Roku (NASDAQ:ROKU) has a big appetite for content. And that appetite won't be satiated by the old series and films media companies are willing to offer on The Roku Channel, Roku's free ad-supported streaming service.

Last month, Roku acquired Quibi's content library from the now defunct streaming service. Now it's looking to expand on that library with more original content, according to a job listing spotted by Revealera and reported by Protocol.

The Roku Channel homescreen on a TV with a Roku stick.

Image source: Roku.

The big opportunity for Roku

Roku has done an excellent job attracting an audience to The Roku Channel. Management revealed active accounts streaming the free service in the third quarter more than doubled year over year, reaching households with an estimated 54 million viewers. 

But some back-of-the-envelope math suggests that represents just 18 million of Roku's 46 million accounts as of the end of the third quarter. It's since continued to expand its user base, reaching 51.2 million active accounts by the end of 2020.

Closing that gap presents a massive opportunity for Roku, which generates outsized revenue from viewing on The Roku Channel versus viewing on other channels it distributes. Roku also has direct access to viewer data in The Roku Channel, which can improve content and channel recommendations and ad targeting. Not only that, but it also has full control over the ad inventory in The Roku Channel, bolstering the overall attractiveness and performance of its Dataxu demand-side ad buying platform.

Original content could turn The Roku Channel into more of a streaming destination, as opposed to the channel users select when they can't find anything good to watch on Netflix (NASDAQ:NFLX).

Spending money to get users to spend time

Original content isn't cheap, and there's no guarantee it'll increase viewership. Quibi spent hundreds of millions on content starring well-known celebrities, and it failed to attract an audience.

Netflix spent $14.6 billion on content in 2019. Even way back when it was just starting to dip its toes in original content, it was spending billions (although that includes its licensed library). Netflix also cut costs in its early days of original content by licensing exclusive first-run rights for its series instead of producing them in-house. It also didn't get the global rights to many of its early originals.

Roku seems to be planning to take a hands-on approach with originals. The job listing for a Lead Production Attorney mentioned responsibilities for negotiating agreements with writers, actors, directors, and producers as well as interfacing with guilds and unions.

That may require more cash upfront, but a lower overall cost in the long run for original productions. Netflix CEO Ted Sarandos said production studios typically charge a 30% to 50% premium above their costs at a 2018 investor conference.

For Roku, cash could be a concern. It ended the third quarter with just over $1 billion on its balance sheet after raising $500 million during the quarter. After the purchase of Quibi's content, it's likely sitting on significantly less, even if it produced strong free cash flow in the fourth quarter. Cash flow in the fourth quarter of 2019 was negative, but Roku's early release in January suggests strong results for 2020.

However, with debt still extremely inexpensive and the momentum in The Roku Channel, it's as good an opportunity as Roku may ever get to experiment with original content. Its core business is on its way to becoming free cash flow positive, so expanding into other growth opportunities like original content makes sense.

There's certainly risk, but Roku's made a great business out of getting other media companies' content in front of its growing audience at the right time to maximize engagement. It's time it starts doing the same for itself.