Why Does Roku Compare Itself to Cable Companies?

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Roku (NASDAQ: ROKU) ended 2017 with over 19 million active accounts using its streaming players and Roku smart TVs. In the company's fourth-quarter letter to shareholders, management said it would be a top three distributor, after AT&T (NYSE: T) and Comcast (NASDAQ: CMCSA), if it were considered a traditional multichannel video programming distributor (MVPD) like them.

Of course, Roku isn't an MVPD. Its platform is often a supplement to a traditional cable or satellite subscription. And while it's another means of distribution for content creators, it's not the primary mode of distribution for premium content.

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Nonetheless, there are a couple of big trends supporting the validity of Roku's comparison of itself to cable companies.

Time spent watching "TV"

Americans spent an average of about 4.5 hours per day watching television in the second quarter last year. That's down about 12 minutes from the year before, according to data from Nielsen.

A big part of that decline is from continued cord-cutting among consumers, but even active television watchers are spending less time watching TV. TV viewers watched just under six hours per day on average in the second quarter last year. That's down from 6 hours and 22 minutes in 2015.

Meanwhile, the average time spent per user on Roku's platform is climbing. Users spent an average of about 2.6 hours per day streaming on Roku during the fourth quarter.

That's still well short of the time spent on TV, but that number is climbing even as Roku adds millions of new active accounts. Average time spent by Roku users was less than 2.5 hours per day in the fourth quarter last year, and it added nearly 6 million new users over the past four quarters.

As time spent continues to shift from linear television to streaming devices like Roku players and smart TVs, the comparison between Roku and cable becomes much more valuable for thinking of Roku as a means for content creators to distribute their work.

The shift in ad budgets

As users spend less time watching television, it's no surprise that advertisers are looking for different ways to spend their ad budgets. Ad budgets are quickly shifting their balance from television to digital, but television continues to hold on to big branded advertising budgets because of its ability to aggregate large audiences. Streaming video and other forms of digital advertising rarely offer the same kind of audiences that a big live television event can.

But Roku is building technology that offers the best of both worlds -- the targeting of digital with the reach and familiarity of television -- and it may be one of the best replacements for traditional television ad dollars. As such, the scale of its audience becomes an important selling point in its pitch to advertisers.

The comparison to MVPDs in that sense might not be perfect. A better comparison may be to individual cable network subscribers. Even better might be other ad-supported video streaming platforms like Hulu, which had 17 million subscribers as of its last update. That's notably less than Roku, and it's growing more slowly, too.

A different model than MVPDs

While Roku is a large and rapidly growing distribution platform, its primary source of revenue is from advertising. MVPDs generate the bulk of their revenue from subscriptions, which averaged around $90 per month per subscriber with Comcast and over $120 per month with AT&T last year.

AT&T and Comcast then pay out a significant portion of those subscription revenues to content creators. Comcast paid out nearly $13 billion in programming expenses in 2017, over 50% of its total revenue from its video service. AT&T paid about $21 billion for programming out of its nearly $38 billion in video service revenue. Roku simply can't compete by paying for content up front.

Roku could, however, take a bigger cut of subscription revenue for over-the-top streaming services as more content creators offer direct-to-consumer products. CEO Anthony Wood noted during the fourth-quarter earnings call that Roku's growing scale could enable it to win more favorable economics in certain situations, such as selling subscriptions for streaming services.

Roku could very well be what an MVPD looks like in an a la carte TV world, but for right now it's drastically different. While the comparison is helpful to show the scale of Roku, it's ultimately more important to pay attention to the underlying numbers such as time spent per user and the shift in ad budgets to digital video from TV. Both are trending in the right direction for Roku.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.