How does Roku make money?

Roku sells streaming devices that plug into your TV. It doesn’t charge a subscription beyond what the streaming providers charge, and the devices aren’t all that expensive. So how does Roku make money? Let’s take a look.

Roku, it turns out, has several revenue streams it’s able to tap. As more and more people seek alternatives to pay TV, it’s likely to grow.

Profit from its devices

How does Roku make money
How does Roku make money? Primarily by selling hardware, but that’s not its fastest growing revenue stream anymore. Image credit: Mike Mozart/Flickr

How does Roku make money selling devices at prices ranging from $30-$100? The devices aren’t all that complex. The ARM Cortex A53 CPU they contain costs less than $8 in small quantities. Since Roku buys them in large quantities and without markup, and since the device only needs a small amount of RAM and flash memory, there’s no reason a Roku streaming stick that retails for $30 would cost any more than $10 to make.

The profit margin on its higher-end devices is likely higher. The prices tend to increment by $5 to $10 as you move up the product line. That means each additional feature needs to cost them between $1.66 and $3.34 to implement. The real cost is probably lower than that.

And when you lose your remote and buy a new one, that’s almost pure profit. The remote costs less than $1 to make but can retail for $10-$15. Roku probably wholesales them for around $3 to cut the retailers a break.

Roku devices aren’t poorly built, but they also aren’t built to last. They have little or no ventilation and rarely contain a fan. You can hack them to improve their cooling, but most people won’t bother. Once they start acting up, which will probably take 3-5 years, most people will just buy a new one, especially since it will tout at least one improvement over the old one. That helps keep the revenue stream going. Roku’s platform business accounts for more than half the company’s revenue.

The buttons on the remote

Speaking of the remote, the remote provides another revenue stream. Each remote contains several channel buttons near the bottom. Those buttons aren’t programmable, which is a source of frustration for end users. That’s because Roku sells those buttons. When Roku sells placement on the remote to those streaming providers, it can potentially make more money from the buttons than it makes off the hardware itself.

Similarly, Roku can also charge money for placement on the home screen.

Shouldn’t that be illegal? Selling placement is a problem when you’re a monopoly, but since Roku has strong competition from Apple and Amazon, it’s not a monopoly.

Licensing

When other companies build a smart TV with a built-in Roku, Roku doesn’t give it away for free. Roku doesn’t have to charge much, since Roku doesn’t have to build the TV hardware in this case. But Roku can charge a few dollars, make some money, and other companies can compete with an Web OS-based LG smart TV on Roku’s name recognition. In 2018, approximately 1 in 4 TVs sold had Roku functionality built in, and some quarters, the TV sales match the sales of Roku’s set-top boxes.

The Roku Channel

And finally. the Roku Channel streaming service built into Roku set top boxes provides an income stream separate from its platform revenue, in the form of ad revenue. In 2018 this was the fastest growing part of its business. Selling ads lets Roku provide a channel without a subscription, but there’s no reason for ad supported channels to be a break-even proposition. Roku places the channel on the home screen whether you ever use it or not. Eventually, most subscribers are going to activate it at some point if only to see what it is.

Roku’s insights into viewing habits allow it to sell ad inventory more intelligently than over pay TV, so this business model has growth potential.

How does Roku make money? Investors are asking

Roku doesn’t turn a profit every quarter. Roku’s pricing model suggests it’s still trying to buy market share, and some of this may be driven by Amazon, who can afford to sell its competing product at a loss. At the end of Q3 2018 it had 23.8 million active accounts, up 43% year over year from 2017. Its total revenue was $173.4 million, but gross profit was elusive. Roku lost 9 cents per share, though it beat the estimate of 12 cents per share. At the end of Q3 2018, Roku said it expects to gross $732 million for the year.

Ideally, as its count of active users grows and player revenue accounts for a lower percentage of its overall revenue, Roku’s business model will prove profitable. Roku’s Q3 results disappointed investors and its share price dropped 12 percent, but it’s premature to write the company’s obituary just yet.

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