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, 6.6 million, almost one-quarter, of U.S. households cut their cable subscriptions in 2020. 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. The company recently revealed that its advertising and media profits surpassed the money it makes from selling the connected-TV hardware. In the company’s latest earnings release, Roku reported $232 million in platform revenue, which includes advertising, versus the $88.2 million generated by hardware sales.
Roku also claimed on the call that it now has over 53.6 million active accounts at the end of Q1 and total net revenue of $574.2 million, up 79% year-over-year.
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 has recently begun to ‘create’ its own original content via acquisitions of Quibi IP and exclusive streaming deals with movie studios.
Roku is at the forefront of the streaming player market, but there is a high chance it will suffer from pricing pressure as more big companies enter the business. In addition, Netflix doesn’t run ads and YouTube makes little contribution.
To combat these concerns, Roku is also expanding internationally and while it may be in the early stages, the plans are going well so far. In 2020, Roku TV was the best-selling smart TV in Canada and it has also signed deals in Brazil, Mexico, and the U.K.
Roku explained; “TV streaming is a global phenomenon, and in 2020 Roku continued to successfully expand beyond our domestic market using the same business model, capabilities, and products that have worked so well for us in the U.S.”
The business will continue to focus on its advertising, media services and is working on building its international presence. Back in January, Roku agreed to buy the rights to content from Quibi, giving the streaming-media devices a collection of original shows. This deal proves Roku’s ambition to not just support other streaming services, but to also provide original content which should attract even more users to its services.
Streaming is one of the fastest growing industries in the world, and will be worth trillions some day. That’s why you should check out these other streaming investments that could benefit, by starting a free 7-day trial with MyWallSt today.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Roku. Read our full disclosure policy here.
Financial Writer at MyWallSt
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