One of Roku's (ROKU -3.83%) biggest strengths over the last few years has been its growing share of the smart TV market. Management says one-third of all smart TVs sold in the U.S. are now Roku TVs, and it accounts for one in every four smart TVs sold in Canada. As it expands into new markets, like Brazil, launching with a TV manufacturing partner has been key to its success.
However, analysts are wary of Roku's ability to keep winning key partnerships with manufacturers. It's a question that's come up on earnings calls. Stephens analyst Kyle Evans expressed his doubts last week in a note to investors. He was particularly doubtful about how long Roku's current partnership with TCL, the biggest Roku TV manufacturer, could continue as is. "We believe Roku has benefited tremendously from TCL's heavy lifting," he wrote. "TCL still isn't participating meaningfully in Roku's downstream advertising/commerce economics."
Roku has said it has no plans to offer revenue sharing to its manufacturing partners. Evans believes TCL and other Roku TV manufacturers may start using Amazon's (AMZN 0.73%) Fire TV platform or Google's Android TV if Roku doesn't start offering some kickbacks for manufacturers. Can Roku fend off Amazon and Alphabet (GOOG 1.17%) (GOOGL 1.16%)?
Roku copycats aren't easy to make
Evans is worried that TCL partnering with other software developers could spark "TiVo-like concerns for Roku investors." TiVo lost its dominance of the DVR market when pay-TV companies started offering their own DVR boxes bundled as part of their subscription offerings. The generic DVRs were functionally similar to TiVos boxes even if they didn't include all of the bells and whistles, and since they were packaged with a cable subscription, they made TiVo look redundant for most households.
Evans seems to think shoppers are more loyal to the TV manufacturing brand than they are to the software that powers them. But if that were the case, TCL would've never seen success with its Roku TV designs.
If making a Roku TV copy was easy, smart TV manufacturers would do it themselves.
A large part of the value of Roku TV is hard to copy: the ecosystem of Channels on the Roku platform, not to mention Roku's own Roku Channel. Amazon Fire TV doesn't have as many channels as Roku, and its willingness to leave big names off of its platform for extended periods of time -- such as YouTube -- can make it less user friendly than Roku. Meanwhile, Android TV still has a relatively small market share, so there's not a huge incentive for media companies to develop apps for that platform.
Roku benefits from a virtuous cycle where a growing user base attracts more media companies, and vice versa. That's owed, in part, to its first-mover advantage. So, a manufacturer diversifying to other smart TV platforms will likely have minimal impact on Roku's appeal to consumers. Therefore, any manufacturer that moves away from Roku entirely will likely see a negative impact on sales as consumers look to other manufacturers for their Roku TVs.
Retail partners are important to manufacturers
A key piece of Roku's strategy is working with retailers to get its products into stores. Those big, in-store displays with random nature videos are still a key source of sales for most manufacturers, and Roku works hard to secure prime real estate.
Amazon can't offer the same benefit to its manufacturing partners. Most retailers aren't interested in working with one of their biggest competitors. So far, Amazon only has one retail partner for its Fire TV Edition smart TVs.
If a manufacturer wants premium physical shelf space without paying for it, Roku is the one that offers it. That said, Amazon has a lot of power in retail in and of itself. An offer to promote a partner's television set on its virtual shelves could sway some manufacturers. Still, a lack of retail partners outside of Amazon would mean a big sacrifice in sales if TCL or another manufacturer moves away from Roku and toward Fire TV. More than half of TCL's sales are in store. That makes moving away from Roku a risky endeavor.
Roku provides manufacturers with a strong brand and advantages in retail that its competitors can't offer. There's no reason to have "TiVo-like concerns" about its ability to maintain, and even grow, its share of the smart TV market going forward, or as it enters new markets.