In recent years, media technology expert Roku (ROKU +3.86%) has been moving away from set-top boxes and dongles, finding more lucrative prospects in software licenses and ad sales. Meanwhile, audio-streaming veteran Spotify Technology (SPOT +0.97%) was always all about those higher-margin plays on intellectual property, inching deeper into premium subscriptions over time.
All of a sudden, both of these companies seem to have found a new appreciation for those unprofitable hardware sales. According to the rumor mill, Roku wants to sell smart TV sets under its own brand. And Spotify's hardware ambition is no rumor -- the company just launched a thing for your car, called Car Thing. This device channels content from your premium Spotify account into your vehicle.
Spotify was supposed to chase high-margin software deals and leave the barely breakeven hardware headache to its largest customer, right? So what's the big idea with these hardware projects?
Let's talk about that.
Image source: Getty Images.
What is Roku doing?
According to Business Insider's anonymous insider sources, Roku has been kicking the tires of smart TV sets since 2020. The idea appears to rest on two motivating factors:
- Devices ranging from smartphones and TVs to cars and industrial manufacturing systems are suffering from a shortage of microchips. This shortage was primed and triggered by various stages of the COVID-19 crisis, and it limits the number of units the device makers can put on store shelves. In Roku's case, TV builders are facing limited availability of screen controller circuits, media-streaming data processors, and other crucial components, which reduced the sale of TV sets with Roku software in the holiday seasons of 2020 and 2021. The company could work around the supply chain issues by choosing more readily available chips for each task, even if it wouldn't necessarily be the best possible choice in a healthy chip market.
- Furthermore, consumer tastes are shifting away from set-top boxes, plug-in dongles, video game consoles, and other external media-streaming hardware platforms. Instead, most people expect their TV set to manage the media selection menus and the actual decoding of the secure data streams. Therefore, the TV set is becoming a more powerful place to highlight your brand -- and slapping the Roku logo on the hardware should be more effective than offering just the included software.
So Roku has reportedly already run some design ideas through the usual focus groups and limited market tests, preparing for a large-scale launch before the 2022 holiday season. The company has not confirmed any of these reports, but that's the scuttlebutt on the street.
NASDAQ: ROKU
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How about Spotify?
And let's not forget about Spotify's Car Thing. This was a focus-group item last fall but is now available to anyone who wants one. For $90 plus tax, you'll get a highly specialized Spotify player for your car, replacing the potential Spotify features in your factory stereo and smartphone-connected solutions.
Except, of course, that the Thing must be paired with a smartphone to suck down media streams from the internet. It's just a cleaner, simpler way to interact with one specific media service.
If you're going that far to get a better Spotify experience in your car, the company is obviously getting some spiffy word-of-mouth marketing from the way you show it off to friends, family, and carpool guests.
NYSE: SPOT
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Is this hardware push a good idea?
It looks like Spotify and Roku want to boost public awareness of their brand names, even if that means running a business operation with a lower profit margin. Ideally, they would love to become the Apple of smart TVs and music service devices, charging luxury prices for a premium experience, but very few companies have been able to copy Cupertino so far.
In particular, Roku should aim for the lower-end mass market. The company is at least partly trying to alleviate the effects of the semiconductor shortage, which may force Roku to work with older and less impressive chips, at least in the early going. And once you establish yourself as a supplier of decent, affordable devices, it won't be easy to lift that brand into the luxury segment. That being said, a low-priced offering of Roku-branded TV sets could be a winner in this year's holiday shopping season. Keep an eye on Roku's device announcements, paying special attention to their pricing and availability.
I don't expect the Car Thing to work wonders for Spotify's brand. There are too many alternatives on the market, and this device isn't exactly priced to fit into tight budgets. This company may be reaching for that exclusive luxury flavor -- at a difficult time, and with a limited marketing effort so far. A big win here would surprise me.
