Roku is in the ad business not the hardware business says CEO

Roku sells more dedicated streaming devices than perhaps any other company in the world. It’s been estimated that there are more Rokus in US households than there are Fire TVs, Chromecasts, or Apple TVs. (Amazon strongly disagrees, but has never shared any sales numbers.) But here’s something that might surprise you: the money that Roku makes from its hardware lineup isn’t enough to sustain the company’s business.

There’s just not a lot of profit margin to be had when your most popular products hover between $30 and $70; Roku’s most expensive player is $100. Last quarter, for the first time in its history, Roku made more revenue from advertising and licensing than device sales.

CEO Anthony Wood was frank and open about his company’s evolving business strategy in an interview on this week’s Vergecast. “We don’t really make money... we certainly don’t make enough money to support our engineering organization and our operations and the cost of money to run the Roku service,” he said. “That’s not paid for by the hardware. That’s paid for by our ad and content business.”

If you’ve got a Roku TV or streaming gadget, you’ve no doubt seen advertising for shows and apps plastered on the home screen. That’s some prime real estate. The shortcut buttons on the remote control — you know, with one or two that you’ll never use — are also paid placement. “It’s kind of an exchange of value. We help content distributors find customers, sign up customers, and promote their content, and we get paid for that.”

But it goes much deeper. Roku is learning fast as it hulks up its advertising operation, and now partially controls the ad infrastructure for some apps on its platform. So if you’re using an app like Crackle, some of the ads you’ll see are sold by Roku itself. Business Insider recently reported that “in some cases, Roku insists on selling 30 percent of a publisher’s ad inventory for an app if they want to be distributed on Roku devices.”

Netflix, Hulu, and other major streaming services are big enough that they don’t let Roku directly sell ads for their apps, but many smaller players do. “We get a share of their ad inventory. We take all that ad inventory, we aggregate it, and then we sell targeted ads,” Wood said on the Vergecast. “Consumers are shifting to streaming. And as they shift to streaming, advertisers are following them. Building out a big, next-generation TV ad platform is an important part of Roku business.”

The just-announced Roku TV Wireless Speakers, designed to seamlessly connect to televisions running the company’s software, are also a roundabout way to bring in more ad dollars by addressing a customer pain point: lackluster sound from small, built-in TV speakers. “One of the big issues consumers have is audio,” Wood said. “We’re trying to make Roku TV the best TV it can be. We’re trying to drive innovation there. And that will cause more people to want to use Roku TVs. And that will cause us to be able to sell more ads, frankly, in the long run.” Roku maintains that it’s very protective of ad data gleaned from its customers and adheres to their chosen privacy preferences, such as the “limit ad tracking” option that’s at your disposal.

The super simple Roku interface will change... eventually

Roku’s user experience has always put simplicity above all else. It’s just a grid of apps. Getting to Netflix or Prime Video couldn’t be much faster. “We put a lot of effort into making a super simple UI, and we’re continually working on the UI and testing different concepts,” Wood said. The company often adds small changes and improvements, but has never drastically shaken things up, and that’s intentional.

“People confuse flashy with great, simple, and easy to use,” Wood said. “It’s a challenge to stay focused on continuing to build a simple UI that customers like to use. So that’s what we do. It’s purposeful. It’s not like we don’t notice that competitors sometimes have flashier UIs. We just think they’re flashier not in a good way.”

But he hinted that Roku has bigger ambitions for the future. There are now “too many” apps on the platform for customers to reasonably dig through on their own, according to Wood. “We do think the future is a different UI, which is more content-focused. More recommendation-focused. And we have that UI! It’s called the Roku Channel.”

Roku’s free, ad-sponsored streaming channel includes movies and TV shows contributed from app partners and studios. Right now it’s fairly rudimentary and looks like Netflix circa three or four years ago. Roku recently added live news and movie collections. But the company is working to hone recommendations and algorithmic suggestions.

“The Roku Channel is our sort of sandbox for building a next-generation, content-first user interface. And someday, when we think it’s ready and good enough and has enough content in it, it’ll probably become the home screen. But that’s not going to happen right away.” For now, the grid stays.

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