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Roku Doubles Down on Advertising Tech

By Stephen Lovely - Nov 2, 2019 at 2:45PM

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For Roku, ads are everything.

Roku ( ROKU -2.24% ) essentially invented the business space that it finds itself in now. Roku created the first "Netflix player," a little box that could plug into a regular old "dumb" TV and make it "smart." The device was a hit, and the company was soon making money by selling devices that ran its eponymous platform.

But other companies soon created streaming platforms of their own -- including Amazon ( AMZN -1.38% ) and Alphabet, each of which had plenty of ways to monetize its platform and each of which could afford to sell its hardware on the cheap -- or even at a loss. Roku needed a more reliable source of income than hardware sales, and the company found that source in advertising. Last week, Roku doubled down on its advertising ambitions with a major acquisition.

Businessmen shake hands

Image source: Getty Images.

Roku's new acquisition

Roku is buying Dataxu, a Boston company that specializes in advertising technology, for $150 million in cash and stock. That's a pretty good deal relative to what, not so long ago, Dataxu had hoped to get. But more important than the price tag, at least to Roku, is the potential that Dataxu's platform has to take Roku's ad-selling operation to the next level.

Dataxu's platform is a demand-side platform. A demand-side platform is one built for digital ad buyers: Buyers can view data and bid on advertising spots in real-time. Ideally, it offers powerful ad-targeting and analytics tools to ad buyers -- while also making it easy for those buyers to bid on advertising opportunities and spend lots of money on them. Crucially, the demand-side platform acts as a hub that connects multiple ad buyers with multiple ad publishers. Roku's advertising platform isn't just for the ads that appear on the Roku platform's home page -- it's also for ads that are published by partners like Viacom.

To be clear, Roku already has an advertising platform. But Roku CEO Anthony Wood says that the Dataxu acquisition will "accelerate" Roku's advertising platform -- and the roughly 300 Dataxu employees who are coming into the Roku fold should bring some innovations as well.

Roku's big audience

It's easy to see why advertising would be so valuable to Roku. Roku is the biggest player in the streaming platform scene -- by most measures, anyway, and despite Amazon's claims to the contrary. Its user base is massive, and that audience is valuable to advertisers.

Roku has more irons in the fire than this -- the company has met with success in the smart TV space, started the "Roku Channel" free ad-supported video on demand (AVOD) service, and has deals in place with other streaming services in exchange for places on Roku menus and shortcut buttons on Roku remotes. But advertising is the clear top priority, the best bet for Roku's future; moreover, those other areas tend to tie back into advertising in some way (which is most obvious in the case of the Roku Channel AVOD service).

Roku's focus on ads made sense from the start, and it still makes sense now. Of the various ways to monetize a streaming platform, ads are among the least disruptive; while fans don't like ads, the ads can still be served up without making Roku a less service-agnostic platform. By contrast, major tech-backed platforms like Amazon's Fire TV and Google's Android TV are less service-agnostic and tend to push offerings from Amazon and Google, respectively -- which makes an effective way to monetize a platform but does not allow them to maintain the sort of sage neutrality that Roku projects. (Plus, being less agnostic sometimes draws the ire of the competition -- witness Disney's almost certainly deliberate decision to leave Fire TV out of the Disney+ launch.) Combine this logic with the relatively appealing price of the Dataxu acquisition, and you have a smart move by Roku.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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