Roku, which has 29.

1 million active accounts, has become one of the front-running ad-supported

OTT offerings in the market. Through rev-share deals, Roku aggregates inventory from content
providers across its platform.

Recognizing consumers are hungry for free OTT content, Roku launched its own AVOD
channel, The Roku Channel, in 2017. The Roku Channel is also strategic on the ad side, where it
opens up O&O inventory for the platform to sell as competition heats up in streaming.

The Roku Channel aggregates content from dozens of ad-supported streaming services
alongside select content Roku has licensed itself. THE BEST IDEA. Over the last year or
so, however, Roku has mostly focused on drawing in new partners to its revenue-sharing
program instead of licensing additional content. The partners cede control of their
entire ad inventory for content they offer in the Roku Channel, and Roku splits the ad
revenue 50-50 with the partners. That compares to the standard ad inventory split in
individual apps, where Roku takes just 30% of the inventory. The partnership is valuable
for both sides. Roku's able to generate more revenue per hour streamed while partners
get additional exposure and don't have to worry about ad sales. And as Roku improves
its targeting capabilities through increased data and demand, the 50% revenue share
could result in greater payouts than selling 70% of ad inventory itself for some partners.
Roku's audience is growing quickly. It added nearly 10 million new accounts in 2019,
about the same amount as Amazon gained. That said, Roku grew considerably faster
than Amazon in the fourth quarter of the year. Roku is also more widely used in the
United States than Fire TV.

How much of your ad revenue comes from The Roku Channel? 

We don’t break out spend on any channel, but the Roku Channel is important for us. It provides
our O&O inventory on premium content. It’s an amazing customer experience because it’s free.
We have live streams now and we’re working on other products as well. It’s the fastest growing
channel in the platform’s history.

How can Roku continue to differentiate as the OTT market gets more crowded?  

We’re a TV-first company. We’re not search or digital trying to move into TV. We’re not
ecommerce trying to move into TV. We’re a TV-founded company, and the operating system is
exclusively meant for TV. That’s the only thing we focus on.
Roku Channel, the company’s ad-supported channel that is now in the top five on
Roku’s platform in terms of reach.

Roku also estimated that one of every three smart TVs sold last quarter were Roku TVs,
a figure that the company said moved it past Samsung and made it the top smart TV
operating in the U.S.

Steve Louden, chief financial officer at Roku, said during last week’s earnings call that
Roku has seen “tremendous growth” in monetized video ad impressions and that it puts
his company in position to take share from the more than $70 billion in traditional TV
advertising budgets.

“The end state that we believe will play out for OTT advertising is that all TV advertising
will become OTT advertising,” said Rosenberg. “Someday everything we watch will be
streamed, all ads will be streamed, and all those ads will be targeted, interactive and
measurable just like any other digital media.”

Of course, OTT video advertising is not the only way Roku’s platform business makes
money. When premium subscriptions distribute on Roku’s platform, Roku gets a share
of the revenue. Roku’s content partners also spend money marketing directly to Roku’s
user base on the platform. Roku also sells buttons on its remotes.

But, advertising is a big part of what Roku does, and it seems like with each passing
day more competition is jumping into the ad-supported streaming market. Sinclair
launched ad-supported multichannel streaming service STIRR earlier this year, Amazon
is reportedly looking to deepen its position in the AVOD, Viacom is putting its premium
content library behind Pluto TV and NBCUniversal is planning its own AVOD streaming
service launch for 2020.

Rosenberg said that even though the OTT advertising space is getting busier, Roku
doesn’t necessarily view other ad-supported services as competition. He said Roku
looks at these services as partners who will come and compete for attention on Roku’s
platform.

“We have a business model where when they win, we win and we make money,” said
Rosenberg. “At the same time there are a lot of content owners starting to think that
they’ll do better by participating in the Roku Channel. And when they do that, we also
win.”

WHO ARE THE BIG AVOD PLAYERS?

1. Peacock-
2. Pluto- 22M monthly active, 67% YoY growth.
 3. Roku Chanel- 43 users, 36% YoY growth. The Roku Channel was second with 26 ads,
spanning 12 minutes.
4. Crackle- Crackle showed the largest number of ads. It averaged 42 ads, spanning 16 minutes,
per movie.
5. IMDB TV (amazon)- IMDb TV was third at 10 ads, spanning three minutes.
6. Warner?
7. Vudu- 25M+ registered users, 100M device install-base
a. accessible in over 100 million US homes with an app that has been downloaded
more than 14 million times.

8. Tubi- 25M users, 20% growth.

9. Hulu- AVOD/SVOD hybrid
10. Redbox TV
11. Xumo- 5.5M monthly active

Although use of the current AVoD services in the US is low, at 3-6% of internet-connected
households, Ampere believes this to be merely the “quiet before the storm.”-

Could hybrid services like Hulu be left behind?

While it appears to be full speed ahead for free advertising-supported services, some are suggesting services
blending a subscription fee with ads could be limited in their growth. Barclay’s analyst Kannan Venkateshwar
says Hulu’s growth was less than peer ad-free SVOD services and free ad-supported services during the
lockdown. He suggests that ad-free SVOD has set consumer expectations higher for all subscription services,
making a subscription service with ads less appealing:

“While it is a bit premature to extrapolate present trends into perpetuity given that ad-supported
models are still relatively new, we do believe newer services will need to think more carefully about
their brand identities and consumer experience when choosing a monetization model. Just creating a
hybrid model to provide a lower price point is unlikely to drive greater subscriber scale in itself.”
On the face of it, the data seems to support Mr. Venkateshwar’s statement. ComScore says that Hulu saw a
20% increase in streaming hours through the week of April 13th but has since seen usage return to pre-
emergency levels. On the other hand, ad-free Netflix, Amazon Video, and free ad-supported YouTube have
seen their streaming hours grow 20% or more and stay at that level.

According to Hulu’s SVP of Ad Sales Peter Naylor, 70% of Hulu’s viewers watch with ads.

Roku focuses on library like netflix did- there’s something there.

 Build niche categories and do them WELL-
o Build relationships w/ prod companies in networks who do those niches (The CW, Sci-Fi,
Bravo etc.)
o What groups in US aren’t being catered to, if theres a large group go after their content and
advertise that you hold it (spanish entertainment, black etc.)
o Good foreign content? Is consumption of foreign content growing in USA?
  The UI has to be 10/10, especially with AVOD, apps often crash, quality isn’t good, and with all big
streamers right now options are actually overwhelming. Customers are getting fatigue watching the
same thing over and over again. Algorithms aren’t good at showing customers what they want to
watch next.

However, the SVOD tent isn’t big enough to provide a reliable future to all media companies
in search of a post-cable home. It’s not even big enough to support all of the existing
platforms...SVOD household penetration was 85% for 2019 (already a high level), and SVOD
subscriber growth is de-accelerating. In 2016, the SVOD market had 200% YoY subscriber
growth. In 2017 it was 119%, in 2018 it was 65%, and in 2019 it was 31%. 

Why the slowing subscriber growth? Market saturation and subscription fatigue. A recent
study by Ampere Analysis explains: 

“SVOD stacking—consumers taking multiple SVOD services—is showing signs of reaching

saturation point in the US, with the average SVOD household subscribing to around 2.8
services, a figure that has remained unchanged year-over-year. This suggests that many more
established US SVOD households have already curated their suite of SVOD services, and
might not be willing to add a new subscription, and associated cost, to the mix.”  

PROBLEMS W/ AVOD
Yet stream abandonment remains high among all VoD providers, with 18% of viewers leaving a
stream before their video even starts. In other words, almost one-fifth of users who have the full
intent to watch a video — and press play — leave before they watch. This is often due to frustration
with playback delays caused by connectivity issues. For ad-supported video providers, this
translates directly into lost revenue.

Pros of AVOD
Yet at the same time, 78% of digital video viewers say they don't mind watching ads if it means the
content is free. This puts AVoDs at a huge advantage, especially in uncertain economic times.