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Is Roku Joining the Big Leagues?

By Danny Vena - Updated Apr 15, 2019 at 3:39PM

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New over-the-top capabilities and the addition of premium cable channels are the next step in Roku's evolution.

Check out the latest Roku earnings call transcript.

Most investors know Roku (ROKU -1.24%) as the company that pioneered internet-enabled streaming devices, but it might come as a surprise that the majority of its revenue now comes from its platform segment. The service, which operates much like competitor Hulu, derives most of its sales from the advertising displayed during programs on its streaming platform.

Roku recently announced changes to its service that may help boost its advertising business even further, meanwhile attracting even more customers to its service. Following in the footsteps of a well-heeled competitor, Roku announced that it would soon offer top-shelf cable channels in a bid to become a one-stop shop for both premium and free content.

A television with the Roku homepage showing a variety of viewing options

Image source: Roku.

The Roku Channel

For the uninitiated, The Roku Channel offers more than 10,000 free, ad-supported movies, television episodes, and digital shorts, as well as live news and sports programs. Similar to the strategy employed by Amazon (AMZN -1.48%) Prime Video with its Amazon Channels, Roku announced it will be adding premium subscriptions from such notable providers as Showtime, Epix, and Starz, as well as a number of less-known channels. 

Roku is also providing a number of incentives to help seal the deal. Viewers will be able to see all of the content offerings from each of the networks to decide if it's right for them. Customers can also take advantage of free trials for each of the offerings, and The Roku Channel will aggregate all of the content in one place, eliminating the need to switch between various channels. With this customer convenience in mind, Roku will offer a single monthly bill for any or all of the additional subscriptions.

Over the top

Another change will allow those with the Roku mobile app -- which is available from both iOS and Android -- to watch The Roku Channel without using a dedicated Roku device. This will let viewers begin watching a program on one device and pick up where they left off on another.

In addition to the marquee names already mentioned, Roku's premium subscription partners include Baeble Music, CollegeHumor's Dropout, CuriosityStream, FitFusion, The Great Courses Signature Collection, Hopster, Magnolia Selects presented by Magnolia Pictures, MHz Choice, Noggin, Smithsonian Channel Plus, Tastemade, Viewster Anime, and more.

What isn't there

Notably missing from the list are HBO, Netflix (NFLX -1.27%), and Hulu. That doesn't mean some of these won't be added later. It more likely means that deals wouldn't be reached in time for launch. Roku may be getting a stipend from the channel providers for each new subscriber who signs up. That's likely part of the reason Netflix wasn't among the offerings.

The streaming giant has long been among the top-grossing apps on iTunes, paying Apple (AAPL -0.32%) a cut of between 15% and 30% for any subscribers who signed up though the App Store. After recently testing an alternative, Netflix announced that it would no longer support iTunes as a payment method for new subscribers, thereby cutting Apple out of the equation. This will save Netflix millions of dollars.

Given that development, it doesn't seem likely that Netflix would have accepted any offer by Roku that involved paying the company a cut of its subscriptions. If the two do come to an agreement in the future, it will likely be one of convenience and not motivated by profit.

The Roku Channel being viewed on a smartphone

The Roku Channel is now available without a dedicated Roku device. Image source: Roku.

The more the merrier

With the introduction of its latest features, consumers have even more reasons -- and opportunities -- to adopt the company's service. Earlier this year, Roku's platform segment, which houses The Roku Channel, overtook the player segment as the primary breadwinner. That continued to play out in the most recent quarter, as advertising revenue grew 74% year over year and topped $100 million for the first time, while sales of devices grew 9% to $73 million. 

Now that The Roku Channel has gone over the top and can be accessed via the Roku app -- even without a dedicated Roku device -- the company should see an uptick in subscriber growth from those viewers who have been waiting for just such an opportunity. More subscribers mean more eyeballs and better advertising revenue.

Way to go, Roku.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon, Apple, Lions Gate Entertainment Class A, Netflix, and Roku, Inc. The Motley Fool owns shares of and recommends Amazon, Apple, Lions Gate Entertainment Class A, Lions Gate Entertainment Class B, and Netflix. 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.

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