Investors jumped at the chance to invest in Roku when the company listed on NASDAQ for the first time last week. Roku will need to invest a some of the money it raised in its app development platform to ensure it can deliver on investor expectations.
IPO a big success
Roku’s IPO has been an unmitigated success for the company. The company offered its shares on NASDAQ under the ticker symbol ROKU for the first time last Wednesday. With an initial offer price of $14, the shares quickly rose on the first day of trading to finish at $23.50. At the market close on Monday the shares finished at $23.56, up 70% from the initial offer price.
The market feels bullish on the connected TV market, where Roku is arguably the streaming media player market leader. Investors also seem to believe Roku is well positioned to continue to grow as the general market expands. However, while remaining the streaming media player leader is important to Roku’s continued success, it is not where the company will generate the revenue and profit that investors expect.
No sustainable advantage in hardware
Roku refreshed its line of streaming media players this week. It introduced two cut-price devices exclusively for sale through Walmart. It also added an Ultra HD/HDR (high dynamic range) streaming stick for $69 and cut the price of its top-of-the-line Ultra to $99. This keeps Roku devices among the best value in the market.
That said, for the long term, there is no sustainable advantage in the sale of boxes to consumers. Since Roku has filed its IPO, Apple has delivered an update to the Apple TV to add 4K and HDR support. The update brings Apple TV to feature parity with Roku’s better boxes, though at a much higher price. Amazon will also soon deliver an update to its Fire TV player to provide 4K and HDR support at a very competitive $69. Chromecast Ultra also supports Ultra HD and HDR and costs $69.
This situation is nothing new to Roku as feature escalation has been going on for years. The company has remained a market leader by beating competitors to market with new features at very competitive prices. However, with declining profit margins on a relatively low-priced product, this is not how the company will build a business worthy of the enthusiasm of investors. As I said before the IPO, Roku needs to develop its licensing and advertising businesses if it is to succeed. Anthony Wood, Roku’s CEO, is well aware of this:
“Our business model is focused on growing active accounts, and then monetizing those active accounts through our platform business. The way we grow active accounts is we sell streaming players, we license to TV companies and we license to operators.”
Key to making both the licensing and advertising businesses successful is the app development platform. The lifeblood of Roku’s success is the sheer quantity of content services available and the quality of experience those services can deliver. Having an easy platform to develop great apps on is essential to supporting both this success. Roku could do better here.
Roku needs to win the hearts of developers
Roku is used by almost three times as many Wi-Fi homes in the U.S. as Apple TV, and twice as many as Chromecast. Despite this huge market advantage app developers frequently turn to Apple TV first. Bitmovin, a streaming infrastructure provider, surveyed 380 developers in 50 countries to assess which video platforms they used to give the best experience to their customers.
In North America, there was little difference in preference between Apple TV, Roku, and Chromecast.~ Apple TV was the preferred platform for 38% of developers, Roku for 35%, and Chromecast for 31%. With such a large market share, Roku devices are the logical focus. Yet developers often opt for the least popular of the top four platforms, Apple TV. For example, when Hulu launched its vMVPD service Live, Apple TV was supported months before Roku. Chromecast and Amazon Fire TV were also supported by Hulu Live before Roku.
These data points certainly match what I hear from the video app development community. Developing apps for the Roku is a world apart from other streaming media player platforms. Developers simply prefer working on them, rather than Roku. That will need to change if Roku is to translate its market leadership position today into the profitable, thriving business investors expect tomorrow.
Why it matters
Investors jumped at the chance to invest in Roku, and the burgeoning connected television market.
Roku continues to lead the streaming media player market, but its future success will come from ads and licensing not device sales.
Success is those businesses requires that app developers chose to develop their marque experiences for Roku first. Today, developers frequently chose other platforms ahead of Roku.
~Without specific details of the number of developers surveyed per country, it is difficult to assess the accuracy of Bitmovin’s sample. However, with an average of just 7.6 developers per country, the difference between Apple TV, Roku, and Chromecast can be accounted for by a swing of 1 or 2 developers. Readers should consider the Bitmovin data as directional, not definitive.