Investors finally get it – Roku is a platform for smart TVs

US media adapter firm Roku this week more than doubled its share price, as doubts about its credentials as a platform player were swept aside. The company re-iterated its claim to be a “mostly” software player, on the back of astonishing growth in platform revenues at its results last week, and on the signing of the Philips TV brand, now owned by Funai Electric, to its recently upgraded TV OS.

In essence, investors are starting to believe the “platform” story, and where Android has dominated set tops and a handful of TV platforms, Roku now appears to dominate smart TVs in the US and is starting to globally. That means its operating software will bring in from licensing fees and advertising revenues.

The news that TCL, which sells the Roku on TVs in the US, has become in the past 2 quarters, the third largest shipper of TVs there, also does Roku little harm. TCL TV shipments were up 34% over last year and in Q2 it made up 13% of US TV shipments, and in Q3 it was 16.3% and it’s only a matter of time before it overtakes Vizio to chase Samsung shipments there.

The deal whereby Funai Electric (Philips) joins the Roku TV licensing program means it will ship the Roku TV platform on its US smart TVs and will get them out in time for the US holiday season. Funai has had a poor time of TVs lately, and this move is supposed to revive its fortunes. It has most of its TV revenues from the US, and that currently means around 80% of some $1 billion in TV sales will convert to the Roku channel.

Close to a third of all TVs shipped in the US will drive Roku revenues going forward after this deal, from the 20% that drives it now. Other TV providers may choose to turn Roku into their software R&D department, rather than give in to Google and Android TV, whereupon they may miss out of some key revenue types.

“We are excited to work with Roku to deliver an exceptional streaming service on our Philips branded TVs,” said Peter Swinkels, GM, Product Planning at Funai Electric. “The Philips brand is a well-known and trusted brand in the U.S. that delivers best-in-class performance TVs. By using the Roku operating system to power Philips branded TVs, our customers will enjoy a simple-to-use interface that offers excellent streaming entertainment and discovery features for smart TVs today. We look forward to delivering new Philips Roku TVs later this year.”

Shortly after Roku IPO’d this year, its stock slumped as investors misunderstood what Roku actually does – believing it to be hardware. The CEO, Anthony Wood made it clear in last week’s results that the company is really about software, “Almost 90% of our gross profit comes from our advertising, audience development, and content distribution services in our platform segment.”

The platform segment grew 137% in the quarter and Roku’s advertising business grew even faster and he claimed that this year, one in five smart TVs sold in the US is based on a Roku TV reference design and our operating system through brands like TCL, Insignia, and Sharp. Now the company has added Philips to that list.

So while much of the criticism which drove down Roku’s share price after its IPO focused on how could a tiny company like Roku continue to compete with better funded operations like Apple and Samsung, that was mostly missing the point. If Roku were like Apple, it would want a high margin on its hardware products, and that means a high price, but instead it is happy to trade that off against becoming dominant in the US as a platform and take consequential revenues. Roku only devised this shift to this model around two years ago, having worked hard to win the media adapter hardware wars on meager margins.

Whereas Android TV has taken years and years to make a dent in set tops, but has come through in the last two years, Roku’s OS and advertising platform has come through on smart TVs in just a handful of deals.

Because of this (hardware) player gross profit dropped 38% year-over-year, with player gross margin down to 8%, something investors misunderstood as its core business.

In early October Roku came out with its OS version 8, which blends the guide data from local broadcast TV and streaming TV, in much the same way that hybrid set tops in Europe – HbbTV and YouView – have blended that experience. This implies that it will be going for a further push into European markets shortly.

Roku has also enabled search across all its wide variety of content sources, both channel and VoD, and has put that under voice control, an area where the leading global TV firms like Samsung and LG have innovated and threatened to leave smaller players behind. This is one of the reasons why so many smaller TV makers want to license the Roku platform. The Roku Voice search now includes natural language understanding and can search for movies, shows, actors and directors, or even launch streaming channels, in a more conversational tone. You can say things like, “show me movies with Tom Hanks,” “launch Hulu,” or even more detailed searches such as “show me comedies with Will Ferrell.”

The new OS also allows for a secure single way of signing onto multiple OTT video platforms and apps. Voice controls for Roku TVs can be also be used on it remote that have a microphone button or through a free app which Roku offers on both iOS and Android phones.

Roku has promised that over time, its Smart Guide will dynamically identify favorite channels and put them at the top of the guide. The search facility spans 500 streaming channels and when a TV antenna is connected to the device, will include results for local broadcast TV. The new OS also allows for “private listening” watching a channel without the sound on, directing it instead through headphones. There is also a “spotlight” channel for 4K, HDR and Dolby Vision content. This OS edition ships in November.

The share price of Roku went from $18 a share to over $45 starting a rally after the results last Thursday, but has since fallen back to $37, making it worth $3.6 billion. At its IPO in September Roku went to $21 and peaked at $29.8 before heading downwards on investor doubts.