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Roku IPO – the tiny company that thought it could, finally did

Roku is like the tiny little company that thought it could, and now it is pretty certain it can, after filing a prospectus to go public in the US raising $100 million on a valuation of somewhere between $1 billion and $1.5 billon depending on its strike price. Prior to going public it raised $200 million in VC funds and began life as part of Netflix, who is one of those investors, along with News Corp and Viacom.

Some US stock analysts were already predicting gloom and doom for Roku, because the prospectus reveals that almost a third of the views carried on the 15.1 million active accounts come from Netflix, which doesn’t pay it anything for the privilege. But of course those analysts are not factoring in that this is why it was such a popular device in the first play in the early days. Other concerns are over the thin margins, getting thinner every day in the media adapter sector. But of course that’s not the only sector Roku is in. Those analysts should have read the prospectus more thoroughly.

Roku admits that it has operated at a loss in the past, and may “incur operating losses in the future and may never achieve or maintain profitability”. Revenues grew by 25% during 2016, to $399 million, but Roku made a loss of $43 million. In June 2017 it had an “accumulated deficit of $244 million”, which the prospectus says it intends to reduce by attracting new users.

But Roku is no longer merely a company that builds physical streaming devices, it has become a viewing platform in its own right bringing thousands of content assets to market, and has a strong play in advertising. Separately it has, in Europe, begun a route to market working alongside pay TV operators.

The company has been punching above its weight for some time, considering the limits of its size and resources compared to the biggest companies in the industry. It has a market-leading share (37%) in streaming devices used in the US, according to research just published by Parks Associates, up from 30% a year earlier.

But it is the Roku advertising platform, not its streaming devices, that will be the company’s primary focus as it goes forwards.

“When ad-supported TV is streamed, it creates an opportunity for content publishers and advertisers to use advanced digital advertising capabilities, such as one-to-one personalized delivery,” the prospectus states. “We believe this presents a large market opportunity for streaming advertising to the TV … there is a large opportunity for growth in the OTT advertising market given the long-standing consumer model of choosing ad-supported content, in addition to paid content.”

Roku has built a series of software tools for bringing these viewers to advertisers programmatically.

In April this year Roku began offering demographic guarantees for TV marketers who use its advertising platform, and claimed it was the first OTT publisher to offer advertising metrics through Nielsen’s Digital Ad Ratings (DAR) that are comparable to linear TV, calling it a major milestone marker for the industry.

Roku partnered with Nielsen back in 2015 to integrate its DAR solution into Roku’s Ad Framework platform. Roku has also partnered with comScore to integrate its digital video ratings into Roku’s platform. And earlier this year, Roku partnered with advertising firm Magna to help its brands deliver targeted advertising to Roku’s OTT audiences.

First Roku sells some of the advertising that appears on its digital media adapters, and it obtains data about audiences by matching its first party data with third part data sets. The company has thousands of online video “channels” on its platform, many of which are ad-supported niche OTT video channels. In fact, Roku says ad-supported video viewing is the fastest growing segment on its platform, so it makes sense for Roku to want to grow this segment of its business.

Second, Roku has partnered with a few TV set makers to develop a Roku smart TV operating system (OS), and can sell advertising that appears on its TV platform, too. LG, Hisense TCL, Sharp, Insignia are now all offering Roku smart TVs.

The company is slowly moving from a stage when almost all its revenues came from sales of its streaming devices to a new era in which a growing share of revenue is derived from its platform: that is, from fees received from advertisers and content creators, and from licensing Roku technologies and the company’s proprietary operating system, to service operators.

In the first half of 2017, 59% of the company’s revenue came from selling streaming devices, down from 61% in the second half of 2016. Over the same period, advertising and TV subscription revenue grew by 91% to account for 41% of money coming into the company. By comparison, during 2016 player sales accounted for 74% and platform revenue just 26% of total revenue.

The prospectus shows that Roku users streamed more than 6.7 billion hours on the Roku platform during the first half of 2017, including 2.9 billion hours of advertising-supported programming. Roku devices can also be used to access a wide range of content: in the US its devices enable access to over 5,000 streaming channels, and more than 500,000 TV shows and movies.

And although it produces a range of different players at different price points, all of those prices are low – so analysts focusing on the margin seem to be missing the point – prices are now down to about $30 for a streaming stick.

But the company’s partnerships with TV manufacturers may turn out to be a crucial element enabling future success. The Roku platform is now embedded in TVs built by manufacturers including TCL, Element, Hisense, Hitachi, Insignia and Sharp. With more smart TV manufacturers likely to join that list, this will reduce further the company’s reliance on selling its own devices and move it away from low margin business.

The prospectus also contains a short letter from Roku founder Anthony Wood. “Our mission is to be the TV streaming platform that connects the entire TV ecosystem,” he writes. “We connect consumers with the content they love. We help content publishers find their audience and make money. We are pushing TV advertising … into the data-driven, machine learning, era of relevant and interactive TV ads.” He believes, he says, that “TVs will be powered by a purpose-built operating system optimized for streaming.”

Clearly, this is where Wood believes the company’s future lies, as a business based on the facilitation of advertising and content distribution through its platform, using its own devices and partnerships with TV manufacturers to increase the number of active Roku accounts.

It will be fascinating to see what impact the IPO process has on Roku’s strategy, including plans for further expansion in non-US markets (at present, Roku devices are available in Canada, Mexico, the UK, France and the Republic of Ireland, as well as in the US).

Even if the IPO is a relatively minor event, if Roku can maintain and strengthen the roles it plays in the industry today – not least as a means of encouraging more consumers to stream a broader range of content without subscribing to pay TV services – its progress will continue to exert a strong influence on the future of the industry. This small company – it currently has only about 400 employees – could play a surprisingly big role in the future of television.

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