Roku Inc. is the leading streaming video platform in the US, accounting for almost half of all households with a specialized streaming device. It closed 2016 with 13 million active subscribers and delivered more than 9 billion hours of video and music through the year. (See Streaming Is an Opportunity for Telcos – Roku's Ferrone.)
In recent years, the company has been working on diversifying its distribution, deploying its operating system with pay-TV providers such as Sky (NYSE, London: SKY) and Telstra Corp. Ltd. (ASX: TLS; NZK: TLS), as well as a broad range of smart TV manufacturers. In addition, the company has been investing in advertising, creating its own sales team and technology to drive advertising revenue.
Today, advertising is the most profitable part of its business, according to Scott Rosenberg, vice president of advertising and audience development. He spoke to Telco Transformation about the value of advertising to Roku, how it works with content partners to monetize the business, and the different formats and approaches it is exploring.
Telco Transformation: How did Roku get involved with advertising?
Scott Rosenberg: We created the ad business at Roku about four years ago. We recognized the way people decide what to watch and the ads they see is changing dramatically. It's our goal to make our OS the dominant TV OS of the future, and to do that we needed to build new ad capabilities and help monetize the TV of the future.
So we created a tune-in toolset, to help content owners get their content viewed. We had to look at things differently, how to do audience development in a streaming, on-demand world. So we started with traditional audience development methods, but then adapted to suit the new environment. We created strategies to help content partners build viewership, show ads, drive downloads of apps, sell-in movies etc.
TT: What are the advantages for advertisers using Roku?
SR: Roku -- and streaming video -- offers several benefits not available with traditional linear viewing. There is more interactivity, more touchpoints. There are more opportunities to message viewers, to let them know what might be good for their tastes. We can spend more time marketing shows, letting customers know that X show on Y app is available now. And we have more platforms, especially mobile, which we can reach people on.
It also generates more data, and offers more visibility. For example, we know who is a Hulu subscriber and who is not. We can then market Hulu LLC shows to non-Hulu subscribers based on what they watch elsewhere -- or to those who have downloaded the app but not subscribed, or those who have previously started a trial but not subscribed. Our customers love "advice," they don't see it as advertising.
So we can offer more tools, more information, more opportunities to engage and inform, and to target that engagement and information.
It also helps traditional brand marketers market to our users. Traditional views are declining, we're seeing cord-cutting, and more and more people going to on-demand platforms like Roku, so traditional marketers also need to shift their strategies.
Fifty cents on the dollar for TV networks comes from advertising (the remainder comes from carriage fees paid by pay-TV operators) so it's important they have a competitive toolset, a set of interactive, targeted and commerce-related capabilities. Some of these interactive features can't be offered on TV, but networks need them to compete with Google (Nasdaq: GOOG), Facebook , Snapchat etc.
TT: How would customers buy -- and measure -- advertising on Roku?
SR: Two-to-three years ago we launched the Roku Ad Framework as part of the Roku software development kit (SDK) -- basically an ad SDK. We've also built out our own sales team which works with content owners integrated into the Roku platform. And we also partner with their sales teams (for content owners that have them), and have made some tools available for them to use.
It's built on the Interactive Advertising Bureau (IAB) Video Ad Serving Template (VAST) protocol for digital video, which provides data for The Nielsen Co. and comScore Inc. ratings, and allows them to identify demographics on Roku. These basically give TV networks an equivalent currency for an ad buy, such as age, gender etc. Views on Roku feed into the ratings data for Nielsen or ComScore, so a network like ESPN can run a campaign and show results [in a manner that is easily understood by media buyers and agencies.]
TT: Do you offer any other formats, like on-demand ads or ad telescoping?
SR: We do, we do offer ad telescoping and other formats, and we can get more specific with viewer segments as well. We set up our ad sales team because we wanted to be in-market, gain first-hand knowledge of what advertisers want. [With something like ad-telescoping] what should the ad telescope to?
We also offer ad placements on the screens themselves. So there's an ad placement opportunity on the main page of the UI -- where we launch. There are also opportunities for banner ads on other interfaces and we usually use them to market content and apps, where the customer pays for the placement. We can also market via email to our users, and Roku marketing emails have much higher open rates compared to your average email campaign.
TT: Is there a danger of competing with TV networks that are also partners?
SR: We have a different offer from what ESPN or Fox might take to market. We don't sell in program placements or dayparts etc. We're complementary -- we don't sell The Good Wife on CBS! It's more like if you want to sell add-on advertising on Roku, then we can do that. Things like targetable or telescope-able advertising -- then we can do that. We're very clear we are not in competition with TV networks; we're complementary.
TT: What is the model -- do you take inventory the way cable operators do, like cable avails?
SR: Yes, it's an inventory split -- we take a share, similar to an MSO avail. Most of the advertising inventory is sold by the TV network.
But we also have different kinds of content providers on our platform. Certainly we have bigger players like the TV networks, but we also have mid-sized players and some long tail partners as well. Some of our content partners don't even have a sales team, so we are the ones selling for them.
TT: How much revenue are you generating from advertising?
SR: Well, our total revenue for 2016 was $400 million. The majority of Roku's revenue comes from the sale of devices [such as Roku set-top boxes and sticks], but the media side of the business is actually more profitable.
In terms of most valuable ad formats, the bread-and-butter format is the 30-second commercial. It's still alive and kicking. But we are layering on interactivity, targeting and telescoping. We can offer full-screen and full-video advertising that can get us a couple of percent click-through rates on clickable ads [considerably higher that the less than 1% average for banner ads.]
— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation