Roku (NASDAQ:ROKU) just took a big step toward boosting subscriptions to its platform with its decision to offer access to premium channels including SHOWTIME, Starz, and EPIX via its Roku Channel.
The Roku Channel is a streaming option through which users can watch free, ad-supported television shows and movies. But the company's latest move will give subscribers the added ability to sign up for 25 premium channels all in one location.
"By making it easy for users to discover, subscribe to and watch Premium Subscriptions, we believe this offering will result in increased subscriptions and user engagement for our subscription partners and an even better user experience," Rob Holmes, Roku's Vice President of Programming and Engagement said in a press release.
The company is also updating its Roku app so that premium subscription customers will be able to stream their channels directly from the company's app. Roku said the premium channel subscription option will be available immediately for users of a select subset of Roku devices, with a rollout for all users early this year.
Roku wants the best of both worlds
Roku earns 58% of its total revenue from its platform segment, and two-thirds of that comes from advertising. So far, its shift to an advertising-centric model has paid off; in its most recently reported quarter (the third quarter of 2018), Roku's platform segment revenue jumped 74% year over year to $100 million.
But Roku wants to be more than just a platform that sells ads alongside media content, and management knows that selling subscriptions for other content providers could push the company's revenues even higher. By giving its users the ability to easily sign up for premium channels, Roku is stepping into the premium subscription ring with Amazon (NASDAQ:AMZN), which launched a similar option for Prime Video back in 2015.
Amazon may look like an unconquerable foe, but Roku's current growth rate indicates that it's already holding its own. In the third quarter, active Roku accounts popped 43% to 23.8 million against the prior-year period, streaming hours skyrocketed 63%, and the company's average revenue per user (ARPU) was up 37% to $17.34.
Most importantly, adding the option for Roku users to directly subscribe to premium content through the company's Roku Channel will enable it to tap into the expanding subscription video-on-demand market that's expected to grow from $11.3 billion in 2018 to $125.6 billion by 2022.
Great move, but don't celebrate just yet
Roku investors should be cautiously optimistic about the company's new focus on premium subscriptions. I say cautiously because it's still unclear how many Roku users will take advantage of the service, rather than using other premium options available through Amazon or Apple.
Providing a one-stop shop for premium subscriptions, and allowing customers to pay for them all on one bill, could make Roku's platform more compelling. Just keep in mind that many other companies offer the same thing, and recognize that it will take at least a few quarters before investors start getting a clear sense of how this enhanced service might boost Roku's top and bottom lines.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Neiger has no position in any of the stocks mentioned. 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.