Roku (NASDAQ:ROKU) announced today it will acquire privately held DataXu -- a demand-side platform that helps marketers plan and buy video ad campaigns -- in a deal valued at $150 million. DataXu provides automated bidding and self-service software that allows marketers to manage programmatic ad campaigns across a variety of digital platforms. In a press release announcing the deal, Roku said that DataXu "utilizes advanced TV and OTT [over-the-top] media planning tools, a proprietary device graph, and data science to help marketers optimize for business outcomes across TV, OTT, desktop and mobile."

The transaction has already been approved by each company's board of directors and is expected to close in the fourth quarter.

"TV advertising is shifting toward OTT and a data-driven model focused on business outcomes for brands," said Anthony Wood, chief executive officer at Roku. "The acquisition ... will accelerate our ad platform while also helping our content partners monetize their inventory even more effectively."

A Roku TV, with shortcuts to streaming providers

Image source: Roku.

The future of advertising is programmatic

To understand why this acquisition is a big deal, it first helps to understand programmatic advertising. Companies like DataXu and The Trade Desk (NASDAQ:TTD) provide software that marketers use for digital advertising. These platforms use high-speed computers and cutting-edge algorithms that match advertising spots with available ad spaces, while employing machine learning to ensure that ads are shown to the consumers who are most likely to act on them.

These platforms have the capability to evaluate millions of ad impressions per second, providing marketers with real-time data to help guide their decisions.

One of only two platforms approved by Amazon

E-commerce giant Amazon.com (NASDAQ:AMZN) recently made headlines by announcing that it would allow advertisers to use select third-party ad-buying platforms -- including DataXu and The Trade Desk -- to buy ads on Amazon Fire TV devices.

At the time, The Trade Desk CEO Jeff Green called the announcement a "game changer." He went even further, calling it "one of, if not the most significant" deals that The Trade Desk had done in the connected television space to date. As I pointed out when the deal was announced, with this change to policy, advertisers are now permitted "to place advertising with 100% of the third-party content providers that have apps on the Amazon Fire TV platform," including providers like Comcast's NBC, Walt Disney's ESPN, and Sony's Crackle. Prior to the change, advertisers were required to use Amazon Publishing Services to place these ads.

Why this is a big deal for Roku

In recent years, Roku has changed its focus from selling hardware devices to selling advertising -- which now generates the bulk of its revenue. In its fiscal second quarter, Roku reported revenue of $250 million, up 59% year over year. Digging a little deeper, however, tells the tale. Player revenue of $82 million grew 24% year over year, with gross margins of 5%. Compare that to its platform segment -- which includes advertising -- which grew to $168 million, up 86% year over year, with a gross margin that topped 65%. It's easy to see why advertising is an area of intense interest for Roku, providing the lion's share of the company's growth.

Roku is already the No. 1 U.S. streaming platform in terms of hours streamed, with more ad-supported hours than any other OTT platform. The company also boasts more than 30.5 million active accounts, putting a Roku device in about 1 in 4 U.S. households. Its growth has made Roku one of the top-performing technology stocks of 2019, gaining more than 330% so far this year.

The company is mining a massive opportunity, as the broadcast television ad market currently tops more than $70 billion. Viewers are migrating to streaming in increasing numbers, currently accounting for 29% of all television viewing, but capturing just 3% of TV ad budgets. As the move to streaming continues, an increasing amount of advertising will follow the viewers, positioning Roku perfectly to take advantage of this paradigm shift.

The addition of DataXu will only accelerate Roku's push into the OTT advertising market.