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How Roku Will Profit On the Streaming Wars

By Evan Niu, CFA - Nov 8, 2019 at 9:00AM

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Roku management discussed the launch of new services on its earnings call this week.

Streaming TV platform Roku ( ROKU -2.24% ) reported third-quarter earnings this week, and this November is an important month for video streaming. Apple launched Apple TV+ at the beginning of the month, and Disney's Disney+ will debut in less than a week. Those are two high-profile service launches that Roku hopes to benefit from as an agnostic tech platform. Investors have been trying to figure out how to feel about those services -- shares tanked in September when Apple announced the aggressive price point of just $5 per month for Apple TV+.

During the earnings call, management provided quite a bit of commentary regarding the streaming wars and how the new services will contribute to Roku's business.

Apple TV app displayed on a Roku TV

The Apple TV app is now available on Roku. Image source: Roku.

Something for everyone

Cannonball Research analyst Vasily Karasyov asked if services like Apple TV+ or Disney+ might hurt the ad business, as they could nudge engagement toward subscription services instead of ad-supported channels like The Roku Channel, which has been crucial to growing advertising revenue.

CEO Anthony Wood dismissed the concerns, saying that anything that drives overall engagement on Roku's platform is good, particularly as more streaming services should accelerate the ongoing shift of eyeballs -- and ad dollars -- from linear TV to over-the-top (OTT) platforms. Wood added:

We think that eventually all TV is going to be streamed and that this will be -- the rise of all these new services will help encourage that transition. So we have customers that want to watch paid premium services. We have customers that want to watch free content. We have customers that want to watch both.

And so we think all those business models are supported on our platform. We monetize all those business models. We see advertising is growing the fastest but they're all generally good for our business.

Platform chief Scott Rosenberg added that the real task is to attract those linear TV ad budgets "out of linear into OTT."

Three ways to profit

RBC Capital Markets analyst Mark Mahaney asked how investors should think about Roku monetizing third-party services. The analyst pointed to three broad revenue categories: customer acquisition ad revenue, subscription revenue share, and advertising revenue share. Mahaney asked, "Of those three buckets, where do you think the impact to you from the streaming wars is going to be most likely seen?"

"For us, this is ultimately about giving consumers even more options in OTT and we're partnering very deeply with these companies to help launch their services, acquire subs, drive engagement," Rosenberg replied, without directly answering the question regarding revenue categories. "And I won't comment on the economics of any specific partner except to say that our relationships are multifaceted."

Wood noted that Roku offers a slew of tools for companies to promote their services and garner subscribers, in addition to earning a piece of premium subscriptions it sells:

There's a [revenue] share for customers that we sign up and that is going to continue to grow. But there is also a lot of marketing opportunity and ways for them to build their subscribers and they're very effective, more effective than probably any other way they spend their marketing dollars. And so that's the big way that we make money for new content partners.

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