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Smart TVs Are the Most Important Front in the Platform Wars

By Stephen Lovely – Sep 29, 2019 at 3:00PM

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Roku and Fire TV want to live in your television set.

Roku's (ROKU 4.77%) eponymous platform came into being as a set-top box that gave the "dumb" TVs of the late 2000s the ability to stream Netflix and, later, Hulu. By the time Amazon (AMZN 4.50%) got into the platform game in 2014, TVs had gone "smart" -- but there was still a big market for "streaming sticks" and "streaming boxes" capable of giving dumb TVs more features and, quite often, effectively replacing the interface of a given smart TV with the more pleasant alternative offered by Fire TV or Roku.

Some smart TVs ran licensed platforms -- in particular, Alphabet's Android TV. But many brands seemed to think it was a better idea to build a platform than to license it. That may have been cost effective, but the frequent use of Roku and Fire TV devices on already-smart TVs is a testament to how weak some of these proprietary platforms could be in the eyes of users. Given that success and Android's example, it was only a matter of time before Roku and Amazon dove into the smart TV market themselves. And so they did -- and now it's clear that it will be TVs, not "sticks" or "boxes," that will shape the future of these companies.

A man watches TV.

Image source: Getty Images.

Roku, Amazon, and their new TVs

Neither Roku nor Amazon has become a TV manufacturer, but both have found partners for their smart TV projects.

Roku was the first of the pair to enter the niche. The company announced its Roku TV line of smart TVs in 2014 and found success in the following few years. Roku TVs have enjoyed a mutually supportive ascendance with TCL, the Chinese TV producer that has transformed itself from a relative unknown into a major industry player in just a few short years.

Roku TV models -- particularly those from TCL -- remain very popular. TCL shipped 26% of all TVs sold in North America in the first quarter of 2019. That was enough to eclipse Samsung and to allow Roku's platform to claim a 34% market share in smart TV sales that same quarter (a figure that includes other partners' sales as well as TCL's).

Part of the appeal is the price. Roku's TVs have been very affordable from the get-go. The company's low-priced 4K models arrived at the perfect time to take advantage of the new normal -- we're well past the 4K tipping point now, and even budget-minded consumers are looking for 4K products.

All of this has not escaped the notice of Amazon. Amazon put out a line of Fire TV Edition smart TVs in 2017 with the aid of manufacturers like Element and, later, Toshiba.

They weren't received with quite the same enthusiasm as the Roku TVs were. But now Amazon is back, partnering with Toshiba to produce a new line of Fire TV Edition smart TVs that will boast new features like OLED screens and built-in Alexa mics. And Amazon has been quick to target the same low price points as Roku.

Roku isn't standing pat, though. It's moving into the UK market with a new line of TVs from Hisense -- a significant play as Amazon has been building up its Fire TV platform's strength in Europe as well.

Platforms matter -- and TVs are king

It's easy to see why Roku and Amazon are in the midst of such a pitched battle for platform market share. These platforms can be very lucrative. While Roku has long since given up on making big money from its hardware, it has become more effective at selling targeted ads. Fire TV runs ads, too. Connected TV devices like the Roku TVs and Fire TV Edition models want to cater to advertisers and ad-buying firms like The Trade Desk, which is why Roku has more heavily invested in its ad-targeting technology. As is so common in tech, the consumers are also the product.

Of course, advertising isn't the only money-maker here. Both platforms also offer users the chance to sign up for some apps and services through the platform, which allows Amazon and Roku to "tax" those subscriptions. On top of all of this, Amazon puts its Fire TV platform to work funneling users to its own offerings: movies and shows to rent or buy, Amazon originals on Amazon Prime Video, and subscriptions to third-party premium services through Amazon Channels.

But all of this stuff doesn't work without consumers. Roku and Fire TV can't survive by making "dumb" TVs smart, because dumb TVs are now virtually nonexistent. Wisely, they also haven't stuck to serving as understudies for bad proprietary smart TV platforms. Now that consumers can get effective platforms from the start (most notably, of course, the Roku and Fire TV platforms themselves), they're presumably unlikely to switch platforms until they buy their next TV. They'll have years to get used to the platform that came with their model and likely become loyal customers in the process. Tech investors interested in the outcome of the platform wars would be wise to keep an eye on the smart TV front.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stephen Lovely owns shares of Amazon and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Netflix, Roku, and The Trade Desk. The Motley Fool has the following options: short January 2020 $125 calls on The Trade Desk and long January 2020 $60 calls on The Trade Desk. The Motley Fool has a disclosure policy.

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