Roku's (ROKU +3.84%) smart TV platform, Roku TV, has been a standout success. In the five years since launching the platform in the U.S., Roku has grabbed a considerable share of the smart TV market: 1 in 3 smart TVs sold in the United States last year was a Roku TV. And the company's managed to translate its success in the U.S. to other markets. Management announced 1 in 4 smart TVs sold in Canada in 2019 was a Roku TV.
Earlier this year, Roku announced 15 brands will produce and sell Roku TVs all over the world, including its first Brazilian partner. The expansion of the Roku TV program is a key driver for the streaming specialist's continued user and engagement growth. So, it's important to understand what's driving more and more manufacturers to opt into using a third-party operating system on their hardware.
A Roku TV model from TCL. Image source: Roku.
Three ways Roku makes money for its manufacturing partners
Roku doesn't pay TV original equipment manufacturers (OEMs) to use its operating system, but it provides several other benefits to its partners.
First of all, it makes the manufacturing process for smart TVs a lot cheaper. Roku offers reference designs, and removes the need for the OEM to design, build, and maintain its own software. As a result, OEMs can produce higher-quality devices less expensively.
Second, Roku can get better placement for Roku TV models with its retail partners. Roku invests a lot of money in retail partnerships and marketing in order to get better and more display shelf space compared to other TVs. The OEM partners get to participate in that.
Third, Roku TVs have lower return rates than other TVs.
The result is greater sales and higher gross margin for the manufacturing partners. That ought to translate into a very tangible benefit to their bottom lines. And with the market share Roku TVs are gaining, it's no surprise that more and more companies want a piece of the action.
What Roku isn't bringing to the table
Once a consumer walks out the door with a Roku TV, that's where the benefits to the OEM partners end. From there, any revenue generated from the Roku platform is all Roku's to keep. And the company has no intentions of changing that.
And that revenue can add up.
Roku's 37 million active accounts generated an average of $23.14 each in revenue last year. It's likely Roku TV users actually generate more revenue due to several additional capabilities versus standard Roku players and the fact that Roku TVs always turn on to the Roku homescreen. Moreover, Roku continues to grow the average as it commands higher average ad prices, more ad inventory, and better revenue shares from distribution; and also keeps growing average engagement.
Over the lifetime of a television set (6-7 years), Roku will generate over $150 in high-margin revenue per account. The gross margin on its platform business was 65% last year.
Roku has no plans to give any kickbacks to manufacturers. Management thinks the market share gains speak for themselves.
Roku doesn't have to give up anything more
Roku's one of two big companies licensing a smart TV operating system. The other is Amazon (AMZN +0.34%). While Amazon has managed to develop a few retail partnerships, many retailers are hesitant to work with one of their biggest competitors.
Roku's singular focus on connected TV is one of its biggest advantages. It doesn't have conflicting interests with any of its partners, OEMs, retailers, and content providers (for the most part). As a result, it can be a much more beneficial partner to OEMs by providing more retail outlets and supporting more content than Amazon or any other competitor.
So, while rumors may circulate that OEMs are demanding a share of Roku's platform in exchange for using its OS, the company is in a position to simply stand pat and keep the economics as they are.
