reason to acquire Roku is their competition with Amazon. Walmart has taken necessary steps to keep up with Amazon particularly in the e-commerce space. However, with the acquisitions made in the last year including Bare Necessities, Cornershop ($225 million), and Flipkart ($16 billion), it’s hard to see the company spending another estimated $10 billion for Roku. From a strategic standpoint, it would make a lot of sense for AT&T to pull the trigger on Roku. HBO and DirecTV would benefit from being front and center on the Roku platform. The blinding issue with AT&T is the debt load north of $190 billion that AT&T has committed to reducing. At this juncture, I don’t believe AT&T is a buyer. Finally, Google Alphabet has been mentioned. Strategically, AT&T makes the most sense. But if one of these companies were to buy Roku, it might be Google. Google is sitting on a significant pile of cash ($113 billion) so Roku is affordable. One reason Google may be interested in buying Roku is to boost the reach of YouTube, particularly YouTube TV. Roku would give good exposure to those services and make up for Google’s lack of significant presence in the video streaming space. If any company were to consider buying Roku, they may want to act quickly as Roku’s price tag continues to grow. As of writing, the stock has nearly tripled year-to-date in 2019. Whether Roku gets bought out or not, the company is certainly in a position to reap massive benefits from the cultural shift into the streaming media age through the success of its platform, streaming service, and hardware.
Roku Built the Dominant Streaming Box. Now It’s Under Siege
Everyone wants a piece of its ad business. – Lucas Shaw & Gerry Smith December 11, 2019, 6:00 AM EST More than 30 million people use a Roku device to navigate the constellation of streaming TV services. The company’s portfolio includes the “stick” ($49.99), which resembles a USB drive; the “puck” ($79.99), a black square with smooth edges and minimal detailing; and a $400 smart TV with Roku Inc.’s operating system. The more expensive options offer better image quality and such features as extra digital storage space. As the era of cable and satellite TV dims, Chief Executive Officer Anthony Wood says Roku is poised to keep capitalizing on the boom in streaming video. It’s an independent player that can work well with all the entrants, he says, including new services from Disney and Apple and forthcoming ones from AT&T and Comcast. “It’s satisfying to see the world be all in on streaming,” says Wood. “That’s nothing but excellent for Roku.” Many investors on Wall Street agree: The company’s stock is up more than 300% this year, and Roku is valued at over $17 billion. Having built the dominant box, Roku is under siege from companies that recognize the value of its business model. Google sells a competing smart TV operating system. Samsung sells more than a dozen smart TVs that don’t use Roku’s operating system. Comcast Corp. is giving its internet subscribers a free streaming box. AT&T Inc. is offering a box for its customers. Apple Inc. is investing billions in streaming shows designed in part to strengthen the appeal of its hardware. But Roku’s biggest challenger is Amazon.com Inc., which is vying for tie-in deals for its Fire TV with smart TV manufacturers and battling for supremacy in international markets. In September it announced a major expansion in Europe, where Roku is less dominant. U.S. Users of Connected TVs Data: EMarketer Escalating competition, along with uncertain future growth, has raised investor concern. In early December, Roku shares fell as much as 17% after a Morgan Stanley analyst suggested the stock was overpriced because of “exuberance over all things streaming” and warned that its revenue and profit growth may “slow meaningfully” in 2020. Other analysts challenged that assessment. For now, Roku enjoys a sizable lead in the U.S., at least in part because it had a head start. Wood founded Roku in 2002; several years later he joined Netflix Inc. to help build its first piece of streaming hardware. In 2007 the product was ready. But at the last minute, Netflix CEO Reed Hastings decided that for his streaming service to succeed, it needed to be on every device, not just Netflix’s. That winter, Hastings spun off the streaming technology to Roku and invested $8 million in Wood’s company.
