Pando

The tech IPO market just may have found the spark it was looking for: Roku

By Kevin Kelleher , written on October 5, 2017

From The Disruption Desk

Tech startups have been avoiding the public markets for a few years. Only 19 have gone public in 2017, higher than the number last year but well below average. 

Roku went public a week ago with an offering price of $14 a share, the top end of its proposed $12 a share to $14 a share range. On its first day of trading, the stock popped up 67 percent to $23.50 a share, giving it a market value of $2.23 billion. Since then, the stock has fallen back to close at $20.85 a share yesterday.

Roku is best known for its streaming-TV boxes and sticks that offer access to Hulu, Amazon, Netflix and many, many others – it claims to offer more than 5,000 channels on its platform in the U.S. and 3,000 internationally. In the tech world, it's also known as a small player that has done a remarkable job of holding its own against rival offerings from Apple, Google and Amazon.

According to Parks Associates, Roku's share of the streaming-media device market rose to 37% in the first quarter from 33% in the first quarter of 2016. Thanks to the Fire TV, Amazon's share also increased, to 24% from 16%, while Google Chromecast hovered near 18% and Apple TV declined to 15%. Parks attributed Roku's gain to its early market presence and lower priced devices sold through retailers like Walmart.

That success helped Roku launch a successful IPO. Can the early surge last? The company says its mission is to be “the TV streaming platform that connects the entire TV ecosystem” now that TV is going over the top. The company has tried to distinguish its platform from those offered by Apple or Amazon as being agnostic – offering no original content or content platform. By contrast, Amazon and more recently Apple have been using content to draw viewers into their platforms.

“Platform” is a vague term in the tech industry, tossed around like a lazy buzzword. In Roku's case, it is the key to its business model working as well as it does – and why it's been able to hold its own against three tech giants. Roku will still keep selling its own branded devices, but increasingly it's pushing to licenses its software and channel lineup to TV manufacturers like Element, Hitachi and Sharp.

A few years ago, Roku CEO Anthony Wood saw that the market for streaming TV devices was limited, even as more and more television programming was being watched over the top and not on cable or broadcast networks. He hit on the idea of licensing Roku's platform to TV manufacturers who were looking for a way to offer streaming TV to stay competitive in the era of cord-cutting. While Android TV and other platforms are also available, Roku moved quickly and forged partnerships with brands.

To entice partners, Roku kept its licensing fees low. That's one reason why, despite the success of the platform business, its revenue made up only 41 percent of Roku's total revenue in the first half of 2017. Still, that platform revenue grew 91 percent year over year.

Perhaps more importantly, platform licensing has much higher gross margins: 76% in the first half, compared to 12% for the Roku player. Like many recent tech IPOs, Roku went public with an operating loss, but thanks to Cooks' efforts to diversify into new revenue streams, the company could reach profitability much sooner than if it had focused on its Roku-branded streaming-TV players.

At the end of June, Roku had 15.1 million active accounts, modest by cable-provider standards but Roku customers streamed more than 6.7 billion hours through its platform in the first half of this year, an increase of 62% over the same period in 2016. And the biggest source of new accounts? Not from Roku players, but from the licensing partnerships it forged with TV manufacturers.

Roku is also exploring other areas of potential. Whereas the company has until now largely avoided its own content channels, it launched last month “The Roku Channel” featuring movies it's licensing from movie studios as well as existing Roku channels. The Roku Channel is free for Roku users and supported by ads targeted by user data or the type of content being watched.

Just where Roku plans to take its experiment with ad-supported channels isn't clear, but the letter that Wood included in Roku's prospectus suggests something ambitious.

We are pushing TV advertising out of the 1940s — when Bulova watches launched the first TV ad — and into the data-driven, machine-learning era of relevant and interactive TV ads. We partner with TV brands and service operators so they can thrive in this rapidly changing ad world.

I believe that just like mainframe operating systems didn’t transition to PCs, and just like PC operating systems didn’t make the transition to phones (is your phone powered by Windows?), TVs will be powered by a purpose-built operating system optimized for streaming.

If it works, will be good for Roku investors. And also give the beleaguered tech-IPO market something it badly needs – a brand-name tech company that can compete against giant rivals and, just maybe, be an inspiration for other companies that have been shying away from the public markets.