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Roku IPO stands a fighting chance in a market hostile to tech offerings

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Anyone who’s watched promising enough brand-name startups go public and promptly flounder in public waters this year — Hello, Snap. Hello, Blue Apron — would have reason to think that Roku, the next IPO candidate with a familiar name in the world of consumer tech, will suffer a similar fate.

Of course, Roku, whose connected devices provide access to Netflix, Hulu, Amazon, Starz, and other channels, may just do that. The company that wants to be “the TV streaming platform that connects the entire TV ecosystem” filed its S-1 on the Friday before Labor Day weekend.

The IPO is notable because Roku is a David facing several Goliaths. Amazon, Apple, and Google all offer their own streaming-video players. Google offers Android TV, and Amazon also offers a product it co-brands with TV manufacturers using Amazon’s TV-streaming platform. This matters because Roku’s growth is pinned less on sales of its own streaming platform and more on its strategy of partnering with TV manufacturers.

Roku’s financials look weak against its rivals. Apple, Google, and Amazon can afford to snicker at Roku’s $70.2 million in cash. That’s not to mention the risk factors section of Roku’s prospectus, which contains those words that once induced chills in tech investors but now seem more and more commonplace: “We… may never achieve or maintain profitability.”

Roku lost $24.2 million in the first six months of 2017 and has accumulated $244 million in losses during its history. Giant rivals can spend millions on moonshots that end up as failures, and the world may never know the exact financial toll of these endeavors. Roku, as a company going public, has no such margin of error.

But here’s what Roku has going for it. CEO Anthony Wood saw a few years ago that the market for streaming-TV devices like the Apple TV was limited, so he started to look for other ways to make money off the transition from traditional TV to over-the-top TV.

Several metrics back him up. Roku’s prospectus says players using its OS accounted for 48 percent of usage on TV-connected devices in late 2016. This year, according to Parks Associates, Roku rose to 37 percent of U.S. homes using broadband, up from 33 percent a year ago. And last month, Roku held a 39 percent share of U.S. connected TV users, rising above its deeper-pocketed rivals.

Some time ago, Roku diversified from its original business plan of being a hardware company making Roku-branded over-the-top TV streaming devices to become, primarily, a software company with a platform that will be to digital living rooms what Windows was to PCs or what iOS or Android is to smartphones. At least, that’s where Wood sees Roku going.

In other words, Wood envisions Roku less as a direct competitor to Apple TV, Chromecast, and Fire TV, and more as the developer of a platform that is emerging just as TV is hitting a “tipping point” that’s fundamentally changing how consumers watch programming and how advertisers reach out to them.

If you are a Roku devotee who bought one of its boxes, you may not appreciate what this shift means for the future of the company. Here’s how Wood explained all this in his letter,

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. 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.

The licensing revenue Roku makes from TV manufacturers isn’t a big contributor to overall revenue, as Roku keeps licensing fees low to compete with Android TV and others. Instead, Roku takes part of the revenue from, say, Hulu, when a customer signs up for Hulu through Roku. The company also controls some of the ad inventory of ad-supported channels that are streamed through Roku.

The company has positioned itself as a branded-device manufacturer successfully enough that some potential investors may not understand that its main product is a software platform and that its main source of revenue comes from advertising and a share of subscriptions sold through that platform. This business plan opens Roku up to revenue streams beyond the highly competitive market for streaming TVs.

That’s enough to make Roku an enduring underdog in the world of tech finance. And eight months into this disappointing year of tech IPOs, who isn’t ready to root for an underdog?

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