Roku pioneered streaming to the TV. Roku connects users to the streaming content
they love, enables content publishers to build and monetize large audiences,
and provides advertisers with unique capabilities to engage consumers. We do
this at scale. TV streaming’s disruptive content distribution model is
shifting billions of dollars of economic value. Roku is capitalizing on this
large economic opportunity as a leading TV streaming platform for users, content
publishers and advertisers.
Consumers win with TV streaming—they get a better user experience, more
entertainment options and more control over what they spend on content. When
users want to enjoy streaming entertainment, they start at the Roku home screen
where we put users first by helping them find the content they want to watch.
From our home screen, users can easily search, discover and access over 500,000
movies and TV episodes in the United States, as well as live sports, music,
news and more. Users can also compare the price of content from various channels
available on our platform and choose from ad-supported, subscription, and transactional
video on-demand content. The Roku platform delivers a significant expansion
in consumer choice. Consumers can personalize their content selection with cable
TV replacement offerings and other streaming services that suit their budget
and needs. Ad-supported channels available on the Roku platform include YouTube,
CBS News, Crackle, The CW and Vice; subscription channels include HBO Now, Hulu
and Netflix as well as traditional pay TV replacement services like DirecTV
Now, Sling TV, Spectrum TV and Sony PlayStation Vue; and transactional channels
include Amazon Video, Google Play and Vudu. Consumers are increasingly streaming
ad-supported content.
Roku operates the number one TV streaming platform in the United States as
measured by total hours streamed, according to a survey that we commissioned,
conducted in the fourth quarter of 2017, by Kantar Millward Brown. Content publishers
and advertisers win with Roku because our large and growing user base simplifies
their access to the fragmented and complex over the top, or OTT, market and
we provide them with direct to consumer engagement and monetization opportunities.
We provide our content publishers with access to the most engaged OTT audience,
as measured by average hours streamed, and the ability to monetize their content
with advertising, subscription or transactional business models. Furthermore,
as a pure play, neutral TV streaming platform, we are better able to serve content
publishers compared to other platforms that have diversified business operations
and competitive content offerings. Advertisers on our platform can reach our
desirable OTT audience with ads that are more relevant, interactive and measurable
than advertising delivered on traditional linear TV. As traditional TV audiences
shrink, OTT audiences have become increasingly important to advertisers who
must continue to reach large audiences. Our growth in active accounts and hours
streamed has attracted more content publishers and advertisers to our TV streaming
platform creating a better user experience.
While we currently generate a majority of our revenue from sales of our streaming
players, we generate a majority of our gross profit from our platform revenue.
Our business model is to grow gross profit by increasing the number of active
accounts and growing average revenue per user, or ARPU which we believe represents
the inherent value of our business. We define ARPU as our platform revenue during
the preceding four quarters divided by the average of the number of active accounts
at the end of that period and the end of the prior four quarters. We grow new
accounts through three primary channels: we sell streaming players, we partner
with TV brands through our Roku TV licensing program, and we have licensing
relationships with service operators. We believe we have a significant opportunity
to grow platform revenue and as we further monetize TV streaming hours we will
increase ARPU, which was $13.78 per active user during the year ended December
31, 2017 up by 48% as compared to $9.28 per active user for the year ended December
31, 2016. Our success in growing ARPU will depend on our ability to increasingly
generate platform revenue from content publishers and advertisers as we increase
the number of active accounts.
Advertising
Our advertising products enable advertisers to serve relevant ads to our users
and measure return on investment. We collect a variety of information on the
Roku streaming platform, including user registration data, as well as anonymized
information like audience engagement with channels on our platform, use of features
like search and interactions with advertisements. With Roku TVs, we have the
ability to use automatic content recognition (ACR) and other technology to collect
information about what users watch via antennae and devices connected to Roku
TVs, and we collect data about the use of the Roku TV’s on-screen programming
guide.
We gather this information and then create user segments, develop look-a-like
audience and predictive models, and activate segments for use in a variety of
business operations including recommendations for users and analytics for content
publishers and advertisers. Our platform also provides a mechanism to match
and ingest third party data sets from our advertisers and data vendors who may
have demographic or other attributes that would enhance our analytics, products
or advertising efforts.
We continue to refine measurement capabilities on our advertising platform.
Through our own measurement tools and third parties including Nielsen, Acxiom,
Oracle Data Cloud, Nielsen Catalina Solutions, Experian, Placed and Kantar Millward
Brown, we provide advertisers the capability to measure audience demographics,
validate ad effectiveness, and quantify sales lift from advertising on Roku.
We offer engagement analytics such as impressions, click-through rates and video
completion rates. We also work with a wide variety of third-party measurement
companies to measure the branding impact of the ads we serve. We have also recently
established relationships with third party providers that focus on transactional
or point of sale data, which enables our advertisers to compare the effectiveness
of Roku ads.
Our primary advertising products include:
Video ads. Our ad-supported content publishers use video ads to monetize our
audiences and we also use video ads to monetize our platform. Video ads are
sold as 15-second or 30-second spots inserted before a program starts or during
a program break, within channels on the Roku platform where we have video inventory
access. One of the ways we secure video ad insertion rights from content publishers
is via our distribution deals with those publishers. In addition, many publishers
also authorize us to fill their own unsold inventory. Except for a minority
of video ads that are passed unmodified in a traditional linear broadcast, all
video ads are selected and delivered to a user in real-time, as the user is
engaging on our platform. Digital advertisers have raised concerns about brand
safety, viewability and fraud after certain issues arose between various video
ad networks and major online video distributors. OTT is an attractive alternative.
On the Roku platform, our video ads play full screen, are not skippable in most
channels and are delivered into a curated channel list.
Interactive video ads. We offer advertisers the ability to make their TV advertising
interactive with customized clickable overlays that invite viewers to engage
more intimately with brands, by watching additional videos, obtaining offer
details, getting a coupon code via text or finding the nearest retailer to buy
a product.
Audience development promotions. We utilize a variety of ad placements, particularly
native display ads, on the Roku home screen and screen saver, to promote content
publishers and their services to our users. We help them to drive channel downloads
and traffic to their channels, and to drive subscriptions or movie and TV show
consumption. Given our strategic role as a user’s TV streaming home screen,
we are increasingly able to predict a user’s likelihood of taking action
in response to an ad we serve. We also sell branded channel buttons on player
and TV remote controls. The branded buttons are reserved for content publishers
who want to reduce friction and drive incremental usage by allowing users to
launch straight into the channel.
Brand sponsorships. We support a variety of promotional opportunities for advertisers,
such as sponsored themes to take over our home screen and content sponsorships
to give users the opportunity to experience a free movie or show (e.g. “Family
movie night brought to you by…”). We also sell branded content rows
in The Roku Channel.
Roku TVs
Roku TVs are manufactured and sold by our TV brand licensees, integrate our
Roku Operating System, or Roku OS, and leverage our smart TV hardware reference
design. Current licensee brands consist of Element, Hisense, Hitachi, Insignia,
RCA, Philips, Sharp and TCL, with a ninth brand, Magnavox, joining in spring
2018. Roku TVs are available in sizes ranging from 24” to 75” at
leading retailers in the United States and Canada. In 2017 we had over 150 models
available to consumers in North America, up from 100 in 2016, featuring a wide
range of prices as well as picture and display capabilities. Consumers are able
to choose from very affordable HD and 4K UHD models to TVs with picture quality
boosted by 4K, Dolby Vision HDR and local dimming. Approximately one in five
smart TVs sold in the United States in 2017 were Roku TVs.
Streaming Players
We offer a line of streaming players for sale under the Roku brand in the United
States, Canada, the United Kingdom, France, the Republic of Ireland and several
Latin American countries, that allow users to access our TV streaming platform.
All players run on the Roku OS, and stream content via built-in Ethernet or
Wi-Fi capability, depending on the model. Our current product line for the U.S.
market includes several models at a range of manufacturers’ suggested
retail prices to meet the needs of different users starting at $29.99.
7.38%