Roku's Business Is Not What You Think

Simply put, there is no shortage of ways to get streaming content. And all of them are fighting tooth-and-nail for users. Google and Amazon practically give away their devices to get users into their ecosystem. Many of the other ways to access are simply add-on functionality for devices many consumers already own for other reasons.

It is against this phalanx of tech giants that Roku competes for new customers, and has to guard against existing customer attrition. Against that lineup, it really has very few competitive advantages. There is no meaningful lock-in to the platform. It is really quite simple and painless for a consumer to switch from a Roku to a competing offering. Getting new customers is even more of a dog fight. What can Roku offer that its competitors cannot? The answer is: not much. A better user experience, perhaps, but that is hardly a sustainable competitive advantage.

Another strike against the company is that its most popular channels do not benefit Roku very much. For example, Netflix makes up over 30% of streaming hours through Roku's platform, but the channel provides essentially no revenue back. Same for Amazon, Hulu, and the most popular ad-supported video network in the world, YouTube. Roku relies on monetizing Roku Channel and other, less prominent content channels. However, there is nothing stopping those other channels from switching to a different ad provider, or (if they are large enough), building out their own.

Conclusion and Business Model Diligence

Roku isn't entirely what it seems at first glance. Its real business is selling ads - a far more attractive model than just selling commodity hardware boxes. Growth has been excellent, with 30% year-over-year revenue growth rates and subscribers expanding even faster than that (+45% last year). The opportunity in video advertising is just immense. In the U.S. alone, advertisers spent over $150 billion in digital and TV commercial ads last year. That is a big, BIG market to grab a slice of.

However, the competitive landscape is just too cutthroat to really consider Roku as a highly attractive company for investment. 

Quick Summary

Roku is a streaming video device and platform company. 56% of revenue (but only 15% of gross profit) comes from its sale of streaming video devices like its "Streaming Stick", "Roku Express", and "Roku Ultra" set-top boxes. These allow consumers Internet-based access to various streaming platforms such as Netflix, Hulu, Amazon Prime, HBO Now, YouTube, and so forth. 44% of revenue, and 85% of gross profit, come from Roku's platform sales. These primarily consist of advertising sold on its own channels or on channels the company has access to ad inventory on. Platform sales also include commissions on subscription sales through its platform, and from offering branded buttons on its remote controls. The company has over 19 million active accounts.

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