Seeing into the Future…
When Roku went public in 2017, it was at a modest $14 a share. Four years later and that share price jumped to a staggering $420. That is a gain of 235% per year! What does it all mean? Well, let us dive into some of Roku’s market trends. We might be able to discern the future.
Last quarter, Roku celebrated its highest growth rate since its public debut. Its market share growth is due to smart company choices. A few of which we will attempt to highlight. The rewards we see on Wallstreet will only amplify Roku’s position, too. You won’t need to be a trader to see how this affects the future of streaming.
Despite the success, some claim concern over the long-term plan of Roku. Much of this is due to numerous rivals entering the market. I want to elaborate on why those concerns might not be all that concerning.
We’ve seen this before…
I believe the early days of Microsoft are parallel to Roku today. After all, we are talking about operating systems. Computer and TV respectively. If Roku plays their cards right, they will dominate the TV operating system arena.
In the U.S. and Canada, Roku TVs outsold any other pre-installed smart TV operating system last year. They beat all of the manufacturers, including those with their own operating systems. Companies like Vizio and LG. Even Samsung, who has been leading in this field, until now. Roku’s lead is the first in history, but it does not seem to be the last.
Roku claims its streaming O.S. is on 38% of the U.S. smart TVs. Their claim also boasts a similar percentage of the Canadian market. Even with competition from manufacturers and big tech companies like Amazon, the market is moving toward consolidation. And guess who’s sitting in the position of the de facto TV OS? It is Roku.
The reason so many smartphone manufacturers license operating systems is simple. It is more cost-effective than building their own. TV manufacturers are coming to the same realization.
Television operating systems are not as complex as those of smartphones, granted. But there are other challenges. For instance, television hardware has significant constraints compared to smartphones. The workarounds and programing wizardry required to squeeze the most out of this limited format should not be taken lightly.
Companies with a smaller share of the market can not justify the cost of maintaining their own operating system. Licensing an OS like Roku is a more economical solution.
As a result, more manufacturers are opting to license Roku. Roku, in turn, continues to add partners to its portfolio. In time, Roku is even likely to flip the large manufacturers.
Steve Louden, Roku CFO, is confident that the market is moving toward one main TV OS. There might be one or two alternatives, and this makes sense. We see the same thing with computer and smartphone operating systems. But Roku is firmly leading this race into the future. A future of a mostly singular TV OS. All signs point to Roku remaining there, too.
Manufacturer loyalty is needed-
Another area of concern voiced by investors is the Roku manufacturing partners. Some have started partnering with Roku competitors, looking to save a buck. Here are two solutions that can prevent this behavior.
For starters, Roku needs to provide more opportunities to increase sales. By working with retailers to gain prime shelf space, it can afford to spend more on marketing. This is because of its strong monetization. It generated $27 per user over four quarters, and half of that period saw a notable pullback in ad spend. As that number increases, Roku can put more money behind its marketing and retail partnerships. All resulting in more beneficial deals for the manufacturers.
Plus, retailers are more hesitant to partner with Amazon due to the direct competition of Amazon’s core business.
Second, Roku will build loyalty as it develops more support in international markets. This is an area Amazon has excelled at for years. The main pain point here is that the Roku TV tuner technology is developed in-house. Tuner requirements also vary from region to region. This takes more time than using an off-the-shelf solution.
Additionally, some countries have additional requirements. Closed-captioning support in the United States, for instance. Because of this, introducing Roku TV into some international markets has been slow. A remedy is in motion, though. Significant international investments have been made over the last couple of years. As the Roku global presence will continue to improve, this dilemma is only a temporary one.
As Roku supports its licensed operating system in more countries, it will win back more from manufacturers. Manufacturers find it more cost-effective to focus exclusively on one operating system anyhow. As long as Roku can provide its OS in every country the manufacturer wants to sell. And the Roku sales record/support put it in the position to do just that.
Owning the television has its advantages…
Roku’s growing share of the smart TV market is also critical. More so than Roku devices that plug into existing TV sets. Monetization is more straightforward for Roku TV users than its device users. A Roku TV will always start up on the Roku home screen. Other TVs will load the last channel or input you left when you turned it off. That means more opportunities to engage users and show ads.
Second, owning the entire TV experience provides additional data points. Data that is not available with the Roku after-market devices. For example, Roku uses audio content recognition in its TVs to determine what shows, movies, and commercials users watch. Both on Roku, and any linear TV the user watches on the set. Local broadcasts and attached cable systems included. That data is valuable for its ad business and content recommendations.
Of course, not much stands in the way of a consumer buying a Roku or smart TV, then adding other devices. Either from Amazon or some other tech company. Still, being the default option has unparalleled value. A title Roku can claim now. Low switching costs will not diminish that. So Roku will add high-value accounts simply by being baked into so many TVs.
Roku will see its share of the smart TV market grow as they expand support internationally. Plus, fewer competitors are finding it economical to maintain their own operating systems. Combined with the above, Roku’s ad system factors into building a positive feedback loop. More ad revenue, more TVs. More TVs, more ad revenue, and so on.
Investors voiced reasonable concerns, but they were concerns Roku had begun addressing years ago. The fruits are coming to bear, so to speak. Every other company, from this vantage point, is just too little, too late.Garrett Cunningham