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Roku's in the Best Position to Win This $7 Billion Opportunity

By Adam Levy – Jun 5, 2020 at 11:00AM

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The connected-TV ad market is fragmented, but Roku offers the best solution right now.

Connected-TV advertising spending in the United States is expected to more than double over the next few years, surpassing $14 billion by 2023. And with the recent pullback in traditional television ad spend, that trend may be accelerating. Streaming hours are booming amid the coronavirus pandemic, and ad-supported streaming services are some of the biggest winners.

Most connected-TV ads aren't bought directly through the media companies behind the various streaming services. Instead, they use a platform that aggregates inventory across multiple platforms or streaming services. Roku's (ROKU -1.66%) OneView (formerly Dataxu), Amazon's (AMZN -3.01%) own demand-side platforms (DSP) for Fire TV, and The Trade Desk (TTD -2.60%) are three of the biggest and most important ad-buying platforms in the market.

But Roku is in the best position of all three to win an outsized portion of the $7 billion flowing into the market over the next few years.

A woman looking at the Roku home screen on her living room TV

Image source: Roku.

Roku has a lot of advantages

Roku counts over 40 million active accounts, and those accounts are heavily concentrated in the U.S. While Amazon said it surpassed 40 million accounts in January, its viewers are much more spread out all over the world. Roku owns about a 39% market share of connected TV devices in the U.S. versus 30% for Amazon.

Importantly, Roku users are highly engaged. The average viewer spent over 3.6 hours per day streaming video on their Roku devices during the first quarter. That high engagement, relative to other platforms, results in a greater share of connected TV advertising. Roku devices took 59% of programmatic ad spend in 2019, according to data from Pixelate. What's more, engagement is growing. Hours streamed continue to outpace account growth for Roku.

One area of outsized engagement is The Roku Channel. Streaming hours in the app more than doubled year over year in the first quarter, while overall streaming on the platform grew 49%. That's important because the only way for marketers to advertise in The Roku Channel is to use Roku's DSP.

Another area of strength for Roku is its smart TV program. Roku TVs account for about one-third of smart TV sales in the United States. Combined with Roku's automatic content recognition technology, the company can gather deeper insights into what content users are watching on linear TVs, including advertisements. That can help it improve the ads users see while they're streaming content on demand.

Roku's challenges

Roku isn't without its challenges. Amazon blocked Dataxu from accessing Fire TV ad inventory after Roku acquired the company last year. Advertisers that want a one-stop shop to reach users across all platforms won't find it with Roku. 

The Trade Desk might offer a better solution, but it has limited access to viewer and other proprietary data owned by Roku or Amazon. Roku's DSP is also limited in its reach to digital video ad inventory controlled by other services (although it's growing) as well as linear TV.

Roku's trying to make up for its shortcomings by guaranteeing TV advertisers will only pay for ads shown to people who don't see their ads on linear TV. It's also offering guarantees for app downloads or website visits. But those offers are only available on ads bought through its OneView platform. Dataxu and Roku's automatic content recognition technology will help achieve those results for advertisers.

Still, Roku's inability to reach every streaming audience will force marketers to spend at least some of their ad budgets on other platforms. And Roku isn't guaranteeing it won't overlap ads with digital ads bought on other platforms. So, with such a high share of the programmatic connected-TV ad market already, Roku's upside in gaining more market share is limited.

That said, Roku's CEO, Anthony Wood, has long said that the company's biggest opportunity is to take a share of the $70 billion spent on traditional TV ads in the U.S. every year. And with more television hours shifting to streaming -- and ad-supported streaming specifically -- Roku is in the best position to win those TV ad dollars. Its guarantee to de-duplicate ads seen on TV is a clear part of its strategy to offer as much value to traditional TV advertisers as possible now in order to win them over long term.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Roku, and The Trade Desk and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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