Roku (NASDAQ:ROKU) ended its streak of five consecutive quarters of accelerating streaming hours when it reported an increase of only 72% year over year in the second quarter. Still, with active account growth of 39% last quarter, users are spending more and more time on Roku's platform. The average user now spends about 3.5 hours per day streaming video on Roku devices.
The big overarching trend
Roku has benefited immensely from the continued growth of cord-cutting. The three biggest pay-TV distributors in the U.S. reported a net loss of over 1.2 million subscribers in the second quarter, which led MoffettNathanson analyst Michael Nathanson to estimate a 5.5% cord-cutting rate during the second quarter and describe the state as "freaking ugly."
Cord-cutters naturally migrate to more streaming content to replace their pay-TV habit. Even if some of those subscribers are switching to virtual pay-TV services, Roku stands to benefit by being the distribution channel and playing a more central role in the TV experience.
Importantly, Roku has never focused exclusively on broadband-only households. It believes its addressable market is anyone with a television set in their living room. That means older cohorts continue to show increased engagement as more and more of them cut the cord. Meanwhile, new cohorts are entering the ecosystem with higher average engagement.
It's also worth noting that the increase in cord-cutting and resultant smaller audience for traditional television ads gives marketers greater incentive to explore Roku's ad products. Management expects ad spend to follow eyeballs to its streaming platform, although it expects that shift to take several years.
Simplified distribution makes it easier to find entertainment
"We believe there's too many apps," Roku CEO Anthony Wood told analysts on the company's second-quarter earnings call. While there's never been more content available for streaming, it's also increasingly difficult to find something good to watch. It's the paradox of choice.
Roku originally wanted to help solve the discovery issue by creating a content-focused user experience instead of a channel-focused interface. That became The Roku Channel, which is one of the top five channels on the Roku platform.
Management says the introduction of premium subscriptions in the Roku Channel is increasing overall engagement on the platform. Tentpole content from HBO, for example, might bring a user into The Roku Channel, and then they'll stay because they discover content from another media partner or Roku itself that they want to watch.
Roku has increased its investments in machine learning to develop better AI recommendations in The Roku Channel. Management says most content recommendations are generated from its machine-learning algorithm than from human curation at this point.
The Roku Channel is a major differentiator between Roku and other platforms like Fire TV. While Amazon has invested in ad-supported video, it doesn't surface content recommendations across ad-supported media partners. Instead, Amazon largely focuses users on its own content from Prime Video and IMDb TV.
The trends will keep accelerating
As mentioned, cord-cutting is only getting worse. As more and more people leave the traditional television ecosystem, Roku stands to be one of the biggest beneficiaries. Less time spent watching pay-TV means more time streaming, and Roku investors should see that reflected in its quarterly results. Over time, that should also translate into more ad dollars moving to the platform as well.
Accelerating that trend is the growing number of streaming services coming from high-profile companies. The next few months will see the release of several new streaming services. As the market for streaming content gets increasingly crowded, Roku's distribution solution -- The Roku Channel -- may become an even more important channel for smaller companies looking to establish a presence in streaming, but getting bullied out by the big companies with big marketing budgets.
While 3.5 hours per day sounds like a lot of time, investors can expect that number to keep growing as the biggest driving forces behind its growth so far get bigger.