With global streaming subscriptions surpassing 1 billion, Roku makes money by growing its ad business, but how else does it make a profit?
Oct. 18, 2024
Roku (NASDAQ: ROKU) just reported exceptional first-quarter earnings earlier this month. As competition in the streaming space heats up, Roku stands to benefit as a neutral middleman for consumers to use as a neat package for their many subscriptions.
According to recent findings, 22 million of U.S. households cut their cable subscriptions in 2023. These figures suggest that the streaming business is in an ideal spot to capture the attention, and dollars, of many more users. With the service growing in popularity, yet there being so many big players in the streaming space, it left some people wondering how exactly Roku actually makes money?
What is Roku?
Meaning "six" in Japanese, Roku was the sixth company founded by Anthony Wood back in 2008, which allows users to watch both free and paid video content on television via the internet. Roku allows you to download and watch Netflix (NASDAQ: NFLX), Google-owned (NASDAQ: GOOGL) Youtube, Amazon Prime Video (NASDAQ: AMZN), and hundreds of other services, all on one centralized platform. The company also has a number of specialized channels that stream everything else from the spiritual to strange.
Roku's business model
In a time where digital streaming has taken over from traditional cable packages, Roku has strategically positioned itself to make partners out of companies that, at first glance, could seem like competitors. Roku focuses on attracting as many users as possible to use its platform and makes a profit on the engagement. It also has its own "Roku" channel that is thriving as part of its offerings.
The company also gets paid when it directs subscriptions to video services. Subscription services are becoming more and more popular, offering users unlimited access to a wide range of programs for a monthly flat rate. For example, if a viewer subscribes to a paid service like Netflix via Roku, then Roku, in turn, gets part of that revenue. In 2019, Roku launched a system that allows users to subscribe to paid channels like Showtime and Starz and then pay for all the services through one bill.
How does Roku make money?
Roku makes most of its money through its unique advertising, an area that it is expanding. It makes almost 7 times more in advertising than the hardware space. In the company's latest earnings release, Roku reported $755 million in platform revenue, which includes advertising, versus the $127 million generated by hardware sales.
While the company builds some of its own ad tech, including backend technology and its data-management platform, Roku mainly relies on vendors for ad serving and automated ad buying - where it generates the bulk of its gross profit. A number of key ways Roku makes money through its advertising and media business are selling publishers inventory, third-party subscriptions, audience data access for publishers, display ads, selling ads for its own channel, email marketing, remote buttons, and deals with TV manufacturers.
What's next for Roku?
Roku is pioneering the future of smart TV advertising with the introduction of "shoppable" ads, transforming the passive viewing experience into an interactive shopping opportunity. According to Mike Shaw, Roku's Director of International Ad Sales, this innovation will enable viewers to purchase items directly from ads on their TV screens. For instance, users might order a pizza while watching a movie or buy clothes featured in a show's pre-roll ad. This seamless integration of commerce into entertainment promises to streamline the buying process, allowing consumers to make purchases with just a click of their TV remote, utilizing the payment details already stored in their streaming service accounts.
Shoppable ads represent a golden opportunity for both large and small retailers to reach audiences in a more engaging way. The concept, which draws parallels with targeted ads seen on social media, aims to reduce the sales funnel to a single click. Other companies like LG and broadcasters such as ITV and Channel 4 are also exploring this trend, with innovations like QR code-enabled ads and voice-activated shopping on the horizon. As Shaw and industry experts like LG's Tony Marlow suggest, this is just the beginning, with future developments poised to make TV commerce even more integrated and intuitive, heralding a new era in how we interact with television content.
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