Roku defied gravity a little in Q1 2020. Though ad rates fell, and TV broadcasters saw ad revenue sag, it managed to grow ARPU 5%. The Roku Channel is a key reason why and it is poised to do even better as the year wears on.
Shelter-in-place viewing has a muted impact
Shelter-in-place viewing had a muted impact on Roku active users and the time they spent viewing in Q1 2020. The number of active users increased by 2.9 million in the quarter to reach 39.8 million, 37% higher than Q1 2019. However, active user growth was about the same as last year. Q1 2019 active users were 40% higher than Q1 2018.
Minutes watched per active viewer increased by 8.4%, well below the 25% increase last year. Roku says that average viewing times did not increase as much as expected because it added an inactivity timer in Q4 2019. If a viewer watches for four hours without touching the remote, a message screen asks if they are still watching. If there is no response, the Roku stops streaming and goes back to the home screen. The feature is likely responsible for a slight decline in average streaming time per viewer in Q4 versus Q3.
Roku rides through the downturn in ad rates
The downturn in ad prices did not appear to affect Roku as much as more traditional TV providers. The average revenue per user increased by 5% over the previous quarter and by 28% over Q1 2019. Meanwhile, NBCU saw ad revenue fall 21% quarter-over-quarter and 13% year-over-year.
Steve Louden, Roku’s Chief Financial Officer, explained the resilience of ad revenue during the earnings call:
“Our advertising business has seen cancellations as some marketing budgets have declined, but this has been partially offset by new marketing budgets moving to Roku from traditional TV given the cancellation of high-profile live sporting and entertainment events as marketers follow viewers and increasingly seek targeted measurable forms of advertising.”
Advertising’s resilience is reflected in the continued growth of Roku’s platform business. Revenue increased 73% year-over-year, to $232 million. By comparison, Roku player sales increased by 22% over Q1 2019 to reach $88.2 million. 73% of Roku’s revenue in the first quarter came from its platform business and 27% from player sales. Three years ago, 36% of revenue came from platform sales and 64% from player.
The Roku Channel is at the core of the engine that is driving extraordinary growth in platform revenue.
The Roku Channel is critical to Roku’s strategy
According to Rob Holmes, VP of Programming at Roku, the idea behind The Roku Channel (TRC) when it was launched two-and-a-half years ago was a simple one:
“We need to make it easier to find great content in streaming.”
Today, TRC has evolved into something more akin to a pay TV service – without the monthly subscription fee. There is plenty of free ad-supported on-demand content across many popular genres. There are also linear channels delivering news, lifestyle, and other styles. TRC also provides access to over 40 premium subscription VOD services like Acorn TV and Showtime.
TRC also recently introduced a Kids and Family service that cuts across premium and free offerings. For example, if a user has an HBO Now subscription, there will be a row of content in the Kids and Family service with all the HBO kid-friendly content.
Now, there are over 40,000 viewing options within TRC, and Roku is using technology, like AI and machine learning, to ensure it is still easy to navigate and find something great to watch:
“So, there’s a bunch of different logical elements we use to create what we think is a more compelling experience, trying to get you to connect with the next thing that is going to be interesting for you.”
Remaining focused on solving the complexity issue is good business sense for Roku. Simply put, the longer people spend in TRC, the more ads they see, and the more money Roku makes. The approach is working, as Roku’s ARPU has almost doubled since TRC was launched in 2017. Moreover, the rapid expansion of the AVOD market online is liable to accelerate. An impending recession will drive interest in free content even higher, making the outlook for TRC rosy for the rest of the year and beyond.