Roku (ROKU 1.29%) just reported stellar third-quarter earnings, and one of the highlights was the growth of The Roku Channel, its ad-supported streaming service. Active accounts streaming The Roku Channel more than doubled year over year, reaching households with an estimated 54 million people. Roku says that makes the app the fastest-growing top 10 channel on the Roku platform.

But there's still a lot of room left for growth for the company's all-important source of ad revenue.

Some back-of-the-envelope math

There are approximately three people per Roku household, according to analyst Rich Greenfield, which means about 18 million active accounts streamed The Roku Channel last quarter. That's less than 40% of Roku's 46 million active accounts, he points out.

The Roku Channel homescreen on a TV.

Image source: Roku.

There's a lot of potential to continue expanding the penetration of The Roku Channel. What's more, Roku's overall user base continues to expand. Active account growth accelerated in the third quarter, reaching 43% year over year. Even before the pandemic shifted more TV time to streaming, Roku's active accounts were growing at about 36%.

So the pie is getting bigger, and a bigger portion of the pie is using The Roku Channel. That's a recipe for rapid user growth.

What's driving more accounts to The Roku Channel

During Roku's third-quarter earnings call, CEO Anthony Wood described a virtuous cycle for The Roku Channel. "[W]e promote it, we onboard more content, we get more users, we get more advertisers, then we get more content, we do more promotion, we get bigger titles."

The company continues to strike content deals for the app. Part of its deal with Comcast's NBCUniversal to distribute Peacock was the inclusion of NBCUniversal content in The Roku Channel, including a live stream of NBC News.

As more media companies move toward streaming and need to partner with Roku, the company can leverage its growing active accounts to win more content for The Roku Channel in exchange for distributing direct-to-consumer content. Roku has taken stronger and stronger stances when it comes to negotiating with big media companies over the past year or so.

Roku has opportunities to renegotiate content deals whenever TV Everywhere distribution contracts come up for renewal. And as more media companies launch their own direct-to-consumer streaming services, Roku should be able to win more content for The Roku Channel, as well as continue expanding its appeal to viewers and advertisers.

Meanwhile, Roku continues to expand The Roku Channel off its platform. It recently made a deal to stream on Amazon's Fire TV devices. It also just launched a mobile app, which lets users stream on their phones. It's also available on desktops through the web and on several other manufacturers' devices.

The value of The Roku Channel

Roku controls 100% of the ad inventory on the streaming service on its own platform, which gives it greater potential to monetize streaming hours than in other ad-supported services streaming on its platform.

The company is confident it can maintain high ad prices relative to traditional TV, and it's taken steps to improve its ad products in recent years. The acquisition of Dataxu last year, which it rebranded and revamped into OneView, gives it broader reach across surfaces, opening the ability to retarget advertisements. 

The company also continues to gather more data on its users through first-party interactions and third-party partnerships. It made a deal with Kroger earlier this year to use its shopper data to target ads, which led to strong growth in consumer-packaged-good ads last quarter.

As Roku continues to improve its advertising capabilities along with engagement in The Roku Channel, platform revenue, which consists primarily of ad revenue, ought to continue to outpace account growth and streaming-hour growth over the long run. As such, there's a lot of growth left for Roku and The Roku Channel.