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3 Reasons The Roku Channel Is So Important to Roku's Future

Evan Niu, CFA, The Motley Fool

Streaming media player maker Roku (NASDAQ: ROKU) utterly crushed its first public earnings release last week as the company executes well on its transition to becoming more of a platform company and less of a hardware company.

Not only is the platform business vastly more profitable, but also less susceptible to aspects of consumer hardware like seasonality, product cycles, inventory risk, and more. Platform revenue continues to steadily march higher.

Chart showing player revenue and platform revenue over time

Data source: SEC filings. Chart by author.

Currently, the platform business is mostly advertising revenue, which comprises about two-thirds of that segment. The remaining third of platform revenue comes primarily from content distribution with some licensing revenue from the company's Roku TV and Roku Powered programs. Shortly before the IPO, Roku also launched The Roku Channel, a first-party ad-supported channel that is free for users. The Roku Channel has quickly jumped to one of the top 20 apps on the platform, and is important to the company's future. Here's why.

The Roku Channel on a TV

Image source: Roku.

Content discovery

On the call, CEO Anthony Wood outlined three strategic functions for The Roku Channel. The first is that a lot of content on Roku is buried within other apps, which makes it hard to find. Some of the very same content is on The Roku Channel, and that helps unearth it, and subsequently be monetized by Roku as well as the content owner.

There's lots of content in The Roku Channel that is also available in other apps on our platform. So it doesn't compete directly with existing content partners. Instead, it provides a new way for existing content partners to reach audience and monetize their content. I mean, there's 5,000 apps on Roku. Many of them are free, ad-supported, but many customers are just not willing to look in every app. So one point of The Roku Channel for us is to start doing a better job of merchandising and recommending content with a content-first UI to our customers. So that -- and that helps our existing channel partners.

Content distribution

Since content distribution is the second-largest part of the platform business overall, The Roku Channel also offers new avenues for content owners to reach audiences, especially those that may not have the ability to reach consumers directly.

Roku is a large-scale publishing platform. And we see that over time, a lot of content will become -- will come directly to Roku, published directly on Roku through a mechanism we call Roku Direct Publisher. I mean, there's a lot of content out there that's not being monetized, that is unlike companies that don't have direct-to-consumer marketing ability, don't have ad sales teams and would love to monetize that content on the big streams. So that is another purpose of The Roku Channel.

Content monetization

The last piece is fairly obvious: It's free! Since The Roku Channel is a first-party channel, Roku has greater control and ownership over video ad inventory, compared to the 30% share of video ad inventory that Roku is entitled to for third-party ad-supported channels.

And I guess, finally, the third point of The Roku Channel is that consumers want free content. Free is one of the top search terms on our website. Consumers are looking -- when they move -- when a consumer cuts the cord and moves to streaming, they obviously want a better experience but they're also looking for better value. And so that -- so free is important, and The Roku Channel really addresses that. So yes, we think -- I mean, we're -- I'm super bullish on The Roku Channel. It's just the beginning of a big, strategic effort for us.

Senior VP of Advertising Scott Rosenberg added that Roku is putting all of its best ad tech in The Roku Channel, which lets the company sell ads at premium prices, while also integrating brand sponsorships.

Roku will always be a diverse platform filled with third-party apps and channels, but The Roku Channel will be a crucial part of building the platform business.

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Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.