Roku Looks Forward to IPO in 2017

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3Q 2017 | IN-4693

In mid-July, the Wall Street Journal reported that Roku would be looking to raise funds for an IPO in 2017, at a valuation of about US$1 billion. Roku has released some additional statistics in the market on its footprint, including:

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Roku Looks to IPO in 2017

NEWS


In mid-July, the Wall Street Journal reported that Roku would be looking to raise funds for an IPO in 2017, at a valuation of about US$1 billion. Roku has released some additional statistics in the market on its footprint, including:

  • US$400 million in 2016 revenue, of which over US$100 million stems from “media and licensing” not related to hardware sales. This includes both licensing revenues from TV platform as well as recurring revenues from advertising and platform sales.
  • 15 million monthly active accounts (worldwide total across all market segments) as of June 30, 2017, up from a bit over 9 million in mid-2016.
  • In January 2017, Roku announced its connected TV partners (Hisense, Hitachi, Insignia, Sharp and TCL) helped it capture 13% of the U.S. Smart TV market.

From a living room video consumption perspective, Streaming Media Adapters and Smart TVs both enable consumers to connect their TVs to the variety of OTT offerings available, from SVOD platforms to ad-supported, unscripted content and authenticated Pay TV content. This very fragmented market presents problems for video service suppliers; while the largest suppliers (i.e., Netflix, Amazon) can afford resources to be on every platform, smaller operators will face difficult development priorities.

From an installed base perspective, comparing Roku to a variety of different categories of options (we ignore game consoles in this analysis as, despite video playback capabilities, it is not a common use case), Roku sits at number 3 in terms of installed base, behind Samsung and Vizio, but ahead of Apple TV and LG.

Platform Installed Base (North America) Key Considerations User Base Commentary
Roku 20 million*
  • Media Friendly
  • Historically limited UI & SDK, being replaced by updated UI.
  • Strong on international content brands.
  • Less tech-savvy audience. Publisher friendly w/ ad toolkit.
  • Support 4K, HDR
  • Still North American centric, but growing international audience: retail boxes (US, Canada, France, Ireland, Mexico, UK), Roku Powered Partners (Europe and APAC), Roku TV (Element, Hisense, Hitachi, Insignia, Sharp, TCL)
  • Focus on easy to use UI makes Roku a good solution for less tech-savvy households and older demographics
Apple TV 18.8 million
  • Works well in Apple iTunes ecosystem.
  • Apple TV 2.0 has strong TV-Everywhere momentum with strong single sign.
  • Apple TV driven by apple ecosystem and loyal households - generally 35+ and higher income. Smart home and Siri integration will play a larger role
Fire TV 7.5 million
  • Newly re-launched channels aggregate premium programmer & independent channels (HBO, Show, Starz, SeeSo, PBS Kids)
  • Support 4K
  • Like Apple Amazon’s Fire TV is tied into its ecosystem of services and content. Alexa and smart home also works with Fire TV
  • User base relatively diverse – products offered at low and higher end of price range
Chromecast 14.6 million
  • No native remote leading to more millennial audience.
  • Relies on DIAL protocol to handoff credentials & URL.
  • Support 4K
  • Chromecast young, millennials, often with roommates with multiple users/accounts per HH and generally less consistent use compared to other platforms due to lack of Native UI
  • Some challenges with UI (no remote), again skews towards younger audience
Google TV/Android TV 2.2 million
  • Multiple apps, Chromecast built in, Voice search, 4K
  • Not well-defined to one SKU or product portfolio. User base tends to be more tech savvy (due to early associated products) but has expanded with more companies coming onboard.
Samsung TV 30.7 million
  • Has tried to develop and market in-house streaming services but has largely failed to generate traction among consumers
  • Significant brand value from mobile division
  • Viewed as a premium TV brand, Samsung has invested more in its connected platform than most, but its platform does not strongly differentiate its TVs.
Vizio TV 25.7 million
  • Connected platform moving to Chromecast
  • Failed acquisition by LeEco keeps Vizio on current path
  • Known for value, Vizio held out longer than others with its VIA Apps but moved to Chromecast. User base generally prizes value over branding but varied in terms of demographics.
LG TV 16.8 million
  • Still supports webOS for Smart TV platform
  • Still pushing OLED for premium TV displays (others like Sony and Chinese manufacturers have also added OLED TVs)
  • As other TV platforms LG’s user base is not particularly notable for being differentiated, but LG does continue to support its platform and branding so some opportunities for separation.

*Roku classifies an account as active if the account initiates a stream at least once per month from a Roku device. Households often have more than one streaming device per home and with the introduction of Roku TVs the likelihood of multiple Roku devices per household increased more significantly. OTT streaming has also transitioned from a binge watching affair (which centered on particular shows at certain times of the year) to a more habitual/regular activity that also more recently increased the number of accounts classified as active.   

Roku’s three customers: consumers, Device OEMs and operators

IMPACT


Roku serves three unique sets of customers. First, it serves consumers directly via the Roku boxes, and indirectly via the Smart TV platform. Second, it serves the device OEMs making Smart TVs. Finally, it offers boxes and software to some operators, such as Sky’s Now TV boxes.

From a consumer standpoint, some of the key selling points of Roku’s services include:

  • Very low-priced hardware (starting at $30) both from a Streaming Media Adapter (in box or stick formats) as well as TV line-up.
  • Aggregated search results across approximately 150 streaming channels, including major distributors such as Netflix, Amazon, Hulu, etc.
  • Straightforward UI which operates smoothly on relatively low-powered CPUs; the latest version of the Roku UI is more in common with other HTML5-based application frameworks.
  • Roku TV’s now feature Live TV Pause, using the memory in the TV to cache the program.
  • The Roku remote features headphones, a feature which some consumers love for late night viewing without disturbing their partner or others in the household.
  • Strong retail distribution, making it easy to find the Roku products.
  • At CES in 2017, Roku announced a 4K HDR TV line-up with TCL, moving away from only selling into the value section of the market.

From a developer / device OEM standpoint:

  • The Roku platform is well maintained and robust, offering a significantly lower degree of software complexity, personalization, and update requirements compared to the best alternative, Google’s Android TV platform.
  • Robust content offerings providing the most demanded applications by consumers pre-integrated, with a single contract to sign for all distribution terms and revenue sharing terms, saving significantly in the cost of R&D and licensing teams.
  • Other alternatives, such as the Smart TV Alliance, an application platform designed to help TV OEMs easily scale with the number of applications they could offer, ultimately never solved the fragmentation challenge, due as much to business model issues rather than technology hurdles.

From an operator standpoint (Roku Powered Partners):

  • Roku is a well proven platform with a simple, yet customizable UI.
  • Roku has excellent features, compatibility and the company has strong supply chain capabilities.
  • Operators have full control over the content on the box. Sky, for instance, offers just shy of 100 applications on the Now TV box. Operators can curate these apps based on those that are viewed as complementary to the service offering from a content or business standpoint. They can customize the payment systems in the storefront to meet their business needs.
  • Strong retail distribution, which can help bring the box and service in front of consumers in retail chains.

What can Roku do with more funds?

COMMENTARY


First off, Roku is in a relatively good position in the market. The worldwide TV market is entering a new phase, following on the Japanese phase (shift occurred in 2000’s), now in the Korean phase, and is soon likely to enter a Chinese TV OEM phase of the market. This, plus the strong position in the streaming media adapter market, put it in a position to grow its active user base – at least until a point where legacy TVs get replaced with Smart TVs – even then, the cost of integrating a Smart TV into a value line are relatively low, and Roku is well positioned within the value segment. Vizio – who was in the process of being acquired by Chinese LeEco until the purchase fell through – is the main supplier offering significant competition in this value segment.

The first thing Roku is likely to do with this funding is to invest significantly in expanding into new markets. Currently, Roku sells it retail boxes in a handful of markets, notably US, Canada, France, Ireland, Mexico, UK. Roku powered partners (operators using the Roku platform) include Sky UK, Sky Italia, Sky Deutschland, Telstra (Australia), PLDT (Philippines). Roku TV partners (Element, Hisense, Hitachi, Insignia, Sharp, TCL) are also limited to countries where the Roku platform is sold. We expect Roku to use its funding first to expand license throughout the EU and into Asia. At first, it may be market by market, but if Roku is wise in its licensing contracts, it can do something like Netflix did when it went from about two dozen countries to an international service virtually overnight, and use its major distributors (such as Netflix, Discovery, Al Jazeera English, etc.) to rapidly expand into new territories.

From an R&D standpoint, we believe Roku should use its funds for a few big bets. First, from a core technology side, we believe Roku should double down on its existing ad technology offerings, extending its ability to be a distribution partner and monetization partner for content owners worldwide, with focus on data, ad valuation, and measurement (see related ABI Research report on Analytics). Second, while a Roku branded “service” may create too much competition with the customers, developing and extending the search platform to offer more of a curation platform, and thus improving the home screen experience in a way which offers a first look experience, allowing consumers to view content from the Roku home or in the applications. Finally, we believe that broadcasters are looking at a migration from “free to air” (FTA) digital terrestrial networks, to “free to wire” digital networks, which can operate over IPTV networks or OTT. Roku could work with operators to make this transition happen, potentially offering platforms that extend beyond the TV and invest in application frameworks as well.