One of the biggest pieces of Roku's (NASDAQ:ROKU) platform business is The Roku Channel. The service aggregates content from other ad-supported media companies alongside some content it licenses on its own. There's also a nascent premium subscription offering within the service.
Ad-supported streaming is significantly outpacing growth in subscription video, and The Roku Channel has been a big beneficiary. And while content owners could go it alone and promote their apps directly on Roku's platform, the service offers several advantages.
1. Better content recommendations
Roku knows a lot more about its audience's viewing habits than a stand-alone ad-supported streaming service.
Most ad-supported services don't require users to create or log into an account, which results in generic content recommendations. Roku is able to track users' viewing habits within The Roku Channel, and it can also see which streaming services users spend their time with or have installed on their devices, as well as what content they're searching for.
Using those data, Roku is able to generate better content recommendations for its viewers. As a result, The Roku Channel is more engaging and users spend more time streaming. Roku reported that streaming hours on the service increased more than 100% during the first quarter. That compares with a 49% increase in total streaming hours on its platform.
2. More targeted advertisements
Not only does Roku know its audience's viewing habits better than most ad-supported streamers, it also has a lot of additional data on its users that can help target advertisements. The company has credit card information for its users, which it uses to process subscription and on-demand payments. It may also have additional data about its viewers' households, such as if they're cable subscribers, based on TV Everywhere apps that require authentication. On top of that, it may even know which advertisements viewers have already seen on linear TV.
All of that leads to more targeted advertisements than most ad-supported services can offer marketers. Third-party streaming apps may be able to offer their ad inventory on Roku's ad-buying platform, OneView, to sell more targeted advertising, but they can't be guaranteed to fill their ad inventory that way. But insofar as direct sales, most third-party ad-supported services can't offer the same guarantees as Roku.
Therefore, advertisements on The Roku Channel will carry higher average prices. Since Roku shares ad revenue with content providers, some providers may end up generating more revenue per streaming hour in The Roku Channel than on their own app.
3. Greater efficiency at driving traffic
The final advantage of The Roku Channel is its efficiency in driving traffic to content. The service now comes preinstalled on Roku devices. That alone makes it easier to bring viewers into the streaming app, as it overcomes a major hurdle for most other ad-supported services: There's no discovery or installation required.
Being an aggregator of content also means Roku is able to bring in a broader audience. It can then use its superior content recommendations to funnel viewers toward appropriate films and series. That should boost overall engagement for all content providers simply by keeping users in The Roku Channel ecosystem and keeping them coming back again and again.
A win-win proposal
Roku offers a win-win proposal for content providers. It can monetize user engagement at a higher rate and it can generate more hours of engagement. That benefits both Roku and the media companies it works with.
Roku is able to generate high-margin video ad revenue with very little capital intensity, since its only cost for most of its content is the advertising revenue share. Media companies are able to generate additional revenue from their content, and in some cases they may generate more revenue from The Roku Channel than their own streaming app on the Roku platform.
Therefore, investors should expect streaming hours on the service to continue outpacing the rest of Roku's platform as content providers make more films and series available on it. In turn, that should lead to strong growth in platform revenue stemming from Roku's greater share of ad sales in The Roku Channel versus third-party ad-supported services.