How Roku Empowers Small Businesses in the Streaming Era

In terms of our overall content, it's massive; we have a massive library, so it's hard to avoid CTV for watching TV. In terms of advertising, the CTV market is in this transformational stage where everything from linear in terms of eyeballs and advertising, specifically video ads but also other kinds of advertising, is moving over to connected TV. And Roku is in such a good position because we are the market leader; we have 85 million streaming households, we're approaching half of broadband penetration in the U.S., so nearly half of households in the U.S. have a Roku operating system. So you can't not see Roku in that context—we're that big. And when we're that big in terms of hours being watched, the ad dollars are going to continue to move over from linear to CTV, and we're in a great position to take advantage of that.

Yeah, it's a great question and it's what I believe is one of our biggest assets at Roku: our ability to program the UI and be the lead-in to all TVs. When you turn your TV on, 99-plus percent of the time you're going to see a Roku home screen, and we control that Roku home screen. That's what we do—we are the operating system, so we are the lead-in to all TV. Roku City is separate—I'll get to Roku City in a minute—but yes, Roku City is of course a part of Roku and a very important part. The lead-in to TV is what drives our ability to get streamers into the Roku Channel, in addition to having great FAST content (free ad-supported content), in addition to having original content, and in addition to having things like the Sport Zone. We control the UI, and when you control the UI, you can help our streamers find what they love to watch, and that's what leads to the Roku Channel being such a large player. So yes, it's 80% growth; we are number three in terms of hours and in terms of streaming households on our platform, and we're growing 80-plus percent, and no one's even close to that level of growth. I often cite this: when you come to the Roku home screen, you can have up to seven entry points into the Roku Channel at any point in time, and that leads to a lot of demand. Our streamers love it; once they get into the Roku Channel, they stay and watch. Now in terms of your point on Roku City, Roku City is so cool and such an interesting phenomenon. It was a screensaver that became a cultural phenomenon. It started out as a screensaver, and then the team got innovative and we said, 'Hey, not only do streamers love this, but we can actually monetize it through putting some ads on it.' So we invested a lot in Roku City, and it's becoming this cultural phenomenon.

Well, in terms of pricing, the streaming household number is a function of our amazing operating system and the devices we sell, both with our third-party partners as well as our first-party TV, the Roku-branded TV. To answer your question, that will continue on. We've said that many times: we are going to grow in all our countries in terms of streaming household penetration. We even said that we expect to hit 100 million in the next 12 to 18 months—that's very impressive. And by the way, that's going to be in the U.S., it's going to be in Mexico, it's going to be in Brazil, it's going to be in Canada, it's going to be in all the countries that we operate. So that's going to continue to grow. Pricing plays a part of that in the form of the device business, where we are very competitively priced both with our third-party partners and our own Roku-branded TV. In terms of the platform revenue growth, where we grew 15% year-over-year in our latest quarter and we guided to continue growth of 14% in Q4, that's coming from basically both our content distribution business where we monetize subscriptions, as well as our growing ad business where we sell video ads and other types of ad products on the platform. Again, that is going to continue to grow as we gave guidance on, and we feel good about that. So pricing notwithstanding, on the video ad front, we'll meet our advertisers at wherever the market price is on this. We feel very good about this; we have a ton of supply, we are not supply-constrained because of that, the Roku Channel and what that brings to us, and we're focused on bringing more and more demand in through our platform.

Yeah, that's a great question. When we look at it, the device matters. First of all, you're right that we do sell it at a loss right now, but we are also—as we get scale, we will improve that loss over time. In the Players business, which is that dongle that we sell very popular and still selling very well, we are so good at manufacturing this; our BOM cost, our components cost, has come down as we've scaled up, and we actually don't lose money necessarily on the player business. On the TV side, yes, we do lose money—that's intentional. We're just getting into first-party TVs, so it's going to take us a little bit of time to scale, although over time we see the margins improving every year as we continue to build scale. Will it ever be a profitable business? I don't have visibility into that. Will the margins get better over time as we get scale? Yes. But again, we make the bulk—in fact, all of our profit—on the OS side, in selling ads, in selling subscriptions, and other ways that we monetize. That's an intentional strategy; we call it 'scale, engage, monetize.' Where we get scale in any particular country, then we get engagement within that country via the Roku Channel and other ways of engagement, and then we monetize that engagement through content distribution agreements and selling ads.

Yeah, it's a great question. It's something we watch closely. We don't manufacture all that much in that area, although component costs do come from that area, so it is something we watch. Although again, we're not focused on maximizing our margins in devices; that is our strategy, so we are going to be less impacted in my opinion than others may be. It is not something I think is a warning signal for us. As a matter of fact, relative to everybody else, I think we're in a great position. We're also, of course, sourcing very smartly; we're moving to where we can minimize our loss in devices. So tariffs are something we're watching, but again, it's not going to be as impactful to us as it could be to others. So I feel pretty good about the position that we're in with respect to the possibility of increased tariffs.

Yeah, you know, Instacart is just another example of a very innovative ad product that we can bring to market. We have many more of them—maybe we'll talk about Ads Manager at some point—but Instacart is just an action-type ad where, again, because of our data set and our sheer scale, we can provide a very real ad that is a positive return on investment for the advertisers. Instacart is just one of many examples of that. If that were to ever become scalable, you could use that similar ad product for many other organizations or advertisers who have a call to action embedded in the ad, like there is at Instacart. So again, Instacart is starting to grow; it's relatively small right now, but it gives you a sense of the innovative type ad products that we are in a great position to be able to deliver for our advertisers.

Well, if it is going to take off, it's going to be in this moment, and I think that's very possible. Because again, with linear TV, you can't target—you might have some scalable reach, but you can't target; you do not have the data at your fingertips. That is another advantage of ours: our vast quantities of data that we can use to target the ad to the right audience, and therefore you will get that higher return. And by the way, you're also not going to have a poor streamer experience who might not want to see that ad, because everybody else is seeing it. Our ability to target is a huge game-changer. In these types of actionable ads, targeted ads in the connected TV world is the hallmark of another one of your partners, Dan, and that's The Trade Desk. Tell us what you guys are doing there.

Again, as I mentioned earlier, we have a tremendous amount of supply at our fingertips. Quite honestly, we can create more supply relatively easily; we don't need to go make a lot of expensive content to create more supply—it's a very enviable position. So demand is something we're very focused on, and one of the ways that we're increasing our demand is by integrating with all the demand-side platforms and the sell-side platforms out there to help increase the volume of demand that comes our way. Our integration with The Trade Desk does that, and it really does that at the next level, in that we integrate deeply with The Trade Desk with what's called UID 2.0, where we can get more demand that performs on our platform. Then we integrate with measurement companies and other ways to measure the ROI, the return on investment, for that ad, which then helps the advertiser really understand the value of the ad. So it's a deep integration; we are not exclusive—we integrate with all the demand-side platforms, and the idea is to create that demand to fill the supply that we can generate in the Roku Channel and across our platform.

Yeah, that is an ad product I am extremely excited about. We just launched it—literally just launched it this last quarter—and it's out there for our small and medium-sized advertisers. It's called Ads Manager, and what it is is think about it as a very localized ad product where it is a self-service ad product where you can come in as an advertiser and say, 'Hey, I want to spend so much money and I want to target these types of advertisers,' and our Ads Manager product does that. It's just—we launched it, we're going to have many iterations on this. I think this could be very large. I think this is a place where AI can be particularly impactful because it can eventually generate AI-generated ads that are highly relevant for a specific advertiser, and you can do this with very limited and in fact maybe eventually no touch at all. I think that is incredibly powerful when you have the scale that we have. We are great for brand advertisers and other medium to large-sized advertisers to come out and advertise across our scale in a targeted way. Getting a self-service small and medium-sized ads-type product—I think is extraordinarily exciting, and it's one of the ad products that I can't wait to see where this is two and three years from now. I think it could be quite large.

Yeah, the cost will be a function of supply and demand, like everything else. But what you can do is you can set budgets and say, 'Hey, I only want to spend X amount,' and then eventually, even now, the product will try to fulfill that at any given budget. So what it's trying to do is tell the advertiser, 'Hey, you tell us what your goals are, and we will work hard to fulfill those goals within the context of this ad product.' So it really depends—it's not that different than other ad products out there, such as CPC cost-per-click type ad products or biddable ad products. So it really is a function of demand and supply. But again, the idea is you can give the advertiser the ability to target. For example, I'm in Austin right now; if I'm a small Austin restaurant with five or six stores, I can come in and say, 'Hey, I want to target just these areas and I'm willing to spend up to X amount,' and then again, we'll try to go and fulfill that within a given budget.

Yeah, first of all, we do have a lot of data that we share with many of our advertisers. I'm not going to get into what we specifically share with local versus our enterprise, but I think one of the big differentials is showing a video ad in the form of somebody watching TV is incredibly powerful. This is why a lot of the enterprise companies show video ads—just because of how much reach you get. So imagine getting a video ad, not a contextual ad, not a link ad, but a video ad that looks professionally done, while you're watching a show—it could be a sporting event, it could be an original piece of content, it could be Two Broke Girls on the Roku Channel—but imagine in your respective area getting to showcase your company via video for some length of time. It's incredibly powerful and very unique, and I don't think really anyone's doing that at scale right now. Yes, there are companies that have video ads, but not in the form of TV watching.

Yeah, that's a great question. First, I think we should talk about how Roku built the scale that it has. Roku has been surrounded by large companies literally since inception, and yet here we are with by far the number one CTV OS by scale out there. In terms of every year, we are number one in the U.S. in terms of connected TV sold; we are by far the number one OS provider in the U.S. and other countries, mainly Canada and Mexico, and growing. We're increasing our share despite again being surrounded by a lot of large players in this space. So in my perspective, having built such—by the way, you don't do that just by spending money; you have to have a great product. We are number one not because we sell ads; we are number one because our OS is incredibly popular with our streamers. They love it; they love the simplicity of it, they love the reliability of it, they love the way it's laid out. Of course, we have distribution with everybody, so they love the selection. That's not going away. We have every intention, and I'm very confident we'll maintain this number one position. So it really becomes—and if you start with there, like we are number one in the U.S., we're number one in Mexico, we're number one in Canada, we'll continue to grow our share in there—which I highly suspect we'll do—that is our moat. And now it's a focus on how do we monetize that number one position that we have spent 10-plus years building in the U.S. and some subset of that in other countries. So again, that is an incredible, enviable position. You do not want to be number four or number five in this space; you have to be number one or number two. And once you are number one or number two, it puts you in a great position to continue to focus on how to monetize, because again, we don't have to make money on the device—we don't make money on the device; we make money for all the years at once a device is sold in how our streamers come in and engage with that device, and they're continuing to do that on Roku. It's a great position to be in.

I enjoyed it, my man Barry.