While best known for its video-streaming devices, Roku (NASDAQ: ROKU) makes most of its profits from advertising. Roku sells its players at slim profits in order to court more users, which it monetizes with ad sales and content distribution. The company generated $12.68 in revenue per user over the past four quarters.
Roku recently introduced a new set of tools called Ad Insights for marketers to measure and target their ad campaigns across linear TV and over-the-top channels. Roku is uniquely positioned to win a growing share of ad dollars shifting from television to digital. Ad Insights provides new tools that will be difficult for competitors to copy -- even Facebook (NASDAQ: FB) and Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google.
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Of the main features highlighted in Roku's press release announcing the new ad tools, the one that stands out most is the ability for marketers to target and measure campaigns delivered to Roku users who don't have a pay-TV subscription.
Roku is one of the few companies with access to that information, because it explicitly asks users if they have a cable subscription when they register an account. Roku users also volunteer that information if they subsequently use their login credentials to access various TV Everywhere apps from cable channels.
Cord-cutting is accelerating: 1.6 million cut the cord last year, according to MoffettNathanson, but cord-cutters reached 2.6 million through the first nine months of 2017. eMarketer says that translates into about 5.5 million viewers, with total cord-cutters growing 33% year over year. Over the next five years, another 10.8 million subscribers could cancel cable, according to SNL Kagan.
If marketers want to reach those consumers, they'll have to spend more in the channels those consumers get their entertainment from. Not only does Roku provide direct access to those channels, it can help marketers spend their digital ad dollars more efficiently by specifically targeting the people that won't see advertisers' messages on linear TV (because they don't have a cable subscription).
Competing with the duopoly
To be sure, Google and Facebook have their own pitches for marketers looking to shift budgets from linear TV to digital. Google's YouTube has over 1.5 billion registered users watching over 1 hour of video on mobile per day. Facebook has 2.07 billion users on its flagship app scrolling through its News Feed for around 40 minutes per day. That makes Roku's 16 million users look like lost change, even if they spend 2.5 hours per day streaming media on its devices.
If a brand wants to reach the widest audience possible, Google or Facebook have Roku beat hands down. But big advertisers generally don't put all their eggs in one basket. They'll advertise on TV, Google, Facebook, and dozens of other channels in an effort to reach the widest audience possible.
Roku's Ad Insights are designed to help advertisers spend across channels most efficiently by leveraging data not available through Facebook or Google. Roku's registration data, cord-cutting data, the amount of time spent in certain apps, and even what content users are watching in some of those apps are all unique to Roku and extremely valuable to advertisers. That should help Roku carve out a good chunk of ad dollars despite Facebook and YouTube's significant presence in digital video advertising.
Keep in mind, Roku's advertising revenue was just $38 million last quarter. Facebook brought in $10.1 billion, and Google generated $24.1 billion in ad revenue. It's true that $100 million in new ad revenue over the next year wouldn't mean much to either of the giants, but it'd be huge for Roku's business.
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