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Roku best hope for growth not in box sales

TCL Roku TV splash

Roku is planning an IPO to get new cash to power its growth. But that growth will likely come from its platform business, not sale of set-top boxes.

Roku’s S1 filing for the IPO revealed that 59% of the company’s first-half 2017 revenue came from the sale of streaming media players. The other 41% came from a variety of market approaches which the company calls its platform business. The company doesn’t give much detail on these platform businesses, but they break out into the following broad categories:

  • Advertising sales
  • Software licensing
  • Hardware licensing

Advertising sales also include several approaches. For example, channel providers pay Roku for ads on the home and other pages of the Roku interface. The company also helps ad-supported channels sell ads.

Roku licenses the software platform to TV manufacturers. For example, TCL, Hisense, and Sharp. This isn’t just a software license sale. Roku maintains the software and keeps the TVs up-to-date with the latest channels.

The company also licenses the hardware and software together to service operators as part of the Roku powered program. For example, Sky’s Now TV box is a Roku powered device. The companies that license the platform can decide which other services can be on the box. They can also change some basic design elements of the box and the interface.

The platform business is the fastest growing part of Roku’s revenue. It grew 91% between the first half of 2016 and 2017. It is also delivering a gross profit margin of 75%

Roku’s player sales competition

The streaming media player market is a ferociously competitive business. Roku faces huge rivals such as Google, Apple, and Amazon. Moreover, Google and Amazon are willing to accept wafer-thin margins, or even sell at cost, to further their other businesses.

streaming media player market share comscoreIn these tough market conditions, Roku has managed to leverage its first mover advantage and stay ahead of the crowd. comScore says Roku boxes are in 16% of Wi-Fi households, Amazon Fire TV in 14%, Chromecast in 8%, and 6% have an Apple TV.

Roku is also making a good profit on player sales, though profitability fell over the last year. Gross profit on player sales was 12% of net revenue in the first half of 2017, but it was 16% in the first half of 2016.

Roku’s software licensing competition

Two of Roku’s major rivals are also licensing software platforms to consumer electronics manufacturers. Google is putting a lot of effort behind Android TV and seeing some success. Televisions from Sharp and Sony use the platforms. Google is also licensing Android TV to streaming media player providers and the operating system powers NVIDIA Shield, Mi Box, and Razer Forge TV.

Amazon is also licensing the Fire TV platform to television manufacturers. So far, Element is the only manufacturer to deploy a box.

Roku’s hardware licensing competition

When it comes to providing hardware to operators, Roku faces a group of vendors that have been selling set-top boxes to operators for decades. As operators increasingly move their pay TV businesses toward an all-IP future, these vendors are updating their product lines to track the changes.

For example, Amino provides IP set-top boxes to pay TV operators and has a range of boxes that can cover all an operator’s needs. It can also power some of those boxes using Google’s Android TV if required.

Roku’s best hope for growth

With no end in sight to the competition in the streaming media player market, Roku’s licensing businesses increasingly look like the new engines for revenue growth. The price of consumer boxes will remain under pressure, resulting in even lower margins.

The licensing business looks much more hopeful. Software and hardware licensing provide two revenue streams: one for the software license and one for the maintenance. The two main markets the company is targeting, manufacturers and operators, also seem to be moving toward positions that are favorable to Roku.

Why it matters

Roku is filing for an IPO to help drive its growth.

That growth may not come streaming media player sales.

The opportunity to license the Roku platform could provide more revenue at higher margins.

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