Roku offers a one-stop shop for streaming TV. Consumer’s cutting the cord on cable TV under high inflation spells good news for Roku over the long term.
Roku device users do not pay a monthly fee and can watch free channels. To watch paid content, they must subscribe or pay rentals via Roku for other streaming channels like Netflix, cable alternatives like Sling TV, as well as TV show and movie rentals from a variety of services, including Apple TV, Disney + Vudu, and more.
Here’s how they make their money.
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What does Roku do?
Roku offers a range of streaming devices, including streaming TVs and devices that work with existing televisions, computers, and smartphones.
Roku works with streaming TV channels, cable-replacement services, and movie and other video content providers to offer users a wide range of content.
Users can subscribe to streaming channels or rent movies, television shows, and documentaries directly via Roku. This brings their digital entertainment into one place with one single bill.
Apart from device sales, Roku also works with TV makers to license its own hardware and software. Roku has its own free Roku Channel to stream videos and generate revenue from advertising.
How does Roku work?
Roku offers a range of streaming devices that work with TVs, smartphones, PCs, laptops and tablets for viewing video content. Roku also has branded streaming video devices and Roku TVs.
The company offers a single, easy-to-use platform for all device users who can view free content or subscribe to streaming video content from providers of their choice.
There is no cost to watch free movie channels like Roku Channel and Pluto TV. Those with existing cable or satellite channels can connect and stream with a Roku device.
Many digital content providers work with Roku, paying them a share of the streaming subscriptions and movie rentals for content taken via Roku. It also works with TV manufacturers to enable TV owners to stream content using Roku devices.
How Roku makes money
Roku makes money through its media and advertising business and the sale of streaming devices. Revenue streams include third-party subscriptions, selling publisher inventory, displaying ads, and selling ads for their own channel. Roku also makes money by providing audience data for publishers, email marketing, deals with TV manufacturers, and remote button sales.
Roku sells a wide range of streaming televisions and devices that can be used with PCs, laptops, smartphones, and tablets. Roku works with TV manufacturers to embed its software in new televisions.
Deals with TV manufacturers and licenses
Roku works with TV manufacturers to integrate its software. As a result, it has become the number 1 operating system for streaming content in the US and number 2 in Mexico. This also boosts Roku’s share of the media markets and increases the potential for expanding its advertising revenues.
Third-party monthly subscriptions
Roku has revenue share arrangements with premium subscriptions for streaming content. When Roku device users subscribe to paid services like Netflix, Hulu, Paramount+, discovery+, or Disney+ via Roku, Roku gets part of that subscription revenue. This promises to be a growth segment as many consumers opt out of cable TV.
Movie and show rentals
Roku users can also rent and watch movies, television shows, and documentaries from services like Apple TV and Vudu via Roku. The benefit to the consumer is that all their rentals are in one bill.
With an active account base that is bigger than all of the US cable companies' subscribers combined, Roku offers a powerful advertising platform for brands. The Roku channel is available for viewing in the US, Canada, and the UK.
Roku has advertisers from both US and global brands. The Roku Channel earns revenue from running ads across the free TV shows and movies it streams.
Audience data access
Selling audience user data to content creators and publishers is another revenue stream for Roku.
Future growth engine
Roku performed well during the coronavirus pandemic because people were stuck indoors.
However, in the aftermath of the pandemic, rising inflation has created a challenge because entertainment subscriptions are among the first to get cut. While many other companies passed on increased costs to consumers, Roku did not hike their prices.
As a result, Roku reported a lower gross profit margin on the player segment for five quarters in a row, with accelerating losses due to reduced ad spending and device sales.
Despite these challenges, Roku offers excellent long-term prospects as millions of consumers give up on cable television. People are unlikely to give up watching television, even if inflation is high, and many of these households are likely to opt for streaming content.
Roku competes as a more affordable alternative for those cutting the cord on cable television. Its competitors on this front include Amazon Fire TV, Chromecast, Apple TV, Google TV, and TiVo.
Roku users can access many of these competing streaming services through the Roku platform itself, making them revenue-sharing partners rather than direct competitors.
Los Gatos, California-based Netflix offers streaming TV series, movies, documentaries, and short films for a monthly subscription fee.
Alviso, California-based TiVo specializes in entertainment technology and audience insights. In addition to the DVR it is best known for, TiVo offers products and licensable technologies that aim to revolutionize how people find content in a cluttered media landscape.
Caavo is another Californian startup that aims to unify home entertainment by connecting pay TV, streaming, and gaming in a package similar to that of Roku.
Vudu offers instant access to the latest television and theatrical releases. Its home entertainment experience is built on its relationships with TV networks, movie studios, independent studios, and international distributors.
Hulu's online video service offers a selection of TV shows, movies, clips, and more. They stream content from brands including FOX, Comedy Central, Lionsgate, MGM, MTV Networks, National Geographic, NBC Universal, Paramount, PBS, Sony Pictures Television, and Warner Bros. Television Group.
MUBI offers an online destination for people who love independent, foreign or classic films. The Palo Alto-based startup offers a single classic or independent movie daily that it enriches with MUBI's take.