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By Abigail Summerville 

Roku Inc. is tiny compared with the tech and telecom giants spending billions to compete in the streaming-video world, but its stock has more than tripled since Christmas on the growing popularity of "over the top" video.

The Los Gatos, Calif., company, which started making set-top boxes more than a decade ago to stream Netflix movies, today has numerous content partners. The operating system that Roku licenses to smart-TV makers recently surpassed Samsung's as the country's top-selling smart-TV platform, according to research firm Strategy Analytics. And Roku's media-streaming sticks and boxes regularly outsell players from Apple Inc., Alphabet Inc.'s Google and Amazon.com Inc., Roku's biggest competitor in the U.S.

But Roku's success isn't based on hardware sales. It says it doesn't really make any money on sales of smart TVs from its licensees, which include Hisense, TCL and Sharp. It makes money when people start watching.

Roku's greatest source of revenue since 2018 has been advertising -- in its partners' ad-supported videos, on its home screen and even on the buttons of its remote.

Roku shares shot up more than 20% Thursday following its quarterly earnings report late Wednesday that beat expectations, including $250.1 million in revenue, 30.5 million active accounts and a net loss of $9.3 million.

Roku finds itself in a prime position at a time when companies are increasingly looking to advertise on platforms like Roku instead of on cable TV -- and when uncertainty among video-streaming providers leads people to subscribe to multiple services. "Our whole business is based on the belief that TV will move to streaming," Roku Chief Executive Anthony Wood said in an interview.

Still, Roku has had struggles: It is no longer developing a previously announced voice assistant, and it has been slow to roll out an ambitious whole-home entertainment platform. Dependence on viewer data could hurt its ad business amid new consumer-privacy regulations, and it has yet to make big moves outside of the U.S. As the company figures out how to expand globally, its frenemies -- particularly Amazon -- could see it as a bigger threat.

"I think a few years ago we would have said [Roku's] big downfall would be if it doesn't evolve," said Michael Greeson, president of TDG Research. "It overcame that and made smart decisions."

What Roku brings to the living room is "over the top" video, which refers to video delivered directly over the internet instead of via traditional broadcast and cable networks. Total U.S. ad revenue for these services, not including YouTube or social media, hit $2.7 billion in 2018, according to media-research group Magna Global. Hulu was No. 1, at $1.5 billion in ad revenue, and Roku was second. While it doesn't break out ad revenue, Roku reported $416 million in platform revenue last year -- the vast majority of it from ad sales. Advertising analysts say Amazon's share is smaller but also increasing.

Because Roku doesn't have its own content, it is in a position to partner with many competing sides, as the streaming market becomes oversaturated: Roku already has Netflix, Amazon Prime, Hulu and many more services. This fall, Disney+ and Apple TV+ are set to launch, followed by AT&T's HBO Max. All are expected to have Roku apps.

Cable cutters have more devices than ever to choose from, but Roku has an advantage over the bigger names: It isn't involved in what the CEO calls "political battles." Roku has been left out of skirmishes between tech's biggest rivals: For example, until July, Google's YouTube wasn't available on Amazon Fire TV, and Amazon Prime Video wasn't available on Google Chromecast. Walmart, the world's largest retailer, doesn't sell Amazon products.

"One of our advantages is that we're not one of those guys," Mr. Wood said. An Amazon spokeswoman declined to comment on its relationship with Roku.

While its rivals are used to competing on a global scale, Roku's expansion outside the U.S. has been small. It hasn't announced an international strategy, but Mr. Wood said, "We think it's an open market. There are no leaders yet internationally."

Roku's smart-TV operating system could be its ticket abroad. Most people outside the U.S. prefer smart TVs over streaming sticks and boxes, Brett Sappington, principal analyst and senior director of research at Parks Associates, said.

Regulations giving consumers greater control over their data could potentially hamper Roku's advertising business. Europe's General Data Protection Regulation , which took effect in May 2018, could make it more difficult for Roku to have highly targeted ads. And in the U.S., in the wake of California's landmark Consumer Privacy Act, passed in June 2018, other states have proposed or passed similar legislation. Mr. Wood said Roku's direct relationship with viewers is an advantage.

Roku has scaled back some of its product ambitions. On Wednesday, it announced a partnership with Walmart that includes audio products under Walmart's Onn brand. But a Roku spokeswoman confirmed it has canceled plans to launch an Alexa-like voice assistant announced in January 2018.

Mr. Greeson said Roku is smart to stay away from Amazon's voice-assistant turf.

"Roku can play the underdog card, and that's good for them if they're too small right now for Amazon to notice," he said. "If Roku becomes truly competitive against Amazon devices though, Amazon can decide, 'Hell, let's give [Fire sticks] away for free.' " On Prime Day last month, Amazon's Fire TV Sticks were a top-selling item -- at $14.99.

Mr. Wood called Amazon a partner in content and a competitor in hardware, but says Roku's lead is expanding. "We compete with them well," he said.

(END) Dow Jones Newswires

August 08, 2019 12:26 ET (16:26 GMT)

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