2020 saw an acceleration in the shift from traditional TV advertising to digital connected-TV advertising. Companies like Roku (NASDAQ:ROKU) were big beneficiaries. But there's one area where Roku still lags the broader connected-TV advertising market, and that presents a massive opportunity for it to keep growing.

Changing the way marketers buy TV ads

Roku has done a great job of attracting more ad dollars over the last few years. Management noted its top six advertisers doubled their ad spend in 2020, and committed to spend even more in 2021. But Roku's still operating in a "supply rich" environment. Monetized ad impressions more than doubled once again in the fourth quarter. In other words, even with the increased spending from marketers, it has even more ad impressions to sell.

A wall-mounted TV displaying the Roku home screen next to a potted plant and a side table

Image source: Roku.

One area that can help accelerate ad spend and fill more of Roku's ad inventory is programmatic advertising. Programmatic advertising platforms allow ad buyers to vary the price they're willing to pay for an ad based on known information about the viewer. For example, a man streaming one app during his lunch break might be worth more or less than a woman streaming a different app after dinner.

Scott Rosenberg, the head of Roku's platform business, said during the company's fourth-quarter earnings call that programmatic ad spend still represents a minority of advertising on its platform. However, the overall market for programmatic ad spending in the United States (where Roku generates the vast majority of its ad revenue) accounted for about 54% of connected-TV advertising last year. That share will rise above 60% by 2022, according to estimates from eMarketer.

Roku's quickly playing catch-up in programmatic. It revamped its 2019 Dataxu acquisition, rebranding it as OneView last year. It's also partnered with external data providers to improve its targeting and measurement capabilities. Ad impressions served through OneView doubled year over year in 2020, and ad impressions served by OneView on Roku devices specifically quadrupled, management wrote in its letter to shareholders. It fully expects the majority of its ad revenue will come through OneView over time.

The advantages of using OneView on Roku

There are several advantages to buying ads programmatically through OneView instead of paying for direct insertion on The Roku Channel or another ad-supported app.

The biggest benefit is the ability to leverage Roku's data. So on top of generic information like location, device, and time, advertisers can also access Roku profile data, including demographics and payment information. Additionally, advertisers will also have access to other ad impressions served to that viewer through OneView, as well as ads on linear television recognized by Roku's audio content recognition on its smart TVs. Those data make ads bought through OneView on Roku devices particularly valuable.

Another advantage is that it opens up connected-TV advertising to more ad buyers. Instead of merely targeting traditional TV advertisers, Roku can bring on smaller advertisers with more limited ad budgets, because the cost to serve is much lower. Roku doesn't have to dedicate a sales team for small-budget advertisers, and small-budget advertisers can commit to smaller ad buys than TV with better measurement capabilities.

That can help Roku take share from the broader digital advertising market, not just the traditional TV advertising market. Management highlighted a case study in its letter to shareholders: Frndly TV shifted some of its ad budget to Roku and saw 65% better return on investment for its ad spend compared to large social media advertising platforms.

Programmatic advertising can grow the average price per ad by improving relevance, conversion, and measurement while bringing in new advertisers to which Roku didn't previously have direct access. And considering Roku's underpenetrated on programmatic advertising versus the industry, the technology has massive potential to supercharge its revenue growth over the next few years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.