Roku's emerging as one of the streaming war's biggest winners

If any business stands to reap the benefits from the streaming wars, it's Roku. But as today's better-than-expected fourth-quarter 2019 earnings prove, even winners in this fight are in a delicate situation, navigating competing interests, still working toward profitability, and facing an uncertain future.

Since the Los Gatos-based purveyor of streaming devices launched its first miniature set-top box in 2008, Roku has become the market leader in streaming media players in the U.S., surpassing the Amazon Fire TV, Apple TV and Google Chromecast, according to market research firm Parks Associates.

On Thursday afternoon, Roku reported $411 million in earnings on a net loss of $17.4 million. It can chalk up much of its earlier success to a smooth user experience and a platform-agnostic approach that let people access a slew of competing streaming services, including Amazon Prime Video, Netflix, Hulu and, more recently, Apple TV+ and Disney+.

"I'm not a fan of the stock, but the product is un-fucking-believable," says Wedbush Securities analyst Michael Pachter, who has followed Roku since its inception. He remains dubious of Roku's $16.4 billion market cap value, given the company hasn't turned a profit yet.

The question facing Roku now is whether it can turn this momentum into profitability. As more TVs get streaming services built-in and more streaming services emerge, can Roku stay the leader, and make money? Experts say it likely can and will, provided the streaming company focuses on further diversifying its business and shoring up areas, such as advertising, partnerships and global expansion.

How Roku is diversifying its business

In an effort to diversify beyond simply peddling puck-shaped set-top boxes and streaming sticks, Roku over the last five years has expanded its products and services to new software and hardware. In 2014, China's TCL released the first televisions with Roku software built-in — a move Protocol's Janko Roettgers pointed out allows Roku to spread its reach beyond its own hardware and capitalize on its growing advertising business.

In Roku's letter to shareholders on Thursday, the company reported that video ad impressions doubled year-over-year. Most of those ads appear in the company's own streaming channel, the Roku Channel, which launched back in 2017 and offers free access to films and TV shows. More and more people are able to watch that channel now thanks in part to Roku software being available on hundreds of TV models from brands including TCL, Sharp, Philips, Hisense, Hitachi and Westinghouse. One in three TVs sold in the U.S. in 2019 were so-called Roku TVs, the company stated in its letter to shareholders. For Roku, the more TV screens its ads are displayed on — and the more people who view those ads — the more ad-related revenues Roku generates.

"The only way to reach customers more and more is through streaming, and advertisers are following viewers," Roku CEO Anthony Wood told Protocol. He pointed out that as of last fall, just 3% of TV advertisers were also advertising on streamed services.

Last October, Roku announced the acquisition of Dataxu, an advertising platform that lets marketers plan and buy video ad campaigns, for $150 million. If Roku can convince a fraction of those TV advertisers to place video ads on its ad-supported Roku Channel — and Roku makes it easy to place and analyze the effectiveness of those ads — Wood says there's huge upside for Roku.

Navigating those headwinds

The company must walk a fine line, however. While Apple and Amazon were particularly fierce competitors with their streaming devices — the Apple TV app only just became available to Fire TV users in October 2019, for instance — Roku has long been viewed as a neutral platform in the streaming wars: a veritable Switzerland, where people didn't have to "choose a side" to access Netflix, Hulu, Apple TV, Amazon Prime Video and thousands of other channels.

Roku receives a small, unspecified cut every time a Roku user subscribes to paid services like HBO GO, Netflix, Hulu and Disney+ if they sign up through Roku. The company does not specifically break out how much in revenues it generates through the sign-up process alone, but it reported on Thursday that the average revenue it generates per user, or ARPU, grew $5.19 year-over-year to $23.14.

But as it pushes forward with the Roku Channel and advertising, Roku must be careful not to alienate the very streaming services that made it a go-to platform, who could eventually view the Roku Channel as a threat if it lands more compelling programming. Right now much of the offerings on the Roku Channel are older films and TV shows, but the quality is high, including critical darlings like "Something's Gotta Give," "Thelma and Louise" and "Schitt's Creek."

Wood, however, brushes aside concerns that its ad-driven efforts like the Roku Channel will upset the careful balance established with other services on the platform.

"The way I think about it, Roku is a platform for distributing content, and we offer the tools necessary to do that," said Wood, who points out content owners have multiple ways on Roku to serve up their content, whether it's through the Roku Channel or a dedicated app of its own that can also live on the Roku platform. "I think the idea that every content owner is going to build an app is just not an effective way for users to find content, and not every content owner is going to want to build their own app. We're offering them different options for them to showcase their content."

Analysts previously expected Roku to become profitable by 2021, but Roku said on Thursday it only expects to break even next year instead.

Moving forward, Parks Associates senior analyst Kristen Hanich says Roku must aggressively focus on international expansion, which until 2019, was not a high priority. Just last September, Roku finally reached an agreement with Hisense to release the first Roku TV in the U.K. Hanich also suggests Roku should throw its weight around more when it comes to negotiating cuts of revenues from other services and advertisers. As the No. 1 TV-streaming brand, it's in an extremely enviable position to do so.

"It is in a position where services that want to reach their viewers know that in order to succeed, they need to get their app on Roku's platform," Hanich said, adding that the power dynamics are slowly shifting in favor of streaming platforms like Roku. "Doing so is less of a choice, and more of a must-do."