Please ensure Javascript is enabled for purposes of website accessibility

2 Ways Roku Is Winning Part of the Smart TV Market

By Adam Levy - Sep 9, 2018 at 5:02PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's appealing to everyone from manufacturers to retailers.

Roku (ROKU -5.18%)(ROKU -5.18%) powers 25% of smart TVs sold in the United States. That's up from 20% last year.

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 (AMZN -1.45%) 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.

A television displaying the Roku homescreen.

Image source: Roku.

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 (AAPL -2.52%) 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 (BBY -4.02%) 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 (WMT -0.60%). 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Roku Stock Quote
Roku
ROKU
$91.85 (-5.18%) $-5.02
Apple Inc. Stock Quote
Apple Inc.
AAPL
$133.89 (-2.52%) $-3.46
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,115.24 (-1.45%) $-31.14
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$118.35 (-0.60%) $0.72
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$70.37 (-4.02%) $-2.95

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
331%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.