The cord-cutting revolution kicked off in earnest when Netflix announced its streaming service back in 2007. But another product announcement that year was similarly important: Roku's (NASDAQ: ROKU) first "Netflix player." The device, a box that could be connected to televisions in order to view content from the web, helped end Netflix's computer-screen confinement.
More than a decade later, streaming services such as Netflix and streaming platforms, which allow users to access streaming content from multiple providers, such as Roku remain arguably the two most important categories in the cord-cutting marketplace. Among Roku's competitors are some of the largest tech companies: Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has Chromecast and Android TV, Amazon (NASDAQ: AMZN) boasts Fire TV, and Apple (NASDAQ: AAPL) offers Apple TV.
It's easy to see how Netflix and other streaming services make money -- they charge subscription fees. But what about streaming platforms? Well, that all depends. Here are a few ways to monetize a streaming platform.
Perhaps the most straightforward way to monetize a streaming platform is the method that Roku used back when it first began producing its devices: Put your platform on a device, then sell that device.
As recently as 2016, Roku reported that 74% of its revenue came from hardware sales. But there were reasons to be concerned about the long-term viability of hardware as a revenue stream. Roku has to pay to produce its hardware and to maintain its platform, which is free to users. Roku competitors such as Amazon rely on other means to monetize their platforms, meaning they have the power to slash prices on their hardware to compete with Roku, confident that they'll make their money through alternative methods later on.
So Roku pivoted and dropped hardware sales to 69% of revenue by mid-2017. Increasingly, it is relying on ads instead.
While hardware can have significant costs, advertising space on a company's streaming platform does not. Roku's increasingly platform-focused strategy relies heavily on ads, which form two-thirds of its platform revenue.
Selling advertisements means that Roku has to imagine its platform's usefulness to two parties: users and advertisers. Roku execs worked to woo the latter in the company's third-quarter earnings call by talking up Roku's ad measurement features.
Amazon's Fire TV also heavily uses ads. A typical Fire TV home screen includes a banner ad and a selection of "featured" apps and games. Meanwhile, the Android TV platform does not have ads. Instead, it makes money for its parent company by promoting Alphabet's numerous services.
Pushing a parent company's other services
Users of Alphabet's streaming devices and platforms will find that they are coaxed toward the tech behemoth's products and services. Chromecast users must download the Google Home app, which is also used with Google's artificial intelligence assistant, and Android TV makes it easy for users to rent and buy videos or download apps from Google Play.
Managing the app store and making money off of Google Play purchase and other subsidiary services are how Alphabet monetized its Android mobile operating system. It worked well. In 2016, court filings revealed that Alphabet had made a $31 billion profit on its Android investments. The company appears to be using the same strategy in the streaming space that it did in the mobile space.
Fire TV devices reserve plenty of promotional space for messages from its parent company, which is involved in the streaming business on multiple fronts. Amazon offers a streaming service as part of its popular Prime membership program, that can also be subscribed to separately; it acts as a broker between third-party streaming services and Prime members through its Amazon Channels platform; and it also sells and rents digital copies of movies and TV shows. All of these services get a push from Amazon's Fire TV platform, which aggressively surfaces Amazon services and content.
Because of this, Amazon doesn't need to worry much about hardware revenue. The goal is to get lots of Fire TV devices in consumer hands, not to make the most money per device. Amazon is known for selling its products at near-cost, cost, or even a loss, all because it knows it can make that money back and more in transactions made on that hardware.
Roku's focus on the platform business and purportedly "app-agnostic" platform make this option more difficult for the company. But even Roku has made efforts to push Roku-owned and Roku-backed services: In 2017, the company launched an ad-supported video on demand (AVOD) service called the Roku Channel, which it promoted on its own platform.
License the platform itself
Plug-and-play streaming hardware isn't a big moneymaker for platform companies. But TVs? Those are a different story. That's why Roku and Amazon have partnered with television manufacturers to produce smart TVs that use their platform. It allows the streaming platform companies to expand their user bases and widen the visibility of advertisements.
Google has not slapped its Android TV brand on televisions as aggressively, but it has been quietly licensing its Android TV platform to smart-TV manufacturers for years now. Some smart TVs from Sony and Sharp feature the Android TV platform, though not all models include "Android TV" in the name.
Opportunities and limitations
Roku and its competitors all want to monetize their streaming platforms. But each situation is different, and each streaming platform uses these methods in different proportions. Amazon and Google have the inside track with integration, for instance, thanks to their many interconnected services and devices. Roku has made advertising its focus, and for good reason: It doesn't have a strong presence on the streaming service market, but it does have a great market share in the platform market. There are plenty of ways to monetize a streaming platform, and how successful these companies are in doing so will help shape their futures.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Stephen Lovely owns shares of Amazon, Apple, and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.