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The Roku Channel Just Made a Big Shift in Strategy

By Adam Levy - Mar 19, 2021 at 11:30AM

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Roku practically said it had no interest in this strategy a year ago.

Roku (ROKU -2.58%) will premiere a new series on The Roku Channel this weekend. Not some exclusive rights to an old show like 24 or Xena: Warrior Princess, but a real premiere. Roku will be the exclusive distributor of the brand new series Cypher, which debuts March 19.

The move represents a major step for Roku to make The Roku Channel a more attractive destination both on and off its own devices. And it's just the first of many exclusive shows that'll premiere on The Roku Channel.

The Roku Channel homescreen.

Image source: Roku.

A shift in strategy

Just a year ago, CFO Steve Louden rejected a report that Roku was in talks with media companies to produce original content for The Roku Channel. Technically speaking, Cypher isn't a Roku original. Roku licensed the rights to stream it on its ad-supported streaming service, just as it does with some older content sitting in the back catalogs of media companies. The series wasn't produced with The Roku Channel in mind.

But it certainly looks like an original series. Roku gets exclusive first-window rights to the series. And that's exactly the strategy Netflix took with its early originals like House of Cards.

Additionally, Roku bought the entire content library from the now-defunct Quibi earlier this year. The library includes over two dozen series that never saw the light of day. And Roku has the exclusive rights through next year with an option to extend the license until 2027. That looks a lot like original content as well.

Why the change of heart?

Roku has put increasing focus on the success of The Roku Channel in its investor updates. Viewers have more than doubled in each of the last two quarters and grew about twice as fast as Roku's overall user base. The service now reaches households with approximately 63 million viewers, according to Roku.

"The continued growing scale of The Roku Channel enables us to be more creative and expansive in sourcing cost-effective content," management wrote in its fourth-quarter letter to shareholders.

And originals, while relatively expensive, can be some of the most cost-effective content at scale, especially for an ad-supported streaming service like The Roku Channel.

Because Roku monetizes each piece of content directly with advertisements, it knows approximately how many people it needs to convince to watch a series in order to break even on its cost. Importantly, if Roku sees good traction with a piece of content, it has the capabilities of promoting that content, both within The Roku Channel and on the Roku homescreen itself with its own advertising products. That will enable Roku to turn a small success into a big success.

Moreover, original series have the power to draw in new viewers. One of the biggest reasons consumers sign up for a new streaming service is original content. That's becoming increasingly important as Roku expands The Roku Channel beyond its own devices. As such, original series could help Roku continue growing The Roku Channel much faster than its overall user base.

The center of the advertising business

The Roku Channel is front and center in Roku's advertising business. Roku controls all of the ad inventory in the streaming service, even for content it licenses from other media companies on a revenue share basis. 

As such, it's likely the biggest source of monetized video ad impressions for the company. Ad impressions more than doubled year over year in the fourth quarter.

Growing The Roku Channel is one of the biggest factors within the control of Roku when it comes to increasing ad inventory it can sell to marketers. The company is making moves to expand well beyond its platform and its own streaming service, including linear TV ads and other digital advertisements across the internet and other devices. But Roku has a much better understanding of its audience on The Roku Channel than in other apps or platforms, making its ads more attractive and more valuable to marketers.

With original programming -- or exclusive premieres, as it may be -- Roku is betting on its ability to expand its audience and attract new advertisers. 

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