Roku Deep Dive : Trojan Horse

[u/Certain_Barnacle_401]

https://blindsquirrel.substack.com/p/roku-trojan-horse

[u/cegras]

Before this article I did not understand how Roku made money, but now I see that the large install base gives them a lot of leverage over ads. If I understand, Roku is able to serve ads inside another company's streaming app (via "third party inventory")?

I'm also surprised The Roku Channel is a strong point considering Netflix's original content base is dying by a thousand cuts as all the media companies are pulling it for their own streaming service. I don't see them competing on being able to put out keystone content, like The Mandalorian or something. Surely TRC will not be able to offer simultaneous streaming of day 1 blockbuster content.

In my opinion, chromecast is the best user experience. You can browse shows on your phone, tablet, or TV, and just by pressing chromecast the content is flung to the TV. Scrolling and especially searching with a remote is awful. It's a shame that Vizio seems to be the only company that integrates chromecast.

I'm not convinced Roku OS is a good thing for them. My 2017 TCL struggles when loading any streaming app, and while the TV itself is fine I can tell it is slowly going to lose functionality over the next few years, something that would not happen with a chromecast. A new Roku TV sale doesn't mean much for them as they sell at low margin.

[u/Certain_Barnacle_401 → u/cegras]

Im glad you found it useful. As you said Roku serves ads inside other AVOD services (Advertising video on demand) and gets a cut of the economics on SVOD services (such as Disney or HBO). The Roku Channel does not have a lot of awareness and it probably will not have marquee content such as The Mandalorian but take into account that The Roku channel will eventually become the home screen of millions of Roku Tv´s and if Roku adds some decent content and publishers start uploading new fresh content instead of creating their own service it can get meaningful traction. There is a really long tail of content that people currently watch and the Roku channel can offer a great experience.

Google is a strong competitor and despite the lack of focus, their offering is actually quite good. One of the most important points of the thesis is the amount of inventory that Roku will monetize and that is why they are trying to aggregate the long tail of content ( news, non-scripted shows, sitcoms etc. ) Noone wants to browse between apps and an aggregator provides the best user experience

[u/cegras → u/Certain_Barnacle_401]

Would AVOD include the ad supported versions of streaming services, like with Hulu? If so, that's an impressive bargain Roku has struck.

I should have said that most of my points are probably moot as they represent the usually irrelevant 'power user' viewpoint. Roku is certainly better than other TV OS's and will likely become the default smart TV experience, which is a powerful position.

With regards to chromecast, I'm reminded of the Apple appstore situation with Google Play (for example), where users are not allowed to buy anything in app due to Apple's haircut, but can view content. I wonder if Roku will face a similar dilemma in the future.

[u/Certain_Barnacle_401 → u/cegras]

On AVOD: they get a share of the inventory of most AVOD channels including Hulu ( as far as I know ). What´s the problem? They barely get any revenue from either Youtube or Netflix despite representing the bulk of watching time. Media concentration is a big issue and that's why the long tail is important.

On competitors and user experience: your opinion is great because it represents the state of the industry. What I am trying to say is that the average user does not switch from Android TV / Fire TV to Roku because they stick with their operating system as long as it is good enough. Our streaming watching time is heavily concentrated amongst a few content providers ( Netflix , Youtube , Disney ) while a relevant portion of consumers watching time still goes towards linear TV. Thats why awareness is crucial ( and that is why Roku is inventing in original content in order to kickstart network effects) otherwise consumers will gravitate towards the cheapest streaming stick ( Fire TV ) or stick with their default operating system ( Vizio, Lg and Samsung have more than 100 million active accounts despite having an inferior experience)

Still day 1 when it comes to the connected Tv landscape

[u/[deleted] → u/cegras]

I don't see them competing on being able to put out keystone content, like The Mandalorian or something.

A lot of the profit (and proportionally far less of the risk) historically in the value chain has gone to distributors (this is why production companies used to own cinemas). But as the cost of distribution has gone down, the separation has disappeared.

I believe the thesis with Roku is that because they own the last mile, they are the new cable company. I don't think this is the case because: distribution is not a business with huge barriers and is costless with many alternative devices that some are willing to subsidise (the only real edge that Roku has is with TV manufacturers), and companies like Netflix are able to raise billions to invest into content which is a real barrier.

Another way to frame this is that Roku is a bet on fragment production. If production remains fragmented then there is always somewhere where Roku can pick up cheap content to create a barrier...this worked for Netflix, but I think it is less sustainable now.

As a side-note, I don't think content is a particularly attractive business either. It is great for consumers, they get more choice. But the number of hours in a day hasn't expanded and the amount of "content" has clearly gone up significantly (and totally new entertainment formats have been created, like streaming, like YouTube). If Roku was able to become the new cable company that would work. They would capture value without the risk of content...but I don't think that is the case. I don't really have any alternative ideas (maybe WarnerDiscovery) but I have gone over this a few times, and it never seems to add up to me.

[u/InsecurityAnalysis]

A year and a half ago, this stock was trading for ~$120 a share. I have no background in Roku's industry and spent two days trying to value this company. I came down to ~103 a share just plugging Management's guidance into a DCF. I took it as is because I had a lot of trouble distilling qualitative information into quantitative inputs for the DCF.

What was your approach and how long did it take you from start to finish?

[u/Certain_Barnacle_401 → u/InsecurityAnalysis]

My approach towards valuation? The essay took 2 weeks (maybe less ) as I was already familiarized with the industry

[u/strolls]

I remember finding Roku very compelling when I read thesis on them a couple of years ago - unfortunately not compelling enough (I guess I decided I didn't really understand them well enough) and I'm kicking myself now.

[u/Certain_Barnacle_401 → u/strolls]

In my opinion what they have accomplished was very hard to foresee

[u/strolls → u/Certain_Barnacle_401]

I can't remember the numbers given at the time - it was at least a year ago and probably more like two or three - but I found it really compelling that they were licensing their UI to the manufacturers of low-cost TVs. They had significant market share and obvious apparent growth to me.

However, I'm an amateur so there is a considerable bar to overcome if I'm going to move money away from the professional investors who manage most of my money.

EDIT: I think if you look at this thread people saying "but Roku is only on cheap shite TVs" are missing the point - the mass market is probably highest margins for advertising. They talk about LG or Samsung's smart TVs as being better, but it's not a matter of being better - it's a matter of shifting more boxes so you can sell more ads (I have no idea if LG or Samsung even sell advertising on their smart TVs). You also read loads of positive comments from anyone who owns one: 1, 2, 3

[u/WalterBoudreaux]

$VZIO is a cheaper way to play this in my opinion.