How Roku Can Win the "Real Streaming Wars"

I just wanted to start off by saying thank you for coming along on this journey with me. The response to launching the newsletter has been great. After three weeks, there are now over 500 of you including Founders, CEOs, CTOs, and other extremely smart people. I’m humbled and excited to keep growing this with you.

My last article focusing on streaming was by far the best performer, so I’m changing the name of the newsletter to “Streaming in Public.” As a product leader, I like to iterate quickly when I see things working.

Streaming in Public will provide an insider's take on the rapidly changing Streaming TV landscape. I will still veer outside of this lane to discuss broader product strategy, but since I live and breathe Streaming TV, I know I will add the most value by giving you front-row seats to watch the future of television being built. Onwards! 🚀

Roku’s Origin Story

You can’t talk about Roku without going deep into its quirky, suspenders over t-shirt-rocking founder Anthony Wood. Every great company has a great origin story, and Roku is no exception.

Wood came up with Roku like a lot of great founders come up with their ideas. By solving a problem that really bothered him: how to record his favorite TV show “Star Trek: The Next Generation.” Wood’s house was littered with VHS tapes so after seeing an ad for hard drives in a local newspaper, he was inspired to invent the digital video recorder (DVR). Wood turned this invention into ReplayTV in 1997.

Wow. I love researching these old devices and seeing just how far the industry has come. Anyway, Wood fiercely competed with TiVo for a few years before selling ReplayTV for $120 million to audio/video equipment manufacturer SONICblue in 2001.

Just a year later, Wood saw the Internet wave coming and formed Roku LLC in 2002.

Netflix: “Project Griffin”

While working on building the world’s first TV operating system (OS), Wood cold-called Netflix’s Reed Hastings and asked him to lunch. Hastings invited Wood to join Netflix as Vice President of Internet TV in 2007 and build Netflix’s streaming player, code-named Project Griffin.

Apple was building the first generation AppleTV at the same time. Steve Jobs told Reed Hastings that he was a huge fan of Netflix, but he was not going to put a Netflix app on AppleTV if Netflix was building a competing device.

Just weeks before the launch of the Netflix streaming player, Hastings decided to kill Project Griffin and spin Roku out with Woods as CEO. Netflix became an early investor in Roku.

Roku’s Rise to Dominate the U.S. Market

Roku launched its first streaming player in 2008 — the first sold for $99.99. They quickly lowered prices with the goal of saturating the market. Today, you can buy their cheapest model for $29.99. Coupling low prices with being first to market allowed Roku to grab a commanding connected device market share in the U.S.

However, SmartTV manufacturers such as Samsung, wised up and started leveraging their own devices to build streaming businesses. Roku needed to act fast to stay relevant, so they began licensing the TV OS they built to several TV makers, enabling users to access thousands of apps such as Netflix on the TV without a dongle. Today, Roku’s OS powers TVs from over 20 manufacturers including TCL, Hisense, and Sharp.

Roku needed to diversify its revenue streams since its device market share was dwindling and it was in a precarious “frenemy” position with other companies.

In 2017, they launched a self-serve advertising product to serve ads to Roku users. Roku also launched its own FAST Service in 2017 called “The Roku Channel.”

I led the launch of one of the first channels on the platform for People Magazine called “PeopleTV” and later launched “Yahoo Finance Live.” You could just feel the momentum working with Roku that year. This was a company firing on all cylinders. Roku was on a mission and filed an IPO to go public with a valuation of $1.3 billion.

Due to Roku’s consistent innovation and dealmaking, in 2023 they have 122 million Connected TV users in the U.S., the most of any single company.

And in the fight against traditional Linear TV and Cable, Roku’s U.S. active account base has surpassed the number of U.S. video subscribers for all cable companies combined.

How Roku Wins

Software > Hardware

Roku has come a long way from its origins mainly selling hardware and has successfully transitioned to a platform business. They generate Platform revenue through advertising sales, operating the app store, the distribution of FAST channels within The Roku Channel, and their payment processor Roku Pay.

This has moved them into a much higher-margin business. Hardware device revenue was $106 million in Q1 2023 (3.4% gross margin) vs. Platform revenue coming in at $635 million in the quarter (53% gross margin).

This puts Roku on the path to better compete with tech giants such as Google, Amazon, and Apple which continue to make investments in the streaming space.

In fact, Roku continues its move to become device agnostic and made The Roku Channel available on Google and Android TV. In terms of competing with SmartTV manufacturers, founder Anthony Wood is betting on Samsung, LG, and Vizio eventually giving up on developing their own OS and licensing it from them. I have a hard time believing some of the bigger players like Samsung will do that for the same reason Roku has pivoted to focus on its higher-margin software business, but I do think some consolidation will take place.

Differentiated Content

Roku’s investments in original content to differentiate The Roku Channel continue to pay off, at least from critics’ perspective. The Roku Channel had 12 Emmy nominations in 2023 for “Weird: The Al Yankovic Story” and Kevin Hart’s “Die Hart 2: Die Harter.” I still don’t believe platforms such as Roku should be investing in producing original content. There’s a lot less operational overhead in licensing content, and it allows The Roku Channel’s programming team to promote the best content vs. feeling the need to promote their own original content. I would love to see a breakout of average hours streamed for original content vs. third-party licensed content, but something is working. Total hours streamed on Roku’s platforms hit 25 billion in the first three months of 2023, up 20% year over year.

Making Moves

Roku has made a dizzying amount of partnership announcements in 2023. LUMA Partners Conor McKenna pointed this out noting just in the last few months they have inked the following deals:

• Doordash - Shoppable ads and six months of free deliveries.

• Best Buy - 1st Party Retail Media shopper data for ad targeting.

• Shopify - Remote-powered shopping ads w/ integrated checkout.

• Comcast - Advertising deal with Comcast’s ad platform Freewheel.

• Microsoft - Bing + Roku cross-channel ad measurement.

Can Roku Win the “Real Streaming Wars” Alone?

I think the last few months have shown us that the “Streaming Wars” are actually already over. Ads won.

Every major streaming platform including Netflix and Disney+ has launched ad-supported subscription tiers, and both AppleTV and Amazon Prime Video are rumored to do the same soon. The key to winning the “Real Streaming Wars” will be capturing the lion’s share of ad spend on CTV which is forecasted to reach $98 billion by 2027. In 2023, Hulu is forecasted to make the most CTV ad dollars ($3.63 billion), followed by YouTube ($2.89 billion) but Roku ($2.19 billion) is a close third.

I’m tempted to talk about potential companies such as Comcast that could acquire Roku to make their own case for the “Real Streaming Wars” throne as I did with Samsung last week.

But I believe Roku’s origins in Streaming TV and Silicon Valley provide the company with unique advantages in the battle for the future of TV. Streaming has its own distinct challenges so a company with roots in the technology is uniquely positioned to solve them. Couple that with Roku’s stubborn billionaire founder Wood who just told CNBC "We're not for sale. We're not looking to be acquired,” and you have a company that is very happy to take its chances in the arena. Roku is, therefore, a legitimate contender to win the “Real Streaming Wars” by charting its own path.

Be sure to tune in next week for the third edition of the “Real Streaming Wars” which features a company that needs no introduction but must get out of its own way to win streaming.

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Until next time.

🤙 Moffie