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Three truths revealed by Roku’s Q3 numbers

Roku active streamer viewing

Now that Roku is a public company we can see details of the streaming media player business heretofore hidden from us. Here are three truths we now know.

Roku users watch more streamed than traditional TV

It is very easy to be fooled by average TV viewing numbers. For example, Nielsen says that the average viewer watched 4 hours and 23 minutes of live plus timeshifted television per day in Q1 2017. The company also says the same average viewer watched just 20 minutes per day on a multimedia device like a Roku.

However, Roku data shows that active users watch a substantial amount of their daily video viewing on the streaming media player. In Q3 2017, the company reports the average active viewer watched 2 hours and 28 minutes. Assuming the total TV viewing time, connected and traditional added together, is the same on average for viewers, Roku users watched 56% of their television streamed and 44% from traditional.

Connected TV viewing mirrors traditional patterns

Roku’s data suggests that connected TV viewing has the same seasonal viewing patterns as traditional television. Looking at Nielsen data between 2014 and 2016 we see that Q3 shows the lowest amount of live TV viewing. In each year, Q3 viewing was between 8% and 12% lower than peak viewing in the first quarter.

At least for the first year of reporting, we see the same pattern in Roku’s streaming consumption. Q3 streaming was lower than both Q2 and Q1. However, the seasonal difference is much smaller than we see in live television viewing. Q3 streaming time was just 2% lower than Q1 streaming time.

Why is the seasonal difference between connected TV viewing and live TV viewing so small? It could be because the time people spend streaming on the television is increasing. For example, Nielsen reports that the time people are spending streaming to connected televisions increased 9% between Q4 2015 and Q4 2016. Roku data shows a 7% year-over-year (YoY) increase between 2016 and 2017.

No one can exist on media player sales

A quick look at Roku’s financials reveals how brutal the hardware business is for all, except perhaps Apple. 54%, or $67 million, of Roku’s revenue, comes from player sales. However, player sales deliver just 8% gross margins (revenue minus the cost of manufacturing and distributing the hardware.) Gross margin on player sales has plummeted over the last year. In Q3 2016, it was 13%.

This data reflects just how competitive the market for media players has become over the last year. Roku, Google, and Amazon make basic players for under $40, and high-end players with Ultra HD and HDR for under $70. In the case of Google and Amazon, it is likely both are selling at or close to the cost of the low-end devices. Both Roku platform and player salescompanies can afford to do so because they are using the devices to further their other businesses.

Luckily, Roku is busily reinventing its business. Platform sales, which includes software licensing and advertising, is growing fast and looks to eclipse hardware sales sometime early in 2018. Moreover, at 77% the gross margins on platform sales are a lot better than hardware.

Why it matters

Roku users stream more than half of their TV viewing.

Connected TV viewing dips in the summer, just like traditional TV viewing.

It is also almost impossible for a company to build a business purely around the sale of streaming media players.

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