The Flawed Reasoning Behind Roku’s Smart TV Play

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Illustration: VIP+; Adobe Stock

Of the many questions at this year’s CES about Roku launching its own line of smart TVs in the spring, perhaps the most pressing is: Why?

After all, Roku is already the top connected TV platform in the U.S., having soared to that dominance first with its line of streaming boxes and sticks, then by licensing its easy-to-use OS to smart TV manufacturers such as TCL and Hisense. (It will continue to do so even after launching its smart TV line, according to a press release.) More than a third of the country’s smart TVs now use Roku’s operating system, per TVision data.

With that success in hand, why venture deeper into the costly hardware business? Roku’s “player,” or hardware, division generates slim revenues compared with its ad business and other sources of income; the player segment has consistently posted a loss each quarter since Q2 2021.

And even if it were still turning a profit, the margins on hardware are far from ideal. In 2020, a year when Roku’s revenues soared thanks to the COVID-lockdown streaming boom, the quarterly gross profit margin for its player segment averaged less than 10 percent. The company’s new smart TVs will almost certainly function as a loss leader to help continue growing its active user base and streaming time.

Therein lies the logic behind the new strategy, however.

Like Netflix in the SVOD space, Roku is a mature, saturated player in the CTV game, and has seen its robust pandemic-era growth slow in recent quarters. The declining ad market has battered the company’s biggest revenue stream and sparked a rout on Wall Street: Roku’s stock price is down nearly 80 percent from a year ago, though it swung upwards in the wake of the smart TV announcement.

Meanwhile, smart TVs are slowly but surely becoming the predominant streaming device, as growth for external streaming dongles begins to plateau. Between Feb. and Dec. 2022, U.S. household penetration for smart TVs grew from 47 to 54 percent, according to TVision, while CTV device penetration shrank from 46 to 43 percent.

Globally, smart TVs also posted the biggest growth in viewing time out of all streaming devices in 2022, per data from Conviva. And Roku’s competitors are reaping the rewards: Google’s Android TV OS posted the largest viewing time gains throughout 2022, followed by LG, Samsung and Vizio, all of which boast their own proprietary smart TV operating systems.

In short, Roku’s dominance of the smart TV space is ebbing, and the move to control at least some of its own smart TVs end to end seems designed to help stem or reverse the tide. (Notably, Roku manufacturing partner TCL also began selling TVs with Android OS in 2020.) It could also help propel greater international growth, which has eluded Roku thus far.

“We believed that a TV made and designed by Roku just makes sense,” Roku’s VP of retail strategy, Chris Larson, told The Verge. “This move can fully realize the full potential of our Roku TV program, by bringing our content, our award-winning operating system and hardware all together under one roof.”

It’s a strategy with precedent: Both Comcast and Amazon launched their own branded TVs last year, and Comcast just announced another new line of smart TVs through Xumo, its joint venture with Charter. Data suggests sales are off to a slow start, however; as the TVision chart above notes, Amazon’s share of the U.S. smart TV market is only about 6 percent.

It's worth pondering whether Roku will fare much better. Its TVs will be competitively priced — 24”-75” models will retail between $119 and $999, per a press release — but this will likely exacerbate the company’s hardware losses as its ad business continues to struggle. And in a crowded market, what can Roku-branded TVs offer consumers that those licensing its OS can’t?

Roku seems to have considered this factor, at least: The company is positioning the move as a strategy to allow for new features to be released on Roku’s own TVs before rolling out to its licensees.

“To better serve consumers, Roku-branded TVs will enable further innovation around the TV experience, and all innovations will be made available to the full Roku TV program, including current and future [original equipment manufacturer] partners,” the press release explains.

But barring any major tech advances, this seems more likely to soothe those OEM partners than to attract any but the most tech-savvy consumers. (“Don’t worry,” Roku is essentially telling its licensees, “you can have whatever cool new features we come up with if you want them!”)

In the end, Roku-branded TVs will likely end up being less of a giant leap forward for the company than simply another tool in its toolbelt, and potentially a detour on the way to even greater success licensing its OS. But don’t take VIP+’s word on that last point — just ask Roku’s own CEO.