Roku has put years of time and effort into developing its players, platform and advertising tech stack, and now the company is in a good position to cash in on the growing AVOD market.
The company just scored a big stock boost after reporting first-quarter financial results marked by significant growth in its user base, time spent streaming, revenue and gross profit (though the company also expanded its operating income loss).
The biggest growth driver for Roku right now is its platform business (up 51% year over year) and the biggest growth driver for the platform business is advertising stemming from efforts like the Roku Channel, the company’s ad-supported channel that is now in the top five on Roku’s platform in terms of reach. Roku also estimated that one of every three smart TVs sold last quarter were Roku TVs, a figure that the company said moved it past Samsung and made it the top smart TV operating in the U.S.
Steve Louden, chief financial officer at Roku, said during last week’s earnings call that Roku has seen “tremendous growth” in monetized video ad impressions and that it puts his company in position to take share from the more than $70 billion in traditional TV advertising budgets.
Scott Rosenberg, senior vice president and general manager of the platform business for Roku, is in charge of building Roku into a strong competitor in the growing OTT advertising market. He said he feels Roku already has one of the most advanced ad stacks in OTT, but that the company is always working on refining targeting, building machine learning applications to help marketers find their audiences, and designing new forms of interactivity with ads. Roku is building its ad stack as it prepares for its vision of advertising’s future.
“The end state that we believe will play out for OTT advertising is that all TV advertising will become OTT advertising,” said Rosenberg. “Someday everything we watch will be streamed, all ads will be streamed, and all those ads will be targeted, interactive and measurable just like any other digital media.”
Today, there’s already a significant amount of people watching TV on streaming devices and platforms. Roku just announced that active accounts on its platform now total 29 million. But, streaming TV ad spend is still catching up.
Rosenberg said ad spend will catch up, and a big part of that will be companies within the OTT advertising space explaining to marketers that audiences that could once be reached on traditional linear are now moving to OTT. Roku puts a lot of effort into researching OTT advertising effectiveness, and it now feels comfortable showing marketers that $1 spent on OTT has much more impact than the same amount spent on linear television.
Of course, OTT video advertising is not the only way Roku’s platform business makes money. When premium subscriptions distribute on Roku’s platform, Roku gets a share of the revenue. Roku’s content partners also spend money marketing directly to Roku’s user base on the platform. Roku also sells buttons on its remotes.
But, advertising is a big part of what Roku does, and it seems like with each passing day more competition is jumping into the ad-supported streaming market. Sinclair launched ad-supported multichannel streaming service STIRR earlier this year, Amazon is reportedly looking to deepen its position in the AVOD, Viacom is putting its premium content library behind Pluto TV and NBCUniversal is planning its own AVOD streaming service launch for 2020.
Colin Dixon, digital media analyst and strategic consultant at nScreenMedia, noted the all the questions about AVOD competition during Roku’s most recent earnings call. During his recent podcast, Dixon said that Roku sees this competition more as validation of the AVOD market and Roku’s hardware strategy. He admitted that Roku’s strategy is working in terms to growing ad revenue and user base, but worried that Roku’s year-over-year ARPU (average revenue per user) growth is decelerating.
“My assumption is that ARPU really is mostly advertising-derived revenue from the various parts of the platform including the Roku Channel. I would have expected, based on some new IAB numbers, that this would be higher,” Dixon said.
Indeed, IAB this week announced that advertising revenue from digital video grew 37% from $11.9 billion in 2017 to $16.3 billion in 2018. While those figures may validate some concerns about Roku’s ARPU growth, they also demonstrate Roku’s thesis that the whole AVOD ecosystem is growing and will have lots of room for many players.
Rosenberg said that even though the OTT advertising space is getting busier, Roku doesn’t necessarily view other ad-supported services as competition. He said Roku looks at these services as partners who will come and compete for attention on Roku’s platform.
“We have a business model where when they win, we win and we make money,” said Rosenberg. “At the same time there are a lot of content owners starting to think that they’ll do better by participating in the Roku Channel. And when they do that, we also win.”