The Roku Business Model – How Does Roku Make Money?

Executive Summary:

Roku is a company that creates streaming devices that allow you to consume content, such as games or movies, via the internet.

Roku makes money via hardware sales, by licensing its Roku operating system, advertising on The Roku Channel, as well as through its premium subscription marketplace.

Founded in 2002, Roku became one of the world’s largest manufacturers and distributors of streaming devices. As a result of its continued success, Roku went public in 2017.  

What Is Roku & How Does It Work?

Roku is a company that has created a variety of media-streaming devices that run on the Roku software. It operates in the over-the-top (OTT) market, which provides television, film, and other digital content over the internet.

Users can stream media, such as movies, tv shows, or music, using either the devices that Roku sells or via its built-in software for smart TVs.

Roku offers different types of products, including:

  • Roku Box: The Roku Box is a standalone device (such as the Roku Premiere or Roku Streambar) that connects to the TV via HDMI.
  • Roku Streaming Stick: The Roku Streaming Stick is a USB stick (along with a remote) that can be inserted into your TV. The USB device has a built-in Wi-Fi connection which allows you to connect to the internet and stream content.
  • Roku TV: The Roku operating system is already built into the TV, thus not requiring any physical Roku product. Smart TVs from brands like Sharp, Hisense, or Hitachi are all compatible with Roku’s software.

Users can then access various streaming services, including Netflix, Disney+, Hulu, Amazon Prime Video, and many more. An existing subscription is required to access the content.

Furthermore, some of Roku’s products allow you to plug in other devices to access files (music or video files, for instance) and display them via Roku.

Additionally, Roku has created a mobile app, available on both Android and iOS devices, which offers similar functionality to the Box or Smart TV.

More than 51 million people are currently accessing Roku’s services every month. Meanwhile, over 10,000 channels can be accessed on its platform.  

Roku Company History

Roku, headquartered in San Jose, California, was founded in October 2002 by Anthony Wood who, to this date, leads the company as its CEO.

While Roku has certainly been his most successful business endeavor, it’s certainly not his first one. In fact, Roku means “six” in Japanese, to symbolize the fact that it’s the 6th company Wood started.

Wood is what people would describe as a tinkerer. From an early age (he was born in Manchester, England but his family later moved to Georgia and Texas), he’d be experimenting with various hardware components.

After spending a year in the Netherlands as an exchange student, where he took a computer class amongst others, Wood came back home to Texas and taught himself how to program.

He started his first company while in high school. His second startup, SunRize Industries, which he launched out of Texas A&M (where he pursued a degree in electrical engineering), became his first successful business.

The company grew to $100,000 in profits while employing 14 people on a full-time basis. Unfortunately, Wood’s grades eventually started to suffer, which forced him to shut the company down and focus on his degree.

After graduating, he and his then-girlfriend, now his wife, whom he started dating after hiring her SunRize, moved out to Silicon Valley to launch a revamped version of SunRize.

Unfortunately, demand for the Commodore, SunRize’s main product, began dwindling soon after. Wood eventually pivoted to launch a software company called iBand in 1995.

The firm’s signature product was an intuitive and user-friendly editor for HTML-based web pages. A year later, he sold to Macromedia for $36 million.

The deal made Wood a millionaire at age 30 yet required him to stay on at Macromedia for another year to serve as the firm’s vice president of Internet authoring.

Much to Wood’s disarray, he found himself tangled in a corporate environment that stifled innovation and was extremely slow-moving. So when his two-year contract was up, he decided to call it quits to pursue his next venture.

The idea for his newest business was born out of the frustration that he regularly missed episodes of his favorite show, Star Trek: The Next Generation, when they aired on TV.

To solve that problem, he developed one of the first-ever digital video recorders (DVR) under the brand name ReplayTV.

In the beginning, Wood financed the venture all by himself. He’d later bring on other investors, such as Marc Andreessen, the creator of Netscape (who’d go on to start the world-renowned investment firm Andreessen Horowitz).

ReplayTV’s first product was released in 1999 and would cost around $1,000. Unfortunately, its biggest rival, TiVo, was able to undercut the market by selling DVRs for $500.

After 2 years of losing money, Wood was forced to sell ReplayTV. Consumer electronics firm SONICblue wound up buying the company for $42 million. Wood, again, stayed on to help run ReplayTV from within SONICblue.

To help differentiate ReplayTV from TiVo, Wood’s team decided to incorporate an ad-skipping feature into the product.  As a result, a group of plaintiffs including Disney, Paramount Pictures, ABC, and more, sued SONICblue for copyright infringement.

SONICblue had to eventually file for Chapter 11 bankruptcy and, in 2003, had to sell most of its assets, including ReplayTV, to the Japanese electronics giant D&M Holdings.

Wood, unphased by what had just transpired, already moved on to bigger and better things. In 2002, he began working on the concept for Roku – ultimately his sixth company.

He cold-called Netflix CEO and founder Reed Hastings and asked him out for lunch. Instead of investing in Roku, Hastings asked Wood to join Netflix as its vice president of internet TV in 2007.

The goal was to guide Netflix, which was developing a streaming player of its own (code-named Project Griffin), through all the necessary production steps.

Wood eventually realized that he’d much rather work on Roku than help Netflix, so he wound up leaving 10 months into the job. Netflix, to the firm’s credit, decided to spin off Project Griffin into Roku – and even become the firm’s first big investor (it sold its shares a few years later).

TechCrunch

The Netflix Media Player by Roku™ launched in May 2008. Wood had ultimately learned from his mistakes, launching the device at an affordable price point of $99. At launch, the product was only able to stream Netflix content.

That would soon change. Within a matter of 2 years, Roku was able to add over 50 more channels to its platform, including Amazon Video, Major League Baseball (MLB), This Week in Tech (TWiT), and more.

Expanding the capabilities of what Roku’s platform could offer remained to be the leadership’s strategic motive in the years that followed. Apart from adding more channels, Roku furthermore expanded its product line, for instance by introducing the Roku Streaming Stick (with the ability to even play games like Angry Birds) in 2012.

That same year, Roku was able to expand into its first foreign market by introducing 2 of its streaming players in Canada, Ireland, as well as the United Kingdom.

The firm’s ascend certainly put a target on its back as well. Both Amazon and Apple had already launched competing streaming products and were desperately fighting for market share. In fact, Amazon, in 2012, even made an offer to buy Roku. Wood declined and decided to raise $45 million from News Corp. and Sky UK instead.

Nevertheless, since its streaming devices were priced so inexpensive, Roku was essentially selling them at cost. The firm, therefore, had to find more profitable avenues.

In 2013, Roku announced that it would partner with other technology manufacturers to bring its operating system to their devices. More specifically, it would collaborate with the likes of Hisense, TCL, Coby Electronics, and 11 other firms to have its OS run on their upcoming smart TVs. These firms would then pay a licensing fee to Roku (more on that later).

That move became an overwhelming success. In less than 2 years, Roku was able to capture over 8 percent of the US smart TV market. Roku continued to thrive, in large part because it remained an independent platform.

While the likes of Amazon and Apple were busy pushing their own content and services (all the while not forming partnerships with each other), Roku remained agnostic about the content it chose to display and the partnerships it inked.

 “We see ourselves as Switzerland in this space, not like some of our retailer competitors like Apple or Amazon,” said Scott Rosenberg, a senior executive at Roku, in an interview with Variety. “We don’t generally compete with our content providers, so that makes us a natural distribution partner for these services. We are, at our core, an operating system play.”

That sentiment would slightly change when in September 2017, Roku introduced its own channel named The Roku Channel. It had launched similar content aggregation channels in the past, such as Roku Recommends in 2011 and 4K Spotlight in 2015, yet The Roku Channel was a different beast.

The company struck licensing deals with the likes of Lionsgate, MGM, Paramount, Warner Brothers, and more to bring ad-supported content to Roku users – free of charge. As opposed to linear TV, which displays commercial breaks at an average of 16 minutes per hour, Roku chose to only show ads for 8 minutes over the same time span.

The firm’s array into independent content distribution became one of the major selling points when it went public a few weeks after announcing the channel. Roku IPO’d at a valuation of $1.3 billion under the ticker ROKU (duh!).

In the years that followed, Roku continued to add more content and channels to its platform, expand the devices it offers, and beef up its advertising platform for better ad placement (for instance through its 2019 acquisition of dataxu for $150 million).

2020, in particular, allowed the company to grow tremendously as the coronavirus forced viewers to quarantine at home and find other, entertaining activities. The company was able to add over 14 million accounts in 2020 alone.

Simultaneously, it signed deals with the likes of Disney+ or NBCU’s Peacock. On top of that, Roku inked a deal with the failed streaming platform Quibi to acquire the rights to its content library.

In recent times, rumors arose that the company would finally start to create its own content which would then be distributed by The Roku Channel. While the rumors had been swiftly denied, many experts believe that Roku will eventually move into creating original content.

How Does Roku Make Money?

Roku makes money via hardware sales, by licensing its Roku OS, advertising on The Roku Channel, as well as by promoting other streaming subscriptions.

Let’s dive into each of these in more detail below.

Hardware Sales

One of the most obvious ways in which Roku generates revenue is simply by selling its streaming devices.

These devices are sold both on Roku’s own website as well as via third parties, such as Amazon or Walmart.

Example devices that Roku sells include a streaming stick, the Roku Streambar (an audio system that connects to the TV), or its HDMI-enabled streaming devices (such as Roku Express or Roku Premiere).

As previously highlighted, Roku sells these devices pretty much at cost. This is done to enable the ad-supported Roku platform, which tends to have much greater margins (over 60 percent).

These days, around 30 percent of Roku’s overall revenue can be attributed to device sales. When it comes to profits, less than 1 percent is contributed.

Licensing

In 2013, Roku announced that it would license its operating system to other smart TV manufacturers to embed it into their devices.

In 2020, Roku-enabled smart TVs reached a market share of 38 percent in the United States, making them the de-facto market leader. Likewise, the company has a market share of 31 percent in Canada.

Today, 15 brands have inked licensing deals with Roku, including Hitachi, JVC, Philips, ATVIO, Westinghouse, and more. Over 100+ models now run on the Roku OS.

Roku generates money whenever one of these smart TVs is sold and activated by the user. How much the company makes for every device is subject to the agreement between the 2 parties (which are not publicly disclosed).

Advertising

In 2017, Roku launched its own independent channel (called The Roku Channel) in which it displays licensed content from other media companies.

Licensing partners include media conglomerates such as Warner Brothers, Paramount, Lionsgate, and many more. Over 100 channels including more than 100,000 titles are now streamable via The Roku Channel.

The way Roku makes money is by showing advertising in between the content as well as when it’s paused. The licensing partners then receive a portion of that advertising income.

Over the past few years, The Roku Channel has grown to become one of the company’s main revenue drivers.

Roku, furthermore, continues to invest heavily into serving users with the best ads possible (and thus maximizing returns for its advertising partners).

To that extent, the company launched OneView in May 2020, a platform for advertisers to monitor their performance. OneView is based on the dataxu platform, which Roku acquired for $150 million in 2019.

For instance, OneView allows advertisers to target users based on ZIP code, personal preferences, and other data points (while, simultaneously, allowing them to pull the ads any time they want).

Furthermore, if users have already seen the same advert on linear TV, Roku will ensure that it won’t be shown on its own platform (it needs user consent to track their linear TV activities, though).

Today, over 60 million households have access to The Roku Channel in some shape or form (either via Roku devices, smart TVs, or the company’s mobile apps).

Subscriptions

In 2019, Roku launched a subscription video on demand (SVOD) platform that allows you to purchase subscriptions to other streaming services, such as Epix or Showtime.

The offer works similar to Amazon’s existing Amazon Channels video marketplace. Users can choose and pay for the subscription all within Roku’s platform.

In exchange for marketing these subscriptions and providing safe means of payment, Roku takes a share of the subscription revenue that these companies generate.

The actual revenue share is not publicly disclosed. A report by Yahoo Finance highlighted that Roku, on average, commands around 20 percent of the revenue generated from these subscriptions.

Nevertheless, the actual percentage share is dependent on the agreement between Roku and the streaming service.

Roku Funding, Valuation & Revenue

According to Crunchbase, Roku has raised a total of $208.6 million across 11 rounds of equity funding. The company raised another $219.4 million when it went public in September 2017.

Notable investors include Menlo Ventures, Viacom, Sky UK, Fidelity, Hearst Ventures, All Blue Capital, and many others.

When Roku went public, its business was valued at $1.3 billion. Today, its business has amassed a market capitalization of around $45 billion, representing a 45-fold increase since it IPO’d.

For the fiscal year 2020, Roku reported revenues of $1.7 billion, representing a 58 percent increase from the year prior. The company posted a profit of $808 million over the same time span.

Viktor

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..