Roku Business Model | How Roku Makes Money?

Roku, Inc. (ROKU) is a provider of a streaming television platform and streaming devices.

The platform serves as a television streaming ecosystem, allowing customers to watch thousands of channels across various streaming services and enabling content providers and advertisers to reach consumers worldwide. 

Roku business model is primarily based on selling digital advertising, audience-building tools, and content distribution to generate revenue. Furthermore, Roku sells televisions branded with the Roku brand and streaming devices, such as players, sticks, and soundbars.

Roku competes in the highly competitive television streaming market. Roku was the sixth company launched by Anthony Wood in 2008, giving people the ability to watch various types of video content, including free and commercial content, on the TV over the internet. 

Roku gives you access to Netflix, Amazon Prime Video, Google-owned YouTube, and hundreds of more services on one platform. The organization also offers a variety of specialty channels that broadcast everything from spiritual programs to bizarre programs.

What is Roku?

Roku is a firm that develops gadgets that enable you to access various materials (e.g., films or games) through the internet.

Roku earns money through hardware sales, licensing the Roku OS, running ads on The Roku Channel, featuring branded content, and premium membership marketplace.

Roku Business Model

Roku, a prominent global brand for home streaming, began operation in 2002. Roku had such fantastic success that it went public in 2017. The firm gets more than $1.7 billion in yearly income.

Company NameRoku Inc
Company TypePublic
FoundersAnthony Wood
ProductVideo streaming players
Founded DateOctober 2002
HeadquarterLos Gatos, CA
WebsiteVisit Website

How Does Roku Work?

Roku is a company that produces a variety of media-streaming devices based on its proprietary operating system. 

The company’s service is over-the-top content (OTT), which provides TV, films, and other digital content to subscribers over the internet.

Users can stream films, TV shows, and music from Roku devices or its innovative TV software.

Roku has several product lines to choose from, including:

Roku Set-top Box:

The Roku Box is a device that connects to the TV through HDMI and looks like the Roku Premiere or Roku Streambar.

Roku Streaming Stick

Roku Streaming Stick is a USB stick you plug into your TV and watch movies and TV shows. The USB device features an internal Wi-Fi connection and will allow you to watch online content.

Roku Smart TV:

The Roku OS is integrated into the TV, so Roku products are not required. Hitachi, Sharp, and Hisense all have smart TVs that work with Roku’s software.

Users can access all streaming services to watch their favorite content like Disney+, Hulu, and Amazon Prime Video on their preferred device. You must be a member of the site to access the content.

The other Roku products also let you connect other devices to access data, such as music or video files, and show them on your Roku box.

Roku has also released a mobile app, which has identical functionality to that of the Box and Smart TV, and it is available for both iOS and Android smartphones.

There are more than 51 million Roku subscribers that utilize the company’s services each month. The service’s infrastructure, meanwhile, provides access to over 10,000 channels.

Roku Business Model

Roku has positioned itself as a strategic partner to larger organizations (like Comcast) that, despite being traditionally competitive with each other, can broadcast content over the internet. 

Roku plans to increase the number of people who utilize its platform and benefit from user engagement. Furthermore, it boasts its own Roku channel, which is doing well as part of its catalog.

And it collects more money when it helps the customer access paid video services. People are subscribing to subscription services increasingly to access diverse programming consistently at a fixed monthly cost. 

If someone pays for Netflix, for example, then Roku will be compensated for their involvement. The Roku platform released a service in 2019 that allows consumers to pay for premium channels like Showtime and Starz in a single subscription and then enjoy all services with that single bill.

How Does Roku Make Money?

Roku earns money by selling hardware, software licensing, Roku Channel ads, and streaming subscriptions.

Roku makes the majority of their revenue from their unique advertising strategy, which they are improving. 

Profits from advertising and media sales have overtaken the corporation’s revenue from the hardware attached to TV sets. 

Roku said that it made $232 million from its platform, compared to the $88.2 million earned from hardware sales.

Roku Business Model

Roku said it has 53.6 million active accounts and 574.2 million dollars in revenue (up 79% year-over-year).

Roku produces some of its advertising technology, including its backend and data-management platform. Still, it relies on vendors for most of its advertising needs, from selling ads to managing campaigns to providing the bulk of its profits. 

The services that Roku offers to generate revenue include selling inventory to publishers, offering subscriptions to third parties, access to customer data, displaying advertisements, and offering self-promotion options, and offering its channels, emails, and advertising buttons, and remote controls.

Let’s take a closer look at each of them.

Sales of Hardware

Roku generates money in numerous ways, and one method is by selling its set-top boxes.

These devices are available for purchase via Roku’s website, as well as on Amazon or Walmart.

Roku offers various devices, including streaming sticks, audio bars, and HDMI-enabled devices (Roku Express or Roku Premiere).

As said previously, Roku offers the devices for close cost. Ad-supported Roku has higher margins, and it is made possible by this (over 60 percent).

Almost 30% of Roku’s income now comes from device sales. The contribution of less than 1 percent of profit is the most significant one.

License Fees

Roku has already offered other TV makers the ability to integrate its operating system into their devices.

It is projected that Roku-enabled smart TVs in the United States will claim a market share of 38 percent in 2020 and so take the lead. In addition, the corporation holds a 31 percent market share in Canada.

Today, the Roku streaming platform announced a licensing agreement with 15 brands, including Hitachi, JVC, Philips, ATVIO, Westinghouse, and others. There are now over 100 different devices using the Roku OS.

Roku makes money whenever someone activates one of these smart TVs. Profits from each gadget are stated in the contract between the companies (which is not public).

Subscription Fees

The Roku subscription service known as Rokua Box offers to provide Epix and Showtime as a monthly payment.

The plan is akin to the Amazon Channels video marketplace that’s already in place. All of the user’s subscription choices and payments occur within Roku’s software.

Roku takes a portion of its partner services’ profits to run a marketing campaign and handle their payment.

The exact percentage of profits being shared with shareholders is kept confidential. A Yahoo Finance study said that Roku takes about 20% of people’s money for these subscriptions.

The percentages can vary depending on the arrangement that Roku has with various streaming services.

Advertising Fees

Roku introduced its own branded channel in 2017, which showcases material from third-party media firms Roku licenses.

Disney’s licensing roster includes media giants like Warner Brothers, Paramount, Lionsgate, and more. 

The Roku Channel offers more than 100,000 movies and TV shows, and there are more than 100 channels to explore.

Roku funds its operations by displaying ads in between programs as well as during their breaks. A share of the advertising revenue is subsequently passed on to the license partners.

The Roku Channel is now one of the most significant revenue-generating channels the firm has.

The Roku service is also dedicated to delivering viewers the best commercials available and enhancing its advertising partners’ earnings.

Grab Business Model

So, OneView, a platform for monitoring the success of advertising, launched in May 2020. Roku recently acquired the platform that OneView is built on.

Consider OneView as a hypothetical example. You can serve ads to consumers based on where they live, what they like, and other factors. 

At the same time, consumers can pull the ads whenever they want so that you can serve them effectively.

Roku also keeps you from seeing ads you’ve already seen by running on traditional TV (it needs user consent to track their linear TV activities, though).

Roku continues to put money into the kind of programming that it broadcasts on its channel. It’s also bought the rights to This Old House and Ask This Old House for $97.8 million in cash, outside of its $310 million purchase of Quibi programs.

Roku can keep all of the ad money if they possess the intellectual property associated with that content.

Today, the Roku Channel has at least 70 million subscribers who have access to it through various means, including Roku devices, smart TVs, and its mobile apps.

Branded Content

Roku started the Roku Brand Studio, a subsidiary dedicated to developing customized video advertisements and other content for ad partners, in June 2021.

This content will be shown on the Roku Channel through Roku’s ecosystem.

Roku Business Model

The Roku Channel launched Roku Recommend, a short presentation that showcases the channel’s best content. Walmart sponsors the show itself.

A good indicator that Roku’s advertising partners pay is based on the number of content hours created for each sort of video.

What is the Funding and Valuation of Roku?

Crunchbase reports that Roku raised $208.6 million in 11 rounds of equity fundraising. The company raised an additional $219.4 million during its initial public offering in September 2017.

The majority of STAN CO’s investors come from venture capital firms, including Hearst Ventures, Menlo Ventures, Viacom, Sky UK, All Blue Capital, Fidelity, and others.

Roku’s business was valued at $1.3 billion when it had its IPO. The company has grown by 45 times since going public, with a value of $45 billion.

What is the Revenue of Roku?

Roku announced $1.7 billion in revenue for FY 2020, a 58 percent increase from before. Profits for the last three months amounted to $808 million.

Success Story of Roku

Anthony Wood founded Roku in 2002, and he serves as the company’s CEO. Roku is headquartered in San Jose, California.

Roku was the biggest success for him despite his earlier successes. Roku’s Japanese name means “six,” referring to Wood’s sixth business, thus informing customers about the significance of the brand.

Wood’s friends describe him as someone who loves to tinker. He had been interested in hardware for some time. 

His first experiments with hardware began when he was young (he was born in Manchester, England, but is originally from Georgia and Texas).

Wood studied computer classes and other subjects while he was an exchange student in the Netherlands.

He began his first business as a teenager. After graduating from Texas A&M with a degree in electrical engineering, he started SunRize Industries, his first profitable firm.

This company earned $100,000 despite only having 14 full-time employees. As Wood’s grades declined, he had to shut down his company to focus on his studies.

His then-girlfriend, now wife, who he dated after she became employed at SunRize, moved to Silicon Valley with him. 

He wanted to bring a new and improved version of SunRize to the market, so they left after he finished college.

Wood started his company, iBand, which provides software, in 1995. The SunRize company’s primary product, the Commodore, began to lose popularity right after that. He began as a traditional musician and gradually changed course.

The product they are known for is a great web editor, which is simple. After that, he sold his company to Macromedia for $36 million a year later.

Wood was a millionaire at age 30 because of his $41 million exits. Still, he was obligated to remain on at Macromedia for an additional year to fulfill his role as the company’s vice president of Internet authoring.

Wood was stunned when he found himself in an atmosphere that prohibited creativity and slowed him down. When his two-year contract was finished, he was ready to start his next project.

His frustration over often missing his favorite show, Star Trek: The Next Generation, while it was on TV, was the inspiration for his next venture.

He built the first digital video recorder (DVR), ReplayTV, which he marketed under the ReplayTV brand to combat that challenge.

Poshmark Business Model

Wood completely supported the project for the first few years. Eventually, he’d get other people involved, such as Marc Andreessen, who created Netscape and later found Andreessen Horowitz, a famous investment firm.

The ReplayTV box was introduced in 1999, costing a little over $1,000. The company was struggling to make any sales after the competition; TiVo took the price advantage.

Wood’s company ReplayTV had to sell out due to losing money for two years. The purchase price for the consumer electronics company SONICblue was $42 million. 

Wood continued and was part of the team running ReplayTV from inside SONICblue.

Wood’s team decided to add an ad-skipping function to separate ReplayTV from TiVo. SONICblue was sued for copyright infringement by many groups like Disney, Paramount Pictures, ABC, etc.

After several years of debt problems, SONICblue finally sought Chapter 11 bankruptcy in 2003, selling several of its assets to D&M Holdings, including ReplayTV.

He proceeded to something larger and better, unaffected by what just happened. Roku was his sixth company when he started work on it in 2002.

He named Netflix CEO and Reed Hastings founder and asked for lunch. He managed to convince Netflix to hire him as vice president for internet television in 2007 instead of investing in Roku.

The aim was to lead Netflix in all necessary production phases, which developed a streaming player of its own (code-named Project Griffin).

Wood finally concluded that he would work on Roku much better than Netflix; therefore, he finished his position by departing 10 months. 

Netflix has opted to separate Project Griffin into Roku — and even become the first large investment of the company.

RokuTM’s Netflix Media Player started in May 2008. Wood eventually learned of his errors and launched the device at a reasonable price of $99. Only Netflix content could be streamed on launch.

The situation will soon change. Roku has been able to add more than 50 channels to its platforms over the past 2 years, such as Major League Baseball, Amazon Video, and This Week in Tech (TWiT).

Roku’s leadership remained focused on expanding the platform’s capabilities in the following years. 

The Roku streaming stick (which allows you to play games such as Angry Birds) was introduced in 2012 and added new channels to the Roku line.

Two of Roku’s streaming devices arrived in Canada, Ireland, and the UK the same year, expanding Roku’s global reach.

The company’s rise surely also placed a target on its back. Before the release of Amazon’s streaming service, Apple and Amazon fought vigorously for market dominance. 

Amazon even offered to buy Roku in 2012. Wood declined and decided instead to raise 45 million dollars from News Corp. and Sky UK.

However, as its streaming devices were at low prices, Roku practically sold them at cost. So the company had to search for more lucrative channels.

As part of its partnership with other technology manufacturers, Roku announced in 2013 that the Roku OS would be compatible with your gadgets. In particular, it would work with Hisense, TCL, Coby Electronics, and eleven other manufacturers to run their OS on their future smart TVs. These companies would then pay Roku a license fee (more on that later).

This move was an incredible achievement. Over the past two years, Roku has gained more than eight percent of the smart TV market in the U.S. Roku continued to flourish, mostly because the platform remained independent.

Amazon and Apple promoted their content and services (but did not partner with them), but Roku remained impartial in its selections and management of partnerships.

Roku does not see itself as a Switzerland in the video entertainment space, as Apple and Amazon do, Scott Rosenberg, senior manager at Roku, told Variety in an interview. 

“We normally do not compete with our content producers, making us a natural distributor for these services. We’re an operating system at its heart.”

The Roku Channel, a new channel from Roku, greatly changed the way people felt about the device. 

In 2011, Roku Recommends and 4K Spotlight had also released comparable content aggregation channels, but these were relatively recent additions.

The licensing organization handles Lionsgate, MGM, Paramount and Warner Brothers, and more so that Roku customers receive free ad-supported programming. 

Groupon Business Model

In contrast to linear TV, which has an average commercial break of 16 minutes per hour, Roku only showed advertising over the same time for 8 minutes.

One of the primary sales points was its array of independent content distribution when it was released a few weeks after the channel was announced. Roku’s IPO’d be worth $1.3 billion under ROKU (duh!) ticker.

Roku further added content and channels to its platform in the following years, expanded its offerings, and improved its advertising platform (e.g., through its 2019 dataxu acquisition for $150 million).

Following the coronavirus outbreak that caused audiences to isolate themselves at home in 2020, a company flourished, especially with alternative fun activities. In just 2020, the company added more than 14 million accounts.

It also inked agreements with Disney+ or NBCU’s Peacock likes. Roku also entered into a contract with Quibi’s unsuccessful streaming platform to secure its content catalog rights.

Recently, the firm has rumored that it would eventually begin to generate its content, subsequently delivered by The Roku Channel. 

Many analysts predicted that Roku would create original content eventually, even though reports were quickly rejected.

As Roku’s announcement in April 2021 clarifies, those speculations became a partial reality as Quibi’s content converted into Roku originals. 

A few weeks later, the company announced it had deleted YouTube TV due to failed negotiations between the two.

More than 2,500 people work for the company today, which has offices in over 25 cities worldwide.

Key Takeaways From Roku Business Model

The Roku platform and streaming devices are both available. Most of the sales and profits come from the platform sector, which is fast growing. Roku has launched several new streaming services in the past year, including Discovery+, HBO Max, and Peacock.

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