How Does Roku Make Money? Roku Business Model In A Nutshell

Roku is an American manufacturer of digital media players for video streaming founded by Anthony Wood in 2002. Wood developed one of the first such players after regularly missing episodes of his favorite television show.
Roku’s revenue generation strategy is based on selling its media players near cost price and then profiting from much more lucrative advertising revenue.
Roku licenses its operating system to smart TV manufacturers and offers premium, third-party subscription channels to streaming customers. It also works with advertisers to produce new and creative marketing campaigns.

Table of Contents

Origin Story

Roku is an American manufacturer of digital media players for video streaming founded by Anthony Wood in 2002.

Wood named the company after the Japanese word for six – roku – because it was the sixth company he had founded to date.

Some years earlier, Wood developed one of the first-ever digital video recorders after becoming frustrated at regularly missing episodes of Star Trek: The Next Generation.

The recorder was released in 1999 under the brand name ReplayTV, but poor sales and litigation from television networks forced Wood to sell the technology to Japanese electronics giant D&M Holdings.

Undeterred, Wood began developing the Roku media player most recognize today.

He pestered Netflix CEO Reed Hastings for a month to let him develop a streaming video box, but Hastings would only develop such a box in-house.

As a result, Wood took a part-time job to create the device at Netflix while remaining CEO of Roku.

Nine months later, Hastings spun out the media player division to Roku after discovering consumers wanted a box that could stream more than just Netflix alone.

Wood received the unfinished device, patents, and control over 20 to 30 Netflix employees. In return, Netflix received 15% of Roku’s equity.

The Netflix Media Player by Roku launched in May 2008 with an attractive price point.

Consumers could also add more than 50 channels to the platform, including Major League Baseball and Amazon Video.

Over the following years, Roku positioned itself as an operating system to differentiate itself in an increasingly competitive streaming market.

The company entered into deals with high-profile producers such as MGM, Lionsgate, Paramount, and Warners Brothers to show ad-supported content to users free of charge.

Importantly, Roku showed up to 50% less advertising than traditional television stations.

Thanks largely to the COVID-19 pandemic, Roku now enjoys around 53.6 million monthly active users. Some 14 million of these were added in 2020 alone.

Value Proposition:

Roku provides digital media players for video streaming, offering a wide range of streaming options.
Offers its media players at or near cost price, making them affordable for consumers.
Provides an operating system (OS) for smart TV manufacturers, enabling them to offer streaming capabilities.
Offers a diverse selection of premium, third-party subscription channels to enhance the streaming experience.
Collaborates with advertisers to create innovative marketing campaigns and deliver ad-supported content.

Customer Segments:

Streaming enthusiasts: Individuals and households looking for convenient and affordable streaming solutions.
Smart TV manufacturers: Companies producing televisions seeking Roku’s OS for streaming capabilities.
Content providers: Premium channels and subscription services partnering with Roku to reach a broader audience.
Advertisers and marketers: Businesses looking for creative and effective advertising opportunities in the streaming space.

Distribution Strategy:

Offers digital media players directly to consumers through various models, including streaming devices and audio systems.
Sells hardware products at or near cost price, with the primary goal of expanding its advertising reach.
Licenses its proprietary operating system to smart TV manufacturers, generating revenue when Roku-enabled TVs are sold.
Provides premium video subscriptions on channels run by third parties, earning a commission for each new subscriber.
Offers Roku Brand Studio services to advertisers, creating unique ad formats and branded content.

Marketing Strategy:

Differentiated itself as an operating system for streaming devices, partnering with major content producers.
Focuses on ad-supported content, displaying ads during streaming and on The Roku Channel.
Shares advertising revenue with media companies, fostering partnerships.
Sells its digital media players at competitive prices to expand its user base.
Collaborates with third-party content providers to offer premium video subscriptions, sharing revenue from new subscribers.
Offers Roku Brand Studio services to advertisers, providing creative marketing solutions beyond traditional ads.

Roku revenue generation

Advertising

As the provider of ad-supported content, advertising is one of the more obvious sources of income for the company.

Advertising occurs for around eight minutes every hour and is also displayed when users pause content on The Roku Channel – an independent network displaying licensed content media companies such as Warner Brothers.

Roku then shares a portion of advertising revenue with these media companies.

Hardware

Roku also makes money by selling its streaming devices, which may include audio systems and devices that are HDMI-enabled such as Roku Premiere and Roku Express.

It’s important to note that Roku sells these products at or near cost price. The devices are simply a way for the company to get its advertising seen by more viewers.

Licensing

Roku also licenses its proprietary operating system to smart television manufacturers such as Hitachi, Philips, and JVC.

Here, the company makes money whenever a Roku-enabled smart television is sold and activated. The exact commission is undisclosed and likely varies according to the arrangement in place with each manufacturer.

Subscriptions

In 2019, Roku began selling premium video subscriptions on channels such as Showtime, Smithsonian Channel Plus, FitFusion, Baeble Music, and Lifetime Movie Club.

These channels are run by third parties, so Roku earns a commission for every new subscriber it signs up. Again, exact figures are undisclosed – but some suggest the fee is around 20%.

Branded content

Roku Brand Studio is a service that produces new and creative ad formats in addition to television programming tailored for marketers.

Roku believes the service helps advertisers see beyond the traditional 30-second ad spot.

Alternative promotion options include advertiser-commissioned short-form TV programs, interactive video ads, and other branded content.

It is likely that each Roku Brand Studio client compensates Roku depending on the nature of the content created.

Key Highlights

Founded in 2002 by Anthony Wood, Roku manufactures digital media players for video streaming with a revenue strategy based on selling hardware near cost and profiting from advertising.
Roku licenses its operating system to smart TV manufacturers and offers premium third-party subscription channels, collaborating with advertisers for innovative marketing.
Originating from Anthony Wood’s frustration with missing TV episodes, Roku evolved from ReplayTV to become a leading streaming player.
Key partnerships with Netflix and strategic content deals helped Roku establish itself as an operating system in the competitive streaming market.
Rapid user growth during the COVID-19 pandemic led to around 53.6 million monthly active users.
Roku’s value proposition includes affordable media players, an OS for smart TVs, premium channels, and creative advertising opportunities.
Target customer segments include streaming enthusiasts, TV manufacturers, content providers, and advertisers.
Distribution strategies involve direct sales, cost-price hardware, OS licensing, premium subscriptions, and Roku Brand Studio services.
Marketing strategies focus on ad-supported content, partnerships with media companies, competitive hardware pricing, and branded content.
Revenue generation channels include advertising, hardware sales, OS licensing, and commissions from premium subscriptions.

Element	Description
Value Proposition	Roku offers a compelling value proposition to its users, including: – Streaming Variety: Providing access to a wide range of streaming content and channels. – Ease of Use: Offering a user-friendly interface for navigating content. – Affordable Streaming: Delivering cost-effective streaming devices and services. – Personalization: Customizing content recommendations based on user preferences. – Cross-Platform: Allowing users to stream content across various devices. – Free and Premium Options: Offering both free and subscription-based channels. – Advertising-supported Content: Access to ad-supported channels and content.
Core Products/Services	Roku’s core products and services include: – Streaming Devices: Manufacturing and selling streaming players and smart TVs. – Roku Channel: Offering the Roku Channel with a mix of free and premium content. – Roku OS: Developing and licensing Roku’s operating system for smart TVs. – Content Distribution: Partnering with streaming services to distribute their content on the Roku platform. – Roku Ads: Providing an advertising platform for brands to reach Roku users. – Content Search and Discovery: Enhancing content search and discovery features. – Roku Pay: Facilitating billing and payments for subscription services.
Customer Segments	Roku serves a diverse range of customer segments, including: – Consumers: Individuals and households seeking streaming devices and content. – Content Providers: Streaming services and media companies looking to reach a wider audience. – Advertisers: Brands and advertisers interested in advertising on the Roku platform. – TV Manufacturers: Companies manufacturing smart TVs using Roku’s OS. – Developers: App and content developers building applications for Roku. – Cable Operators: Partnerships with cable operators offering Roku as a streaming alternative. – International Markets: Expanding to international markets with localized content.
Revenue Streams	Roku generates revenue through various revenue streams: – Hardware Sales: Earnings from the sale of streaming devices and smart TVs. – Platform Revenue: Income from advertising, licensing, and distribution agreements with content providers. – Advertising: Revenue from advertising on the Roku platform. – Subscription Revenue Share: Sharing subscription fees with premium content providers. – Content Distribution Fees: Fees for distributing content on Roku’s platform. – TV Licensing: Licensing Roku’s OS to TV manufacturers. – Roku Pay Transaction Fees: Earnings from billing and payment processing.
Distribution Strategy	Roku employs a strategic distribution strategy to reach its users: – Retail Partnerships: Partnering with retailers to sell Roku devices. – Online Sales: Offering products through online channels and Roku’s website. – Content Partnerships: Collaborating with content providers to offer their channels. – App Store: Hosting an app store for users to discover and install new channels. – TV Manufacturers: Licensing Roku OS to TV manufacturers for pre-installed software. – Advertising Sales: Selling advertising space to brands and advertisers. – Content Recommendations: Using algorithms to recommend content to users. – Developer Community: Encouraging developers to create apps for the Roku platform.