When it comes to licensed operating systems for smart TVs, Roku is absolutely dominant. Its biggest competition is the homegrown operating systems developed by the manufacturers. Other competitors like Amazon (NASDAQ:AMZN) also represent a challenge to Roku, but it's largely been able to overcome bigger players by being more nimble.
Here are two big reasons Roku is taking a share of the smart TV market.
An operating system designed for televisions
Roku built an operating system for television from the ground up. Amazon, comparatively, took an operating system designed for smartphones (Android), and changed it for the television format. Likewise, Apple (NASDAQ:AAPL) used its phone operating system as the basis for tvOS on the Apple TV.
By designing an operating system specifically for televisions, Roku's platform is less hardware-intensive than others'. It's easier for manufacturers to meet the specification requirements for Roku than it is for its competitors.
The same is true for Roku's own devices. It can make less expensive players and still generate a small profit on its devices. Meanwhile, Amazon often sells devices below breakeven, with the goal of driving customer engagement with Prime Video and Alexa.
Roku's management said it would entertain the idea of selling devices for below breakeven if it increased engagement on its platform. That's something that doesn't fit into Apple's business model of generating high profit margins on device sales. While Apple benefits from adding features and complexity to tvOS and its hardware, the company would be disadvantaged if it ever wanted to license its operating system like Roku.
By designing a simple operating system, Roku is winning the lion's share of licensed smart TV deals.
Developing strong relationships with retailers
Ultimately, people buy smart TVs in stores. Most retailers can't stock every single smart TV on the market, so success in sales comes down to relationships with retailers.
While Amazon is a significant force in online retail, it's just one of many options for customers to find a new television. And customers are more likely to do a little more research on a television purchase than smaller shopping endeavors. They might go showroom at a local store in person before ultimately deciding which unit to buy.
In that context, Amazon's deal with Best Buy (NYSE:BBY) earlier this year was rather significant. Best Buy agreed to license Amazon's Fire TV OS for its Insignia-branded smart TVs. Meanwhile, Roku generates 66% of its sales through Amazon.com, Best Buy, and Walmart (NYSE:WMT). In fact, that number is growing; it was just 57% in the first half of last year.
But Roku's relationship with retailers is strong. It's partnered with Walmart to include a button for Vudu, Walmart's streaming video service, on the Roku remote. Having the largest retailer in the world in your corner is a good get. Additionally, Amazon's deal with Best Buy is exclusive, meaning Amazon won't be partnering with any other retailers in a similar manner and Best Buy won't license any other operating system for its own brand of smart TVs. Still, there's nothing preventing Best Buy from selling Roku TVs.
If Roku can grab a larger share of the showroom floor at retailers, it's bound to win a larger share of sales. Working with manufacturers to develop new products can help, but winning over the retailers that ultimately decide which units they stock is essential.
With an operating system specifically designed for television sets and strong relationships with retailers, Roku is poised to keep winning market share in smart TVs despite strong competition standing in its way.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Levy owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.