Roku (ROKU -10.29%), a leading streaming platform, announced a few weeks ago that it is extending its partnership with the tech giant Amazon (AMZN 3.43%). The multiyear partnership will allow customers to stream Amazon Prime and IMDb TV apps on their Roku devices. Although this news has gone relatively unnoticed, it is more significant than it may appear on the surface. Let's review why.
Cooperation over competition?
Roku has become a central gateway to modern-day entertainment, connecting viewers to the content they love. With its comprehensive ecosystem of Roku TV, streaming devices, and the Roku operating system, the company pioneered a convenient way for users to aggregate and access their favorite shows and movies from a variety of content providers such as Netflix, Disney, and many others.
Roku generates much of its revenue by showing advertisements to viewers. Any time a viewer subscribes to a streaming service such as Netflix or Disney+ via Roku's platform, it also takes a cut of the price the user pays. Streaming companies pay Roku for premium placement on the home screen too.
With its early entry in the industry, Roku has commanded a leadership position in the streaming space. In 2021, the Roku operating system (OS) remained the No. 1 selling smart TV OS in the U.S., representing more than one in three smart TVs sold.
Image source: Getty Images.
But it's not the only game in town. Amazon's Fire TV Stick is a very capable competitor, and it has been rapidly gaining ground. According to Parks Associates, Roku commanded 36% of U.S. market share in 2021; right next to it was Amazon with about the same share.
So why would a behemoth such as Amazon with virtually unlimited resources opt for collaboration with its competitor?
Roku is here to stay
Amazon's decision to reach a multiyear content distribution partnership with Roku may not be a complete game changer, but it certainly is a recognition of Roku's firm and durable position in the industry.
Unlike many of its competitors who repurposed their cellphone or computer operating systems to stream content on TV, Roku purpose-built a software platform from the ground up for TVs, and the company believes its platform to be the best in the industry.
Roku has more than tripled its subscribers over the past four years -- reaching over 60 million households at the end of 2021. Consumers are also spending more hours watching content on Roku's platform. According to the company's assessment, the total viewing hours on its platform in 2021 grew over 25% year over year and significantly outperformed the broader industry.
As more viewers spend more time engaging with Roku, there is a greater incentive for TV manufacturers, content providers, and advertisers to partner with the company. Growth of the platform and the content available on it, in turn, attract even more users and lead to greater advertising revenue for Roku, ultimately creating a virtuous cycle. Thanks to that business model, Roku grew its average revenue per user an impressive 43% last year to $41.03.
Amazon recognizes Roku's staying power.
Take a closer look to invest for the long term
Audiences are steadily abandoning traditional cable TV and moving to streaming. Along with the viewers, businesses are following suit with their advertising budgets. According to eMarketer, advertising revenue for the connected TV segment in the U.S. is projected to more than double from $14 billion in 2021 to almost $30 billion in 2024. Roku is in a great position to benefit from this trend.
It's also investing heavily in growing its customer base in its core U.S. market as well as in international geographies. The international streaming player market is still highly fragmented, and Roku held only about 6.4% of global market share, according to Statista. The company has a big opportunity to extend its successful formula beyond the U.S.
Roku stock is down 80% from its all-time high. While such volatility may be anxiety-inducing, its business fundamentals and future prospects remain strong. Many industry followers may overlook the partnership news, but savvy investors may want to take it as a signal to buy into Roku at its discounted price.
