Popular streaming platform Roku makes money by growing its ad-business, with the possibility of doubling profits by the end of 2020.
With Roku (NASDAQ: ROKU) set to announce its fourth-quarter earnings for 2019 this week, analysts are forecasting a loss of -$0.14 per share compared to $0.05 in the same period last year. With a loss expected, 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.
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Roku’s business model
In a time where digital streaming has become more and more popular, 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. Earlier this month, 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 — 69% in its most recent earnings call, amounting to $180 million, versus the $82 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 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. Roku stated in its quarterly report “we have no access to video ad inventory at this time, and we may not secure access in the future.” It is a concern for Roku, that they don’t really have an economic moat within its model, and their efforts to maintain an advantage over other companies like Amazon Firestick and Apple TV could dwindle.
The business will continue to focus on its advertising and media services and is working on building its international presence. Roku’s acquisition of dataxu in October last year, which is a demand-side platform that allows marketers to plan, buy and optimize their video ad campaigns that are showcased on Roku’s devices, could be the key to accelerating the companies ad tech roadmap to a variety of advertisers.
Some experts believe ad revenue will surpass viewer growth in the future, predicting U.S. ad revenue to more than double to $632.9 million this year.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Roku. Read our full disclosure policy here.