Roku's Wild Ride

When its shares peaked at $490.76 last July, more than one Wall Street publication called Roku "the next Netflix," the streaming superpower that incubated Roku more than a decade ago.

By December, however, as negotiations with Google threatened to take YouTube (the second most popular streaming app in the U.S., behind Netflix) off the Roku platform, Roku stock plummeted to a fifteen-month low of just over $210. Pundits called Roku "overvalued" and wondered if it would be overrun by bigger Silicon Valley rivals.

But just five days later, the stock rebounded to more than $256, after a deal to keep YouTube on Roku was announced. Roku, the U.S.'s leading provider of streaming hardware and software, was now undervalued, pundits said.

So it goes for the most dynamic, volatile company in streaming, which in four years as a public company has seen its stock price gyrate wildly numerous times. Investor mood swings about Roku stem, at least partly, from the fact that many folks — on Wall Street and beyond — don't understand Roku's complex business, which has evolved way past selling streaming gadgets.

Indeed, Roku might be the most interesting company of the Streaming Revolution. It competes with giants like Google and Amazon for control of global regions like Europe, but if you stream in North America, chances are you use a smart TV powered by Roku's operating system — or a Roku device.

Controlling nearly 60 million active user accounts — many representing households full of individual users — gives Roku a wide command of the "platform," the software environment used to stream video. Analysts say the company handles about 40 percent of all connected TV usage in the U.S.

One noted analyst, Craig Moffett, recently called Roku a "gatekeeper," saying, "If you operate a streaming service, you must have your app on Roku to reach your audience."

In the past several years, Roku has leveraged this status to develop its own streaming app, The Roku Channel, which licenses content from more than 200 partners. According to Nielsen, The Roku Channel is the third most popular ad-supported streaming app in America, trailing only ViacomCBS's PlutoTV and Fox's Tubi.

Its popularity has led to an explosion in Roku's advertising sales, with the San Jose–based company generating around $2.3 billion of what it calls "platform" revenue in 2021. That's money Roku makes off all the apps on its OS. Most of that is ad revenue.

The Roku Channel's success has emboldened Roku to branch out into original programming. Roku started that push in January 2021, buying a library of more than seventy-five series from the defunct streamer Quibi; the modest purchase was valued by internal sources at "significantly less than $100 million."

Roku kept those shows in their original ten-minute, "bite-sized" format, and it renewed a few, including Kevin Hart's tongue-in-cheek Die Hart and the Emmy-winning mystery sendup Mapleworth Murders. Last May Roku paid $97.8 million for This Old House Ventures, the company behind the long-running home improvement show. Then in September, after NBC canceled Zoey's Extraordinary Playlist, Roku assumed a role familiar to Netflix fans — streaming video savior — and produced a special called Zoey's Extraordinary Christmas.

In November, Roku made its biggest original-series announcement yet, pledging hundreds of millions over the next two years to produce more than fifty scripted and nonfiction shows with "basic-cable budgets."

"We've created this virtual cycle where we can invest more in content that brings in more viewers, that brings them more advertisers, that provides more dollars to spend on content," Roku CEO and cofounder Anthony Wood told investors in November.

So Roku controls a massive platform on which it's building its own hugely successful streaming app and advertising sales apparatus. Why does it keep riding a roller coaster on Wall Street, up big one day, down huge the next?

Roku isn't just producing and licensing shows and movies. It's a multifaceted enterprise that spans everything from gadget manufacturing to programmatic ad sales globally. It's in many businesses, facing many competitors and challenges. It makes headlines, good and bad, every day. And from Hollywood to Wall Street, folks are reactive.

Consider the industry that put Roku in business more than a decade ago: making streaming gadgets. Wood actually went on the Netflix payroll back in 2007, working on what was then called Project: Griffin. Still a modestly sized Silicon Valley company mailing out DVD rentals, Netflix was then looking to develop its own device to help consumers get internet video onto their TVs. Ultimately, cofounder and co-CEO Reed Hastings determined that owning a platform would undermine Netflix's goal of being a streaming Switzerland, a neutral pureplay content service distributed on almost every digital device on the planet.

So Wood, already a successful tech entrepreneur, having founded one of the first two DVR companies (not TiVo but the other one, ReplayTV), took his startup and built it on his own. Roku has sold a lot of gadgets over the years, which has led to more and more people using its platform.

But these days, building and selling Roku devices isn't easy. Thanks largely to the shortage in computer chips, Roku now loses money on every device it sells. In the third quarter of 2021, Roku reported a loss of $14.6 million on the "player" side of its balance sheet, which is hardware. In 2020, it had made a $20.2 million profit in the same period.

And there are all sorts of hiccups in the retail technology business. In December, for example, Roku's stock tumbled 12 percent after Universal Electronics, which makes remote controls, issued a press release declaring that a patent ruling would keep Roku and its partners from importing their smart TVs and streaming devices.

That ruling was actually a month old, and Roku had already removed the features that related to Universal's patents. But any negative publicity seems to ding Roku on Wall Street these days.

Roku now makes far more selling advertising on its platform than it makes on streaming devices. So why doesn't it simply exit the hardware business? Because the more devices Roku sells, the more people use its platform and watch The Roku Channel — and see its ads.

Of course, consumers have other choices for streaming hardware — namely, smart TVs and dongles powered by Google TV and Amazon Fire TV. So Roku needs to keep its gadgets affordable to keep its platform numbers growing. When supply chain problems occur, there's little price flexibility.

This price sensitivity extends to key partners like China's TCL and Hisense, which make inexpensive smart TVs powered by the Roku OS. Those sets have undercut Korean rivals like Samsung and LG on price to become hugely popular in the U.S. In fact, it's primarily been the brisk North American sales of these TVs that have made Roku so popular domestically.

But the supply chain crisis forced Roku's smart TV partners to raise prices by an average of 42 percent in 2021 to account for higher materials costs, according to Roku CFO Steve Louden, who says their sales then fell 31 percent.

With fewer TVs selling, Roku's growth in active users cooled. It added only half as many from the end of June through the end of September in 2021, compared to the same period a year earlier. In early November, when investors heard that, they hammered the stock again. By then, however, a darker specter loomed — a tech war with Google.

Roku and Google engaged in brinksmanship throughout 2021, with Roku pulling the app for YouTube TV (Google's streaming pay-TV service) out of its app store in April. Only a last-minute agreement in December kept the much bigger, broader YouTube flagship app from coming off Roku, too.

At the heart of the dispute was Roku's support — or lack thereof — for AV1, a so-called "codec" developed by Google, Netflix, Facebook and other Silicon Valley companies to make transport of 4K video more efficient.

Roku initially resisted AV1, fearing that support for the new codec would further drive up the price of its hardware, including smart TVs. However, Roku quietly introduced AV1 support in its newest 4K streaming stick just before it settled with Google.

Then a report surfaced in the influential business publication The Information that Roku would soon have trouble with Amazon over the Prime Video app. Roku denied there was anything to the report, but investors reacted anyway.

Next, an even more influential source, equity analyst Moffett, wrote a letter advising clients to sell Roku stock. He said the market for subscription video on demand was going to consolidate and cool; fewer competitors spending less to promote themselves on Roku — and thus signing up fewer customers — would mean even less money for Roku.

"While there is no doubt that advertising is a significant driver of Roku's revenue upside, a material part of the company's growth has come from third-party SVOD–related contributions, which are obviously set to slow," Moffett says.

That damning note wasn't the end — in early January, more analysts piled on with ominous forecasts. Meanwhile, the company announced that Scott Rosenberg, the MIT–trained engineer who had led Roku's rise in media and advertising over nearly a decade as senior vice-president and general manager of the platform business, was leaving in the spring.

Roku has pulled out of slumps before. The stock was down around 40 percent before the pandemic started in March 2020, only to rebound once everyone noticed how much Roku's quarantined users were streaming.

And certainly, an entry into original series interjects a wild card that analysts like Moffett may not yet have accounted for. Just look at the trajectory of Netflix, that $260 billion global giant. Through the aughts and the middle of the past decade, Netflix grew at a steady rate, occasionally roiled by its own roller-coaster rides, such as when it rattled the market in 2011 by trying to spin off its DVD-rental business into something called "Qwikster."

But starting around 2015 — when House of Cards and Orange Is the New Black established themselves as legitimate draws — Netflix's trajectory began to shoot upward. And Netflix hasn't really looked back.

Indeed, Roku seems to have more room to grow, and confidence to match. At press time, it announced a deal to lease 240,000 square feet of pricey office space at 5 Times Square, a deal that quadruples its previous Manhattan footprint — and includes the huge vertical sign previously used by Ernst & Young.

Roku may be tanking on Wall Street at a given moment, but it's doing just fine on Madison Avenue... and in Times Square, too.

This article originally appeared in emmy magazine issue #1, 2022.