It might be hard to remember a time when Netflix (NASDAQ:NFLX) was seen as a great friend to media companies rather than their worst nightmare. But just seven years ago, Netflix didn't have a single Emmy or Oscar to its name; "original content" was still just an experiment at the streaming service.
In 2012, it was primarily a platform for other media companies to distribute their content to an audience beyond traditional TV, specifically in the United States. Netflix's first original series Lilyhammer didn't debut until February 2012, and Netflix ended that year with 85% of its streaming subscribers coming from its home country.
Media companies like Disney (NYSE:DIS) have wised up since then. Disney signed a massive film output deal with Netflix in 2012, but one that didn't bring its movies to the streamer until 2016. And fairly soon after that deal went into action, Disney announced it wouldn't be renewing it. Instead, it would launch its own direct-to-consumer streaming service to fully capitalize on the value of its content library. Several other big media and tech companies have followed suit.
While the strategy might have changed, distribution is still a key part of the equation. And there's one company that sits exactly where Netflix sat in 2012 when it was courting Disney and making massive content deals as it planned for its own original content ambitions and a big international expansion. That company is Roku (NASDAQ:ROKU).
What exactly is Roku?
Roku is best known for its streaming media players, but savvy investors know the company isn't focused on the hardware side of the game anymore. Now, it's all about its platform. The platform business, which counts 30.5 million users across Roku's own devices as well as those of other manufacturers that license its software, accounted for 96% of the company's gross profit in the second quarter.
At its core, Roku is a distribution platform through which media companies can reach an audience without going through traditional TV and cable systems. Now, doesn't that remind you of Netflix?
There are more than 5,000 streaming channels in the Roku Channel Store, and that number is getting bigger as more and more media companies launch their own streaming services. Likewise, Netflix saw significant growth in its licensed content library in the first part of the decade by taking pretty much whatever streaming content it could get its hands on. (Subscribers have noticed a considerable shrinkage in the Netflix catalog over the last few years as it focuses more on originals.)
Budding original content ambitions
The Roku Channel launched two years ago, and it was an instant hit. Management consistently shares that it's a top-five channel on the Roku Platform. Featuring the company's own licensed content, content from partners that share ad revenue with Roku, and premium subscription content all under one roof --it's Roku's equivalent of Netflix's original series and films.
Netflix originals cost more up front, but provide the company a path to better long-term economics, particularly at scale. Likewise, Roku sees better economics from its users watching content in the Roku Channel compared to its revenue share from ad-supported content or premium subscriptions.
While the Roku Channel is already fairly popular, it's still, relatively speaking, in its infancy. As the company scales up and increases engagement in the Roku Channel, it has opportunities to invest more in content for the channel and demand a greater share of revenue from its media partners. Amazon, for example, already demands 50% of revenue from its smaller partners for Amazon Channels.
Just as Netflix invested more in building out its original content catalog as it scaled, Roku can spend more in building out the Roku Channel as it scales. It may even invest in original content, although management has said that's not part of its current plan.
Still mostly a domestic company
Another important similarity between Roku and Netflix circa 2012 is the potential for international growth. Netflix went from 85% of its streaming subscribers being in the U.S. at the end of 2012 to a customer base that was less than 40% domestic as of the end of the second quarter this year.
Roku's user base is largely concentrated in the United States today, but it has big plans to expand in Europe and other international markets. It's laying the groundwork this year, and it expects to start seeing results in 2020. It recently announced the expansion of its TV licensing program to Europe, to integrate Roku OS into smart TVs. CEO Anthony Wood thinks Roku OS could power half of all TVs in the world long term. While Roku currently powers about one-third of all smart TVs sold in the United States, it commands just a 4% market share globally.
One analyst thinks Roku's international expansion could move even faster than Netflix's. Roku could have 80 million active accounts by 2025, according to William Blair analyst Ralph Schackart. He also expects average revenue per user in the U.S. to climb to $58 that year. Roku last reported ARPU of $21.06.
As the best alternative distribution platform for media companies today, Roku should experience Netflix-like growth as long as it can execute on its plans for international expansion and the Roku Channel.