Roku sells digital media players enabling users to access Internet-streamed video via television sets. The company also licenses its operating system, called Roku OS, and its smart TV hardware reference design to TV manufacturers. While the company is best known for its hardware, it has been scaling up its software platform to become a leading player in streaming video distribution, increasingly supplanting linear pay TV.
We believe the Ads & Commissions segment (Platform) is more valuable than the Devices segment for three primary reasons:
1) Its higher revenue base (about $2.7 billion in 2022 versus about $400 million for Devices)
2) Stronger gross margins of 56% in 2022 versus single-digit or negative historical margins for the players business.
3) Higher projected revenue growth rates for the player business.
Customers have been increasingly canceling their pay-TV subscriptions in favor of Internet-based streaming options. In 2022, U.S. pay-TV players lost 5.9 million subscribers combined, per the Leichtman research group, compared to losses of less than 1 million subscribers in 2016.
The linear TV market in the U.S. is valuable, with advertising spending on TV estimated at $66 billion in 2021 per eMarketer, with user spending on pay-TV subscriptions standing at over $100 per month. Roku, trying to become a distribution platform for streaming content, could benefit from users and advertisers moving their spending away from linear TV to connected TV.
Roku's software platform is seeing a stronger uptake by TV OEMs, who leverage the company's operating system and reference design to produce connected TVs. As TV sets have long replacement cycles (7 to 10 years, according to IHS Markit), this could give Roku a loyal base of users to grow its platform business.