ROKU Competitors’ Strategies

Investment Analysis Clubs Saul’s Investing Discussions
21

Does anyone know the following:

1. Does Netflix, Prime, Hulu or youtube pay Roku for being part of the offering? I know smaller channels like Crackle do.

2. Does Hulu, Prime or youtube offer a portion of their ad spots for Roku to sell? I know Crackle and many other smaller channels do.

Roku says Netflix and YouTube make up greater than 50% of viewing hours. Hulu gets a good chunk too. They don’t get material revenue from Netflix, YouTube, or Hulu, and probably not Prime. Many of these larger services are probably negotiated and entered into multi year contracts and have leverage for renewing those agreements. Roku captures some revenue from the subscription services here when someone subscribed through the Roku platform and manage their subscription payments through Roku, but again these big ones probably get a discount compared to others on the platform.

For even the big providers it’s a larger market for them to sell subscriptions to new users and satisfy the wants of their other users acquired outside of Roku. It’s a two way street. Roku wants them on their platform and the providers want their content on Roku.

Roku doesn’t get access to YouTube or Hulu ads. That pretty much sums up the big 4.

Here’s the agreement that new services operate under in the Roku Publishing Platform. I imagine this is the starting point and new services like Disney Plus probably have leverage for negotiating better rates probably in exchange for longer term deals or marketing partnerships (things like that).

https://developer.roku.com/docs/features/monetization/payout…

Publishers can monetize their channels in a variety of ways, depending on their business model. Below is the complete list of channel monetization options:

Transactional channels: Channels can enter into a revenue share program with Roku, in which the channel receives 80% of net revenue (net of credits, refunds, etc.), and Roku retains 20%. A transactional channel is any app that monetize through subscriptions, in-app purchases, or are pay-to-install.
Ad-supported channels: Channels also have the opportunity to monetize their content with ads. By default, this is accomplished by entering an inventory split agreement with Roku. For more information about Roku’s ad monetization options, see our document on monetizing a channel with video advertisements.

All partners with monetized channels are required to enroll in the RPPP. In fact, our system will prevent you from publishing a monetized channel until your account has been enrolled in the program.

If you follow the link you’ll see the ad supported options there. Inventory split 30/70 Roku/Publisher or Roku manages the whole inventory and shares revenue 60% of ad revenue minus net of a fee. Bigger partners most certainly negotiate better rates.

Here’s the Roku channels by most popular overall.

https://channelstore.roku.com/browse/most-popular

And most popular free channels.

https://channelstore.roku.com/browse/top-free

Roku says the Roku Channel is “the fastest growing channel in the platform’s history.”

Public information is scarce, but one Channel #15 ranked at the time Filrise, reported last year to be delivering 300M ad impressions a month on Roku. There’s a lot of ad inventory being viewed out there. YouTube says people watch 200M hours a day on TV sets. TV is a huge part of YouTube’s marketing strategy. Being on the most popular platform is vitally important. Just as having YouTube on their platform is to them.

Darth

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22

The truth is, your average consumers don’t care whether their TV has the ROKU OS on it or not.

That may be true for some but many definitely do. I just bought a new TV for my son last week and most definitely sought a RokuTV. He knows how to use it, Roku is viewed as the “in” product, and I wanted minimum cord use. We’ve recently migrated from Fire and we like Roku much better and we have access to a lot of content we couldn’t get on Fire. He mostly watches YouTube as well as a number of ad supported channels from networks like PBS Kids and Disney. But he has almost no experience watching the cable. It’s not even hooked up.

I would say that people probably have 3 major priorities for choosing a TV based on what they are looking for.

  1. Quality. Those who are looking for the best TV, picture, sound, features that kind of thing. The pixel counters. Performance. Samsung, LG, and Sony. Many of these already have a Roku or will buy one to go with the TV. Performance minded consumers more than likely will want the best streaming player to go with their expensive TV and not settle for a lesser performing system.
  2. Cost or value. Looking for either the least expensive or greatly consider value in a mix of cost and performance.
  3. The system OS. The people who are getting a new TV who have been using a particular OS for years or want one they know they’ll like. The ones who know that all or at least the majority of their viewing will be streaming and the streaming experience is what is most important to them. Probably overlap with 2 and maybe some 1.

So if we look at the best selling TVs on Amazon we see Roku dominating the top 10. And Amazon obviously promotes their own Fire branded TVs. Are people buying TCL because of 1, 2, or 3? Why are they buying the other one brand in the top 10, Samsung. The superior TV performance or whatever they call their OS. You’ll probably see different behavior at Best Buy where you are more likely to see performance minded customers.

https://www.amazon.com/Best-Sellers-Electronics-Televisions/…

Darth

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23

Thanks for your detailed reply Darth. I need some time to go over the links. Filrise ad impresssions is of interest as Roku clearly monetizes that. Even though youtube has a huge amount of ads and I agree that they would want to be on Roku their presence does not materially benefit Roku it seems.

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If you think about it in pure money from YouTube to ROKU, you’re right as Bear was.

*But any engagement on ROKU is going to drive viewing throughout the platform. Say you turn on the ROKU to watch the trailer for Disney Plus upcoming show “The Mandalorian” followed by another “honey badger” viewing on YouTube. When the home screen fires up you see a button with the movie “Dodgeball” just sitting there. Hhhhmmm. I was just going to watch this 3 minute thirty second trailer and 5 minute clip, but I have time to kill later and that movie was hilarious and I like popcorn so I’ll come back after I do my honey-do list and watch that in a bit. I just engaged for 3 different platforms for ROKU. YouTube, DisneyPlus, and the ROKU Channel. It’s like Roku knew I would want to watch that.

I mean you go in there to watch something on Netflix and as you scroll around you think “hey has that new season of Jack Ryan come out on Prime yet” or “I wonder if ABC put last nights Episode of Modern Family on the app yet”. Watching anything on ROKU is a win-win. Even if watching something ad-supported is win-winner.

Darth
*may be an actual representation of a Darth event

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25

Can they track what someone is watching inside Netflix, Prime, youtube? I thought those apps were blackboxes and Roku could not track once someone entered that. If that is not the case and they can track viewership metrics across all apps that is surely data on the viewer that Roku can monetize in other ways as you stated. That is definitely interesting…

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Darth,

Here, https://discussion.fool.com/is-roku-another-tivo-great-idea-but-…, Tryingmybest compared Roku to Tivo, and I do think in a similar way, Roku’s platform itself might not be anything special. What do you think of the power dynamic between Roku and its primary distributors, television set manufacturers? I said before: If being imbedded into televisions is so valuable to Roku, maybe LC and Samsung and Sony and HiSense should charge Roku – maybe take a piece of Roku’s profits.

Do you think that’s at all plausible? If not, why not?

Bear

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They probably couldn’t get Roku for free but probably very cheap if they decide to go that route. It’s extremely expensive and resource consuming to build, develop, and support that ecosystem. And then they have to market and obtain content to engage. Even if you build the best operating system ever and no one uses it and instead watches on their Roku or Fire stick, what have you accomplished other than spend a lot money? For the consumer as you watch a device that device becomes very personalized managing all your subscription and logins and payments and apps and content.

Choosing to license the software spreads all those costs among all the licensees and Roku does all of that for them. Making it very cost effective for HiSense or Samsung or whoever. As we can see many brands are going the license route, particularly the value brands that don’t have the margins to absorb that cost. And those value brands are capturing market share by offering competitive TV performance combined with a Smart function that’s already well established and has a significant following and content library.

We can also see that many TVs manufacturers, particularly higher end (Samsung and LG) are going with their own solution. The engagement on those systems (viewing hours) pales. Will they continue to invest in the platform for minimal return? Starting out miles behind and never progressing in engagement.

I think 12x shared this somewhere else. This is Q1 2019 US TV shipments compared to Q1 2018. Notice how TCL (Roku) completely overtakes Samsung in shipments. Now I’m sure this has a lot to do with the tariff threats, but demand is an issue as well to be sure. And demand has a lot to do with TCL offering an excellent TV at an excellent price (Samsung still rules supreme in revenue in the article). Does Roku have at least some component to the demand? What if there’s a similar dynamic as these Roku TVs hit the international market? TCL’s competitors will be taking notice.

https://hdguru.com/ihs-tcl-holds-no-1-tv-market-share-for-no…

I have no idea if Samsung or LG or Vizio will ever abandon their own OS in favor of a licensed model. Any one of those would be a big deal. Sony uses AndroidTV OS, which apparently from reviews has serious stability issues that seem to be getting a little better on newer generations. Android share is tiny.

I get why someone skeptical of Roku wants to compare to Tivo. But Tivo is not a good comparison to me. Tivo had about a year maybe a year and a half of great growth and then failed. Roku has been around for a decade and is still accelerating. During that time Tivo lived competition free. They were it. Roku has thrived despite competition from the biggest names in tech, Amazon, Apple, Google, and those tv manufacturers. And that competition has been at it since the early days. Tivo had a technology. That recorded digital content for playback. Roku is a platform and an ecosystem, a hub for daily entertainment. A much more valuable enterprise.

BTW, interesting that Tivo still has about $700M in annual revenue.

This are my thoughts on your questions, crowdsourced from many other great posters.

Darth

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28

Something else to consider is the content producers themselves. Each operating system is its own software. The content producers have to expend resources on developing apps for each system they want to put their content on. Then they have to support it and provide updates to it. Each OS has to demonstrate they have the engagement that is worth it to the publisher. In the long term that puts pressure to consolidate to fewer OS out there. Which will ultimately mean the top 5 or so will remain standing with others choosing to license and get back to focusing on their core businesses.

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29

I’m having a real hard time understanding the parable between TiVo and Roku. One basically got obsoleted and the other is working to become the defecto standard operating system of TVs. A better comparison may be some failed operating systems be it word processing or some other devices where a standard never became adapted or the early leader got shut out.

TiVo came from a different era. If you wanted to watch a show that you wouldn’t be home for you had to program your VCR every single time (which was a PITA) until TiVo came along. Which cane about the same time DVD players came along, and soon afterward the DVD recorder (DVR) which soon came down in price to match DVD players without recorders.

TiVo got obsoleted by quick advancement and commoditization of hardware.

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I’m obviously not here to convince people to buy Roku. It could blow up. Just trying to get to the truth.

Yes, TCL, which is growing like a wildflower, could say we don’t need Roku. They could go down the Samsung path. But what is Samsung really gaining by having their own streaming? What’s it costing them? Are they profiting on it? Are they having negotiations with TTD because they just have so many users?

I’m thinking at this point Samsung sees their streaming as a way to tie users into buying other Samsung hardware for repeat business and streaming credits much like Amazon does. But no other TV maker will ever adapt Samsung’s OS. And no retailer in their right mind would offer Amazon Fire TVs. It’s like handing money to your enemy.

So the question of the day is why would Hisense or any other brandcwant to home brew their own OS? Samsung success wirh their Tizen OS will be the key. If they cannot make a success of their OS nobody can. And from what I understand Samsung streaming is not a blockbuster.

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Here, https://discussion.fool.com/is-roku-another-tivo-great-idea-but-……, Tryingmybest compared Roku to Tivo, and I do think in a similar way, Roku’s platform itself might not be anything special.

PaulWBryant

To make it easier for people to think about, just think about how Smartphone OS’s developed.

Android is nothing special, so anyone can develop a Smartphone OS and pound Android into the dust, right? Then why have powerful companies like Samsung with Tizen https://www.tizen.org/about/devices and Amazon with Fire https://en.wikipedia.org/wiki/Fire_OS have not pounded Android into the turf yet?

Answer that question and one might understand Roku a bit better.

I have a feeling that Smart TV OS’s might play out similar to other hardware platforms. How many major computing platforms are there? iOS and Windows…Two. How many major Smart phone OS’s are there? iOS and Windows. So, I suspect that there might be only two major Smart TV OS’s that develop worldwide and Roku has a nice headstart in becoming one of those major Smart TV OS’s.

Starrob

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But what is Samsung really gaining by having their own streaming?

They get viewership metrics which they monetize I imagine. But agreed their reach will be lower than Roku. We have a LG OLED TV. OS is ok. They do give a chrome browser and that is pretty useful. Does Roku provide a web browser?

33

With the talk of computer and phone OS comparisons, what is stopping someone like Microsoft from developing a smart TV OS and integrating with their ecosystem? I can see in the not so distant future TV’s having all the capabilities of a PC, it’s already easy to do. Imagine watching your favorite show and pausing to answer an important email right on the same screen from the comfort of your couch.

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With the talk of computer and phone OS comparisons, what is stopping someone like Microsoft from developing a smart TV OS and integrating with their ecosystem?

I think you they have been burned trying to do this enough at the consumer side. They are better staying on the enterprise side where they do well

I can see in the not so distant future TV’s having all the capabilities of a PC, it’s already easy to do. Imagine watching your favorite show and pausing to answer an important email right on the same screen from the comfort of your couch.

That sounds like hell, especially if you are with somebody while watching. I tried to have a no phone policy if wanting to tune out for a movie.

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With the talk of computer and phone OS comparisons, what is stopping someone like Microsoft from developing a smart TV OS and integrating with their ecosystem?

invain

What’s stopping Microsoft from developing a Smartphone OS and integrating with their ecosystem?

https://en.wikipedia.org/wiki/Windows_Phone

Starrob

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We can also see that many TVs manufacturers, particularly higher end (Samsung and LG) are going with their own solution. The engagement on those systems (viewing hours) pales. Will they continue to invest in the platform for minimal return? Starting out miles behind and never progressing in engagement.

To be clear, it’s not that I think Roku’s competitors have a high likelihood of displacing them. Rather, I think Roku’s current revenue, at the rate of $21/user and rising, is too good to be true. And I think it’s plausible that other stakeholders (the TV makers that imbed Roku, Netflix and YouTube, etc) would want a piece. Do you have any thoughts on that? Does $21/user seem like a lot to anyone else or is it just me?

That’s the key to my skepticism. It’s almost too lucrative. I get that they put in a lot of work and years to get to this point, but if there is so much to be gained (and growing), it seems like it might attract more competition. That said, competition risk is the side car. The main problem I have is not understanding how they can be worth what advertisers are currently paying them.

Bear

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37

“That said, competition risk is the side car. The main problem I have is not understanding how they can be worth what advertisers are currently paying them.”

What I can’t figure out is what leverage does ROKU have to set the price. Are they in control or are they at the mercy of the content providers? Do they control the toll booth or can their ad profits be cut in half simply by being forced to share their found pot of gold.

Confusing. I’ll stay clear and stick with TTD. Brings back memories of AOLs dominance in the 1990s.

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Well ROKU is certainly getting its behind kicked on even the slightest bit of a whisper.

39

With the talk of computer and phone OS comparisons, what is stopping someone like Microsoft from developing a smart TV OS and integrating with their ecosystem?

This is a little dated, as the onset of SVOD, AVOD, etc hadn’t fully come into focus at that time, but Apple was rumored for many years in a row to be developing their own physical television, with a fully integrated OS, further bringing users into their ecosystem. Obviously it never materialized, and the company has clearly moved on from that. If Apple, at the peak of its powers a few years ago, either couldn’t crack the code, or ran the numbers and realized it wasn’t worth it, decided to pass then that certainly highlights the challenges of either entering the TV OS partnership space with a hardware supplier, or going it alone and building the entire unit in house.

Brandon

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40

Bear.

We’re going in circles I think. I could be wrong about Roku and that’s ok. We don’t have to all see the same thing.

If someone like FilmRise has (make up more current numbers). 800,000,000 monthly ad impressions across all viewing platforms net of what they revenue share with those platforms and 500,000,000 of those are on Roku. And ROKU helps FilmRise serve data for ad targeting that drives up CPM for their own ad selling. I believe, and it’s fairly wide known, ROKU has great symbiotic relationships with these publishers. Roku makes them rich. If they lose ROKU they loose a significant source of where their revenue is sourced.

Netflix too. They would really tee off a great deal of their customers if Netflix got into a feud with Roku.

The power relationship goes both ways.

In my opinion.

There is still doubt and controversy obviously or it wouldn’t plunge so much on non news.

But they keep crushing it so I’m not worried about it long term.

Darth

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