Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Just about every consumer electronics company aspires to be more than a maker of low-profit gadgets. Roku could actually be one of the few to fulfill those dreams.

While you were stuck in Labor Day weekend traffic, Roku Inc. filed paperwork for its initial public offering. The 15-year-old company is best known for its $100-or-less plug-in boxes that let people pipe Netflix and other streaming web video through their TVs. Roku is the U.S. market leader in internet TV gadgets, but that's a financial dead end as Apple Inc., Amazon.com Inc. and Google crowd into the streaming hardware business.

Roku knows this, and that's why it's in the midst of a tough transformation with some impressive early results. More than 40 percent of Roku's revenue this year, and all of its growth, came from areas other than sales of its Web-streaming TV boxes and connectors. Two years earlier, that hardware was responsible for 85 percent of Roku's revenue.

More Than Hardware
Nearly half of Roku's revenue comes from sources other than its original business of selling streaming video boxes and other hardware
Source: Roku IPO filing

Roku morphed by using its streaming TV gadgets as gateways to other ways to generate revenue. It's selling commercials in some streaming videos that people watch on their Roku devices and ads on Roku TV home screens. It's taking a slice of revenue when people sign up for some Web video subscriptions. 

Roku has long been an oddball hardware company fighting against tech giants, but its ability to break out of the "just a hardware company" box should make GoPro, Fitbit and even mighty Apple jealous.  Making it as a consumer hardware company is tough. Making it as hardware company pivoting to another business model, as Roku is doing? That's almost inconceivable. 

Imagine if Apple generated 40 percent of its sales from its cut of revenue from the App Store, iTunes downloads and other internet services. (Despite a big push in this area lately, Apple derived just 16 percent of revenue from services in the latest quarter.) This shows the enormity of what Roku is trying. Remember when GoPro Inc. wanted to be a media company? It didn't work. Fitbit Inc. is trying to use its fitness-tracking wristbands to get into health care. Good luck.

Hail to the Chief
About one-third of U.S. households with internet access own a streaming video device, and Roku is the gadget of choice
Source: Consumer survey by Parks Associates in the first quarter of 2017

That's not to say Roku has a clear path to riches. Among many of Roku's 15.1 million active accounts, Roku will always be a dumb box through which viewers watch Netflix movies. As Recode's Peter Kafka's wrote, Netflix and YouTube -- two of the most popular Roku apps -- barely generated revenue for the company.

The video titans such as Netflix, YouTube, Amazon and Hulu have their own ambitions to sell more Web video subscriptions, and they have the heft not to share their windfall with Roku. Many young Web video addicts are glued to their phones or computers and don't own a TV, which doesn't leave an opening for Roku. And the company also has no choice but to find ways to make money from areas other than its streaming devices. Revenue from that business is shrinking, and so are the gross profit margins.  

Opposites
Roku generates high-margin sales from advertising, revenue sharing from digital video and other non-hardware sources
Source: Roku IPO filing

Roku also has the feeling of a company that is gussying itself up to make its public market debut, or perhaps to sell itself. The trajectory of revenue from non-hardware sources increased noticeably this year as executives knew an IPO was a possibility. Roku also shifted quite quickly from burning cash to generating a healthy amount from operations in the first half of this year. I don't know whether Roku had to cut any corners to make itself look financially attractive and whether those changes are sustainable. 

Still, I'm rooting for Roku's David to succeed in the digital video market dominated by Goliaths. It may not be a losing fight, either. As Amazon is also finding, the zillions of wannabe digital video stars from Disney to Gaia are desperate to funnel people to their shores. So are advertisers panicking about viewers ditching live, traditional TV. And Roku is happy to collect tolls to let them reach its users eager to find something good to watch.

A version of this column originally appeared in Bloomberg's Fully Charged technology newsletter. You can sign up here.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Why would Roku file its IPO paperwork at 4:52 p.m. Eastern Time on the Friday before a holiday weekend? Did the company want no one to notice? Or were the lawyers rushing the document out the door before they hit the beach? (Do lawyers even go to the beach?)

  2. In fairness to the other hardware companies, Roku's relatively small size of $399 million in 2016 revenue made it easier to quickly show the impact of efforts to make money from non-hardware sources.

  3. A suggestion for the folks at Apple: When a company like Roku wants to get credit for its non-hardware businesses, it discloses metrics including average revenue per user, as Netflix and the telephone, internet and cable TV companies do. Roku said average revenue per user "represents the inherent value of our business model." Apple doesn't disclose ARPU.

  4. Roku says this is the result of its strategy to sell its video hardware at lower prices to put devices in more homes.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net