It's a lot more number-crunching than you'd expect.
Despite facing off against those bigger competitors, Roku has been steadily winning the battle for your living room. The streaming hardware company cites Nielsen numbers showing that, as of December 2016, Roku accounted for 48% of the active streaming players in the U.S. (with Amazon, Apple, and Google all trailing behind). Roku currently boasts roughly 14 million active accounts—up 40% year-over-year—and the company says its users streamed 9 billion hours of content last year, a 70% increase from the previous year. The company also posted its highest annual revenue in 2016, reaching $400 million, and sales already topped $100 million in the first quarter of the current fiscal year.
One thing that helps Roku stand out is the fact that, unlike many of its biggest rivals, the Los Gatos, Calif.-based tech company relies solely on deals with outside content producers. In other words, Roku doesn’t make its own original programming, in contrast with Amazon, Google’s YouTube, and others. That means it can stay neutral when it comes to carrying streaming apps and the content it markets to users.
As Roku’s user base has climbed, the company’s focus has shifted somewhat, from selling hardware to generating additional revenue by selling advertising to its many content partners. Advertising and content distribution comprised roughly 75% of Roku’s gross profit in the most recent quarter, up from a little over 50% last year, says CEO Anthony Wood, a Silicon Valley veteran and a former vice president at Netflix.
Roku also has the backing of a handful of major players in both media and tech, with nearly $210 million in reported funding so far from a list of investors that includes News Corp, Viacom, 21st Century Fox, and Netflix. (Wood disputed reports from February suggesting the company was working on a $200 million funding round, telling Fortune that Roku is “well capitalized” at the moment.)
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Wood recently spoke with Fortune about competing with tech giants in the streaming hardware market, how user data and targeted ads are the “future of TV,” and what the evolving landscape of streaming content means for companies like Roku. (The following conversation has been edited for clarity and length.)
Fortune: You currently have the largest market share in the U.S. for streaming devices over companies like Amazon, Apple, and Google. How can you maintain that position and keep growing?
Wood: If you look at the market share, it has been growing. We had our biggest market share ever in Q1—not just players, also televisions. 48% of active streaming players in the United States are Roku [according to Nielsen], and that number hasn’t changed in about a year. The other half is split between Amazon, Google, and Apple.
Our market share is growing fast. It’s growing 40% to 45% active accounts year-over-year and that’s on a big installed base: 14 million active accounts. That comes from players and TVs. We released the Roku Express at the end of last year at $29 and it’s now our number one player. And, last year, one in eight TVs sold were powered by our OS [operating system]. This year, we expect it to be almost one in five TVs—almost 20% of the Smart TV market this year will be powered by our operating system.
Roku has been described as “Switzerland” in the streaming devices market because it’s content-neutral. How does that strategy help you stand out versus bigger rivals who produce and distribute their own original content?
Having a strategy of carrying as much content possible and the most content definitely is a big part of our strategy and works well for us. And we can do it because we’re an independent company. We’re not vertically integrated like our competitors where they can’t carry each other’s content. So we have Amazon Instant Video and Google Play, for example. And, more importantly, we have built the only proprietary operating system for TV. We have the only purpose-built OS for TV and it’s got lots of advantages: it’s better for partners, it costs less to build TVs with our own OS, it’s a better consumer experience, and it has more content.
So, I guess we shouldn’t expect to see any Roku original programming anytime soon?
[Laughs] You’d have to have a lot of scale, even more scale than Roku [with 14 million active accounts]. We have reasonably large scale and are growing quickly, but Netflix has 100 million accounts. So it makes sense for them to do original content. It doesn’t really make sense for us.
You mentioned the success of the relatively new Roku Express. How important are those low-cost devices (including Google’s Chromecast and Amazon’s Fire TV Stick) to the market versus more expensive set-top boxes?
What low-cost does is it brings more customers into streaming. That’s one of the things that we saw with the Roku Express is it was so inexpensive that people who hadn’t streamed before said, “Oh, well I’ll give that a go.” And, then as they say, “I love this,” then I think there’s a decent chance they will, at some point, upgrade to a more expensive product with more features. With that said, the vast majority of unit retail sales are sub-$50 price points. Most of the market is below $50. It’s one of the main reasons Apple is last in market share for streaming players.
We have focused on great value for customers from the beginning as a way to gain market share. We introduced the first $100 streaming player. We introduced the first streaming stick, the first $29 player. We have a strategy of driving prices down to make the product more accessible to consumers. Because, for us, hardware is not a business, it’s a way to acquire active accounts. Our business is advertising and content distribution services.
A big part of the advertising platform is tracking what users are watching to compile and analyze that data for targeted ads and content recommendations.
It’s super important. The future of TV—both with content distribution and advertising—is based on data and machine learning. And it’s a huge competitive advantage to be good at that.
I just want to clarify that the ACR [Automatic Content Recognition] program is opt-in for our customers. We don’t just force it on them, although it has a very high opt-in rate because we have some very cool features that they get access to that are powered by that data. One of those features is called “More Ways to Watch.” If you opt in to the ACR data feed—let’s say you’re watching The Big Bang Theory on CBS—it will pop up with an overlay and say “Hey, you’re watching The Big Bang Theory, do you want to watch it from the beginning?” Because it’s available on CBS All Access and also you can watch all of the back episodes, so it gives them more ways to watch that TV show. There are lots of privacy issues around data that we have to be careful about, but it really delivers a much better end-user experience.
When it comes to video content, does Roku root for companies like Netflix, Hulu, and Amazon to upend the entertainment industry because it means more people are streaming content and that’s good for device-makers? Or, at this point, is most content streaming at some point anyway?
The big picture is one of the big drivers of our growth is when more content comes to streaming. Like you said, there’s been an explosion of streaming content. There’s not much you can’t get, if anything, streaming. So, in that sense, we’re completely neutral. We don’t really care. We want to offer our customers choices. I think one of the biggest advantages of streaming, for customers, is that it’s created competition in the TV business, which used to be controlled by a few big distributors and that’s really changed. So, that has resulted in lots of choice for customers: the choice of more content, the choice of not having to watch ads if they don’t want to, they can pay extra or they can sign up for Netflix, or whatever. So that’s all good.
I guess we’re not really in anyone’s particular camp. Our biggest focus is just bringing on as much content as we can and keeping our UI [user interface] simple. One of the challenges with a simple UI when there’s so much content is how do you make it easier for customers to find what they want to watch in that sea of content.
What are some ways that Roku helps customers manage the deluge of content?
We were the first company to offer universal search, so you can search for a program and find out how much it costs and where it’s available and we sort results by price. Another example is we came out with a feature called My Feed, which allows you to follow shows you’re interested in and you’ll get notifications when new episodes come out.
What are your thoughts on the proliferation of live-TV streaming services? If they succeed in drawing more consumers away from traditional cable packages, isn’t that a game-changer for online content and streaming devices?
We’re super positive on those services, because they’re bringing more content to the platform, they bring more people to streaming. We have business deals with all of those services, they buy audience development products, so it’s driving a big increase in our business. But, the dynamics are interesting. They often have overlapping content, so there’s going to be a lot of competition between them. And, I think that will result in better value for the customers.
Personally, I am not sure how popular repurposing a linear cable network will be in a streaming environment. Certainly, it’s in the millions the number of customers who want it. But is it 100 million, like Netflix? I think that’s an interesting question: whether people have changed the way they want to watch content and what content they want to watch.