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Roku really wants to compete with big cable

The Motley Fool logo The Motley Fool 6/24/2018 Adam Levy
A woman pointing a Roku remote control at a TV displaying the Roku Channel homepage© Roku A woman pointing a Roku remote control at a TV displaying the Roku Channel homepage

In Roku's quarterly letter to shareholders, the company highlights the fact that if it were a multichannel video programming distributor (MVPD), or what most people refer to as a cable company, it would be the third largest in the industry. And with 20.8 million active accounts and rapidly growing, it's only a matter of time before it surpasses the subscriber count of the biggest pay-TV distributors.

Of course, Roku isn't like a typical television programming distributor. Its customers simply buy a Roku device or a smart television with the Roku OS and sign up for a free account. That's a lot cheaper than the $70 or $80 the average person pays for cable.

But Roku is working on a platform that will give it a greater cut of the revenue earned by the streaming video services its users watch on its platform. The company is developing a marketplace for subscription video channels similar to Channels on Amazon Prime, according to a report from Variety. Roku will handle the payment processing, consolidating a user's bills for each service into a single payment, and presumably take a larger affiliate fee from the services.

The product could help drive revenue growth for Roku as well as its streaming partners.

A Roku Channel for paid content

Last year, Roku launched the Roku Channel, which aggregates free ad-supported video content from various apps into a single app on Roku. Management believes the Roku Channel could provide an alternative to licensing content to premium streaming video on demand services like Netflix, allowing content owners to get the most value out of their content.

Thanks to the data Roku is able to collect on its users' streaming habits, particularly within the Roku Channel, the company is able to suggest content users otherwise might not discover on their own outside of the Roku Channel. That makes audiences more engaged and increases the value of some content providers content. Netflix uses a similar method to maximize the value of its content budget.

Roku could do the same for premium services. If a user is streaming a whole bunch of one type of content across various apps on Roku (e.g., documentary films), Roku will be able to suggest an app that specializes in that type of content (e.g., CuriosityStream).

As a key piece of its growth, Roku is already using its data to effectively target advertisements. The marketplace presents an opportunity to employ data to grow its distribution revenue, the other crucial piece.

Money to be made

Amazon has had quite a bit of success with its Channels product. It accounts for 53% of HBO Now's 5 million subscribers, according to data from the Diffusion Group. That number is even higher for other premium SVOD services.

While the distribution revenue from all those subscriptions doesn't mean much for Amazon, which brought in $51 billion in the first quarter, it could be significant for a company the size of Roku. Roku generated just $136.6 million in the first quarter -- a rounding error on Amazon's income statement.

Importantly, Roku's 20.8 million active accounts is not too far off from the number of people streaming video on Amazon Prime. Internal documents leaked earlier this year revealed that only about 26 million people in the U.S. stream video on Amazon Prime. If Roku can convert its audience as well as Amazon has, it has the potential to add tens of millions of dollars in high-margin revenue to its top line every quarter.

Related video: Streaming player shopper's guide (provided by USA Today)

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.

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