Deeper Dive—Why it’s fair to compare Roku with Netflix

An eye-popping claim - like Roku is growing faster than Netflix did at the same point in its evolution - is bound to be met with some skepticism.

Earlier this week, William Blair analyst Ralph Schackart reached this conclusion in a research note examining both companies’ international expansion efforts. Since Roku is best known for building inexpensive streaming hardware and Netflix is the preeminent streaming video content machine, comparing the two might seem pointless.

This is a fair point to make. Roku and Netflix are more complementary to each other than comparable; one has the shows, and one has the devices used to watch the shows. But, a closer look at Schackart’s research shows how the comparison makes sense. His stated objective was to estimate Roku’s potential growth through 2025 by using Netflix’s own international expansion as case-study framework.

Schackart predicts Roku by 2025 will see its market cap expand to between $40 billion and $50 billion, its active accounts grow to 82 million and its platform revenue to growth to $4.5 billion. Then he compared Roku’s most recent nine quarters with Netflix’s quarters in the beginning stages of phase 2 of Netflix’s international expansion and found that Roku is growing 9% quarter over quarter compared to Netflix’s average 8%.

“This comparison, while not perfect, gave us an approximation for Roku’s international penetration, and ultimately active account estimates, at certain points in the future,” Schackart wrote.

The important distinction is how William Blair presents Netflix’s international expansion timeline:

• Phase I (September 2010 to September 2011): North and South America (includes select European countries)
• Phase II (September 2011 to September 2014): Rest of Europe
• Phase III (September 2014 to January 2016): Rest of world expansion

Netflix in 2011 (or the beginning of Phase II) was a much different company than it is today. Back then, Netflix was considering raising its prices and splitting its company in two: one side for the DVD business (which would be called Qwikster) and the other for the streaming service. Subscribers revolted and one million left the service, leading Netflix to abandon the plan. Netflix had yet to become the prolific producer of original content it’s known as today. “Lilyhammer” hadn’t even debuted on the service yet. In 2011, Netflix was still mostly a distribution platform for other people’s content, and that’s a fitting descriptor for Roku as well.

While Roku’s player business is still growing, but it’s Roku’s platform business that is creating the most revenue opportunities for the company. During the second quarter, platform revenue reached nearly $168 million, which was up 86% year over year and accounted for approximately two-thirds of total revenue.

There are still key differences between Roku and Netflix, primarily that Netflix makes its money from subscriptions, and Roku makes most of its money from advertising. And, Roku doesn’t seem interested in originals; Roku CEO Anthony Wood has said that his company has no plans to license original content. But, that could change as the company’s active user base continues to scale and growing data sets continue to reveal what Roku users want to watch on the platform.

Both Roku and Netflix will continue to evolve over the next five years – particularly as new powers like Disney, NBCUniversal and WarnerMedia advance in the streaming market. By 2025, both companies could have drastically different strategies than they do today. But for now, tracking Roku’s current ascent in the AVOD market alongside Netflix’s early dominance in SVOD makes sense.