Roku, Inc. (NASDAQ:ROKU) Needham 17th Annual Technology & Media Conference May 16, 2022 1:30 PM ET
Steven Louden – Chief Financial Officer
Conference Call Participants
Laura Martin – Needham & Co.
Good afternoon. I’m Laura Martin. I’m the senior Internet and media analyst at Needham & Company. I’m joined on my stage by Steve Louden, who’s the CFO of Roku. I don’t know how they gave you a demotion to IR. But okay, Conrad’s probably got the CFO title over on his screen. That’s okay. Let me introduce…
Breaking news, yes.
Breaking news, breaking news. Steve Louden has been the Chief Financial Officer of Roku since June of 2015. He keeps trying to leave, but they don’t let him. From May 2009 to June 2015, Steve served in various financial capacities in Expedia. Prior to joining Expedia, Steve held finance and strategy and planning roles at Washington Mutual, McKinsey and The Walt Disney Company. He began his career as a financial analyst with Merrill Lynch. He holds a BA in Economics and Mathematics from Claremont McKenna College, just like me, and an MBA from the Harvard Business School, just like me.
Q – Laura Martin
All right. Let’s start here. So the business has changed a lot since [indiscernible] ’17, largely thanks to others fast-following Roku’s example. For example, Roku has several new competitors, like Samsung, VIZIO and LG, not to mention Comcast. When you became public, investors were only worried about Google and Amazon, and that was why people didn’t buy the IPO. But today, you have a lot more competitors. So let’s start with competition. Can you talk about Roku’s competitive position today given its more competitive marketplace?
Yes. Hey, Laura, and thanks for hosting as always. It’s great to see you, and thanks for everybody joining today. Yes, in terms of competition, I mean, we have always been based with a very competitive environment as the world shifts to streaming. For us, the competition is really just another means of fueling our continued innovation. And yes, we feel very good about our positioning in the market. We’re the leading streaming platform by engagement in the U.S., Canada and Mexico and making progress in other countries as well.
And as a reminder, the platform, which is really the core of Roku, and the operating system, it’s the only purpose-built operating system for streaming TV, it’s the number 1 licensed operating system for TVs out there in North America. And so this, we find ourselves in a very good position. And the way we keep up with the competition or stay ahead is continuing to innovate, and that’s all we do, right?
A lot of the competitors you mentioned, this is not necessarily their number 1 priority. But for us, this is all around that service, with that vision of the world moving to streaming. So certainly, more big-name competitors have joined the fray. A lot of the success that we’ve had in terms of growing the active account base, now over 61 million active accounts, and growing the ARPU, which is now over $40 on a trailing 12-month basis, these are all things that will attract more people to get into the mix. But for us, it’s always been about staying ahead of the competition despite always competing with several big-name competitors.
Okay on that. So I cover VIZIO. And they would argue, Steve, that having the integrated sort of software and hardware actually is a better mousetrap than what Roku does, which is you have software, but other people are actually manufacturing the TVs.
So can you talk about why it’s better to just have the software, let me call it, monopoly, but not have the integrated hardware, software like VIZIO and LG and Samsung? Because that is a new kind of competitor. They are copying your platform, but they actually have backward integrated in the hardware. Why is your software-only vision better at Roku?
Well, I actually think we have an integrated hardware, software solution. If you remember, since you go back with Roku a long way, right, we started on the hardware side of things, and that’s still an important part. We produce players ourselves with the help of Foxconn. And then on the TV side, it’s a very similar setup.
We don’t manufacture the TVs, but remember, it’s not just kind of Roku software that’s being licensed in the OEMs, we are designing the main board of the TV, we are sourcing the components or helping them find the suppliers of the components. We’re certifying the factories. We’re actually the ones that are doing the software updates on the Roku TVs, which is very different than, say, the Google Android program, where the OEMs are having to do a lot more, including the updates.
And so, for us, there is an integration and we find that that’s very successful. And where I think we have differentiation is not only on the core OS that ours built, the players and the Roku TV program, but also on things like the ad stack, which is highly developed.
In our last shareholder letter, we had a little bit of a retrospective on the ad technology innovation. We had a time line that went back almost 10 years to show the progress we’ve made on the ad stack and the continued innovations that we have that we just announced recently as part of the upfront presentation. So for us, it is about the integration, not only on the hardware side, the software side, but then also the related monetization, ad stack and other capabilities we have on the platform.
Okay. That’s fair enough. Let’s stay with scale. So one of the points you made, which is valid, is you have 61 million U.S. homes, right? And like VIZIO as your next closest competitor, that has a platform, an integrated ad platform, and they have 15 million homes.
Why does that matter? Why is 61 million — is 61 million homes 4x better? Or is it actually like 20x better? Like what’s cool about having 61 million U.S. homes instead of 15 million, which is your closest integrated competitor?
Yes. Yes. Great question. The — yes, just to clarify, 61-plus million active accounts is actually a global number. The majority of those — the vast majority of those are in the U.S., but we do have active accounts international as well. But the point in the question is still the same. The key, especially on the monetization side, is around the — especially on the advertising side, right?
If you’re a brand advertiser, one of the most important things that you’re going for is reach. And so having significant reach is really important, not only to just even stand up the ad business, but also to get more attention and a greater share of the budgets.
And so for the fact that we have the largest, most engaged streaming platform in the U.S., Canada and Mexico is really important on that monetization side. It’s also important that when you talk to the content publishers, we have median entertainment tools that basically are promotional tools that help the content publishers either attract new subscribers or reengage lapsed viewers or potentially retain subscribers or viewers as well.
And so having that kind of critical mass is very important for the economics as we talk with deals on the content publisher side. So having not only the best monetization capabilities out there, but also the scale, they feed off each other, right? And a great example is The Roku Channel, where we’re able to spend more free ad-supported content, which drives inventory availability.
That’s attractive to advertisers because we do have the reach and we have the engagement. And then that monetization allows us to invest back into the platform and to content. And so that works really well, and having the scale and the lead on that front is really important from a competition standpoint.
I assume it’s step function, Steve. I assume when you guys got to 30 million or 40 million, you’re now at 100% advertiser penetration, and 60 million actually didn’t get you on any new advertisers, right? There’s some scale at which every advertiser is now on Roku. They just can’t put $10 million to work, which they can today at 61 million, right? It isn’t breaking new advertisers, is it?
Well, it brings in more budget, right? So one of the interesting stats that was in the — our last shareholder letter was the fact that for the first time ever in the U.S., reach on streaming actually was greater than reach on traditional TV. So it’s been going that way for a while as traditional TV ratings decline. And the reach of streaming and engagement streaming continues to go up.
But for us, there is more budgets to be had, right? Almost 50% of the viewing time in the U.S. for TV has moved to streaming, but about 18% of the ad budgets have moved over. So the advertisers are actually lagging the consumers. And so there is more budget to be had. And so as we get more reach and more engagement, that’s an even more compelling proposition for them to move their budgets over. Frankly, they’ve been a bit slow to follow the viewership, but it’s coming over time.
Bad things about streaming that TV does not have is frequency capping. I constantly will see the same ad on my streaming platforms, not necessarily The Roku Channel, but across streaming, I’ll see the same ad 10 times. You never see that on broadcast or cable TV.
So if all these advertisers are coming over, why do I — I guess, because the ads are being targeted. Like I think it’s a problem with targeted ads that there’s no frequency cap.
Well, I think — yes, what I would say is it’s a bit of a Wild West out there. We’re very aware of it, which is why, let’s call it, the advertising experience on the consumer side, yes, we’re really focused on the hygiene there for The Roku Channel, right? So every streaming service controls their own rules around frequency capping or their ad load or any other factors, right?
And so, for us, on The Roku Channel, one of the value propositions for the consumer is that it’s got kind of maxed half the ad load of traditional TV. And then we also use our ad stack in our tool set to make sure that we have frequency caps and we have other factors to make sure that you’re not getting hit with the same ad many times or you’re not having blank spots in your ad pod, where you’re just staring at the dark screen for a minute. And so that’s really important, and we think that’s a differentiator for us.
But I agree with you, not everybody has the same view in terms of — some of the ad loads are just as high as on certain services or just as high as linear TV, which is not a great consumer experience and like I said, thus, why we went half the ad load on The Roku Channel, and then frequency capping, there’s a lot.
But again, that, I think, points to somebody that’s got a scaled, well-developed ad stack like we do, and so that we can not only have a greater consumer experience, but that should translate into better ROI and better brand affiliations for folks that are doing it the right way.
Well, I think you just asserted you have a frequency ad — a frequency cap. So I — is it…
Yes, we do. We do on The Roku Channel, but certain services that are on platforms, including Roku, may not have that, right? But the company that owns the streaming service itself is setting those rules. And that’s why it’s an uneven experience on all platforms.
So is the frequency cap just like 10 on The Roku Channel? So it just annoys me at 5, and so I’m just annoyed for the final 5. I mean what is the frequency cap on The Roku Channel?
Yes, I’m not sure what the exact cap is off the top of my head. But we do have one and just like we have the sort of ad load target max of half of traditional TV. And again, for us, it’s — our whole business philosophy is consumer first and the rest will follow. And so that’s really important, to have a good consumer experience.
So one of the things that’s the most exciting for AVOD is that Netflix has announced an ad-driven tier, and Disney has said they will have an ad-driven tier by year-end. Now Netflix — sorry, it will actually have an ad-driven tier by year-end. We’ll see. And HBO Max just recently added an ad-driven tier.
So my question is — I guess, my question is the debate on Wall Street is, is this good for guys who have already been making their money in connected television or bad in the near term? I think everybody agrees that, long term, more ad units on more ad services is good for the whole business and will hasten advertisers moving off of linear TV to CTV. Okay, fine.
But the question is, when we suddenly get all of this new supply of connected television inventory, do we end up with excess supply? Whereas today, we have excess demand, so there’s really high CPMs. So do we get CPM contraction sort of starting in the fourth quarter for 6 months? Could you, as a CFO, could you comment on that, the CPM risk with new supply coming on all at once?
Well, yes, let me take a step back — a half step back. I mean what I think the industry is learning is something that we figured out years ago, and that’s why we started The Roku Channel, which is free ad-supported TV is a core part of the consumer experience, and some consumers are definitely willing to trade off some of their time in the form of watching ads for a lower overall out-of-pocket cash cost for the entertainment experience.
So if you remember, when we started The Roku Channel, most of the world had declared free ad-supported TV dead, in that everyone thought SVOD was going to be the only solution. So I think one thing, we’re very happy that the thesis that we had, where The Roku Channel has been so successful, has proven out to be one that’s important and that the rest of the industry is starting to focus on.
For us, I think you have to differentiate the platform and the service, right? So certainly, there will be more competition among services, and that’s in part why some of the services are finding new religion around different models or different approaches to the market.
Overall, for us, as the platform, that’s good. When there’s more competition among services, there — we, as the sort of leading platform out there in terms of engagement, we feel like we’ve got the best media and entertainment tools for content publishers to promote themselves and retain their subs. That’s all good for us as a platform.
Again, so I want to differentiate that because I think a lot of folks with — that are looking at streaming have maybe thrown the baby out with the bathwater in terms of thinking that some of the moves that are happening right now are just bad for streaming. The fundamental shift to streaming is remaining on pace, and that’s led by the consumers moving their time and their wallets over. What’s changed is there’s more competition between the services.
So certainly, the fact that we have the OneView Platform, we have a great ad stack, we can certainly help out these services as they transition in the ad world. That is a very different world. And like in our letter, we had our sort of time line back, like I said, almost 10 years.
And so that’s really — it’s a much harder problem. It’s kind of like somebody getting into the streaming OS game, which a lot of folks are now. That’s way harder than it looks. There’s a lot of time and money that gets invested in that. And so we would be a great partner for other people that are newer to the ad business.
Certainly, there’s supply-demand balancing acts in the short term, and so we’ll have to wait and see how much supply comes on at any one time. But in general, the thing that gives me good confidence about that business for the medium to long term is the fact that the consumers are voting with their time, and they’re well ahead of the amount of ad budgets that have come on. So certainly, anything that gets more advertisers to put more money into streaming will be good for Roku.
Okay. So the answer, I think what I heard you say is, you’re not a service and more competition between services is good for Roku because you’re a platform and now they have to advertise more on your homepage to pull people into their services. Okay. And it does sound like what you’re saying is you might see CPM weakness in the near term, but you think there might be enough pent-up demand.
I mean you guys don’t sell out, so it can’t be good for you, right? Because you already are unsold. So if there’s more supply and CPMs go down, it just can’t be good for you, but you’re just saying we don’t know. It depends on how fast actually Netflix shows up in the marketplace because if Disney shows up in the fourth quarter and is absorbed within 6 months and Netflix then comes after, there might be no big CPM downdraft. Is that sort of what you’re thinking?
Well, the first thing I’m thinking is I don’t know what all these purported new ad services or hybrid SVOD, AVOD models are coming on. The other thing I’ll note is Roku’s business model is designed to — when somebody else makes money, we make money, right? So that’s another piece. This is a new entry into the market that could potentially grow the market.
Also, these services need to have economic deals for different business models on Roku and other platforms. So that’s also another thing that would need to get sorted. But right now, the main thing I don’t know is what their exact plans are and what the timing is. And that makes it hard to answer that specific question.
So you raised a point I hadn’t ever thought of. So if you have a deal with Disney+, which is right now 100% subscription, and they now introduce an ad-like tier, do you have to do a new deal? Is that a new service, even though it’s under Disney+? You have to do a [new cost]…
Yes, without getting into any specific deals, yes, if there’s a fundamental change into the business model and the contract, then there’s a discussion that it needs to have, I assume, on all platforms.
Even if it’s under the Disney+ moniker, even it’s under the same table…
Well, I can’t talk about any specific deals, yes.
So introduces an ad-driven tier, the Netflix contract no longer applies because it has some kind of rev share that didn’t exist in the contract that they’re now introducing into the marketplace. Even though it’s under the Netflix name, you’re going to need a new contract though on the Roku platform. That’s what you’re saying.
Well, without talking about any specific deal, yes.
Yes. Okay. That’s a great point I haven’t thought of before. Okay, let’s talk about [content spending]. Steve, I really had hoped that one of the benefits of platform, when you think about the platforms I cover, like Amazon or Google or Facebook, they aggregate content. They don’t have their own. [indiscernible] so that’s what I thought Roku was when you became public, but now, you went into the content business, more recently, the last couple of years.
So — and content spending is through the roof, mostly driven by the SVOD, like subscription video-on-demand guys. But you get caught up in that because content spending is content spending. So can we talk about how you spend money on content? What are the return on capital metrics? And how do you use data to keep your costs down and spend money on the smartest type of content that drives viewership at positive return on capital?
Yes. No, it’s certainly a focus area. We get a lot of questions, so this is great to talk about. The — I think the most important thing to realize is our approach out there in the market is very different than that. I agree there’s a lot of spending on the SVOD side in the market.
There’s a lot of concerns lately about whether that level of spending for the industry is sustainable. But it’s important to differentiate, our content spend is in the lens of the free ad-supported market within TRC. And really, what’s changed is not our content aspirations per se, right? We’re not an SVOD service. We don’t want to spend gazillion dollars on a new hit, exclusive, high-budget show and hope people will show up.
Our math is all around that same business model we’ve had since day 1 for The Roku Channel, which says within that free ad-supported business model, in terms of the margin structure we’ve had, in terms of blended cost per streaming hour, those types of metrics, it’s the same model. What’s changed is the scale of The Roku Channel and the growth trajectory has allowed us to do the math so that it’s actually more efficient to spend in different categories that we weren’t able to.
So for example, when we started, we had largely rev share licensing deals for back catalog, deep library stuff, right? And that’s all we could afford at the scale and the viewership we had. And that flywheel, right, is that content drives viewership, which creates ad units in that free ad-supported model, which allows us to then monetize and then we can put the money back in.
So now, we’re at the scale, and with the growth trajectories, we’ve been able to continue to do those rev shares licensing deals. But now, we have fixed licensing deals we’ve moved into, the breadth and quality of the content has moved up. And now, we’re at the point where various types of Roku Originals — and the Roku Original program basically is about a year old, right, a little over a year old.
And so what’s happened now is that we can — it’s more efficient for us or gets us more bang for our buck in terms of driving reach and engagement to do Roku Originals and do fixed cost licensing deals. And so that’s really what’s changed.
So we’re trying to be very prudent and let the economics of the engagement level in The Roku Channel drive how much we spend on content. And so that’s a big difference than a lot of the spend on SVOD that’s pretty heated, but it’s very much on high budget exclusives, and that’s not where we’re at.
A good example would be This Old House, right? We bought This Old House, a great franchise, and so we’ve been able to upsize the number of episodes that we’re producing on This Old House. We’ve started some linear channels, both a free linear channel within Roku — The Roku Channel as well as a subscription channel within the premium subscription side of The Roku Channel. And so we’ve been able and drive a lot more engagement to that property.
So that’s a good example of something that home improvement, very popular genre, a great franchise, and it’s driving a lot of viewership and that Roku flywheel is working well. And so that’s a very different approach, and that’s how we’re structuring.
I think the one thing people need to note is we’ve been spending money licensing that content one way or the other for the entirety of The Roku Channel. And so the fact is some people will say like, “Hey, did you go from $0 to now you’re spending Roku Originals?” We’re spending in the same construct that we always have.
The only thing that’s changed with some of the Roku Originals where we’re actually funding the production is there is a different cash flow lifecycle, right, where you’re putting the money upfront and then you’re getting the money back once you air it on The Roku Channel versus a licensing deal tends to be much more matched from the revenue and the cost side of things. That’s the main part of exchange, not the actual sort of business model in how we fund content on TRC.
The biggest distinction because I want to understand the role of the financial office, like what do you do. Tiny house, I understand, because you guys were running it for a long time and you knew all its data. So you could do a breakeven, right? You could say if we buy it, we’ll get a payback in 18 months or something, and then we get to keep all the upside and we own the IP, right? You were involved in that process before you bought it, weren’t you, your finance staff?
For This Old House?
Yes, of course. Yes, exactly. Yes, we have a lot of data on what categories do well, how much engagement. This Old House or other things on that, we can look at comparable shows, right, and see kind of, roughly, the engagement. And so we do our own business modeling, not only for licensing, but also for potentially Roku Originals or acquisition of content so that it works in that model.
But we have increasing amounts of data, both longitudinally as well as the amount of engagement we have and the breadth of content. So we leverage that. And that’s one of the important advantages of being the platform, right? We have the first-party relationship with the consumers. That’s really important for relevant content, to feed them in the UI and also to monetize on a targeted basis. But it’s also really helpful for understanding what areas of content are good investments.
Okay. So I want to move from that– this tiny house, where you had a lot of input and there was a lot of data specifically on that property, and you could do a breakeven. You could say if we buy it and we hold on to all the money forever, our breakeven is some number of months.
With the kind of stuff you guys were showing at the upfront, where it’s much [indiscernible] field, it’s much more we’re going to take a flyer. I want to know how involved — what you — from the financial point of view, is your involvement on the finance staff at Roku, here’s $100 million budget, you content people just go figure out how to get the most viewing?
Are you involved property-by-property the way a studio is? Like they have to get individual budgets by property approved at the — in the studios? How involved is the finance staff now in this greenfield stuff that you — didn’t exist, there is no data for, and some guys saying, we think [it’s a great] view?
Yes. I mean certainly, a Roku Original show is a new show, but it’s against a benchmark of a bunch of different shows in that genre, and we — that we may have licensed or we may have created in some other factor. Might have bought the content distribution rights via Quibi. There’s a lot of data even for a Roku Original.
Again, the part that’s most important for everybody to absorb is that the overall business model is what is guiding the piece, our investment, whether it’s which part of that are we willing to put into, say, Roku Originals.
And by the way, there’s a sliding scale of Roku Originals, like true productions that we’re greenlighting. There’s also exclusive shows in a geography like Cypher. You remember that from last year. That was considered a Roku Original, but it was this existing show that we licensed in the U.S. but had never been seen in the U.S., right? So that’s a Roku Original as well.
So there’s a whole sliding scale even within the Roku Original umbrella about what we’re putting on the platform. That is great. That Roku Original content is great for the discussion with advertisers at the upfront, right? A lot of traditional TV brand-based advertisers want a connection into whether it’s exclusive content within The Roku Channel.
[We have] one of the other motivations for our Brand Studio. We acquired that from Funny or Die about a year ago, right? So now they can have immersive brand sponsorship content as well that’s in there. And then you’ve got, obviously, the OneView, the DSP platform, where there’s other targeting capabilities in that for the advertisers as well.
So for us, one of the big things about the upfront, and it sounds like you were watching or in attendance, is the fact that, first of all, you need to start with streaming, right? Reach is now bigger in streaming than traditional TV. And also, it’s got better ROI.
And Roku has a scaled platform with a leading ad stack platform. We can certainly sell you 15s and 30s. We can give you content. You can put — pair your ads with exclusive content, just like you could from the traditional network upfronts. And then we have all these technological capabilities.
And then because we’re the platform, we also have these capabilities that are very difficult to replicate, around things like the Brand Studio or take over — takeovers of the home screen and stuff like that, that we can marry. And we can package them all up as a more holistic advertising experience for the advertiser itself, and then obviously, they want to get that in front of the consumer.
So that’s very important. But back to your original question, the main thing that we’re focused on is making sure that we’re living within the same box as a business model of The Roku Channel. And then we look at like, okay, how much of that is still going to be the licensing side, and that’s one of the things that people need to know. We talk a lot about the Roku Originals. It’s new, it’s interesting, right? We can talk about the specific shows, and that’s important for the advertisers.
But the vast majority of the spend is still license-based. The predominant model is still licensed rev share, right, which is a great variable model. Direct license, we have more and more of that because the scale allows us to get content on that basis, that studios wouldn’t give us on a rev share basis because that’s what they’re used to for that higher-end licensed content.
And then we can also potentially make better margins on that because we have a better handle on how we perform. And then you’ve got the Roku Originals, which is really the kind of top part of the iceberg, that is fun to talk about, but that’s not the main part about the business model of The Roku Channel.
Yes. Okay. That’s super helpful, Steve. The — we do have questions. Oh, my God. We’ve got a million questions, Steve. Okay. So enough with my questions. Apparently, everyone hates mine. Okay, there’s a lot from the audience.
Oh, my gosh, I’m going to do a short one here, because I got 5 paragraphs, that says, theoretically, would you expect to achieve material revenue share on new ad-based offerings from big-name streamers like Disney and Netflix? Do you have enough leverage to make that happen, not [indiscernible], but if it was a really big company here, can you get rev shares from them?
The question rev shares on the ad side of the business or just rev shares in general? I mean we have an economic deal with Tier 1 companies right now. And what I would say is, yes, our economic position and our value to content publishers only grows as we continue to grow scale.
Like we’re talking about at the start of this, 60-plus million active accounts, the vast majority of them are in the U.S. And our share of viewership, our engagement, we’re leading on engagement in the U.S., Canada and Mexico, as I mentioned earlier. Our market share as the number 1 overall TV OS, with mid-30s market share there, sell a lot of players as well. So yes, we’re an important part.
If you want to have a scaled successful streaming service, you need to be on Roku. And our business model is designed that as those services are successful, we’re successful as well, but you need to have an economic model, right, as a service. And so that’s really important to those negotiations.
I’m going to make a bet right now with the audience that you’re going to have — you’re going to go into a strike with Netflix because they are not going to want to rev share with you on ad-driven and they’re going to threaten to pull off their SVOD service, and it is going to be a war of giants. We’ll see how that goes.
Well, and just to note on that, Laura, in general, we have, historically with AVOD companies, we have ad inventory, right? So we feel we’re better positioned to actually monetize the ad inventory.
Fun fact, years ago, when we started our ad business, we actually did rev shares on the ad business, and we realized that we were actually probably better positioned to make — to monetize those. Because we have that first-party consumer information, we have more proprietary data on the platform than any service, even the big ones, and so — and now, we have the ad capabilities to monetize that in a lot of different ways.
Yes. I remember a lot of companies would give you all their ad inventory in December because you guys could monetize it better. Even if you took your cut first, they were still going to make more money if you sold it for them.
Absolutely, yes. And that’s still true in The Roku Channel, right? Even with the rev share, because of more volume and the fact that we can sell on a better targeted basis than stand-alone AVOD, then they will actually make quite a bit more money than as a third-party app.
Okay. This is a long one. It’s about Paramount Plus. Okay. You announced Paramount Plus will be available on The Roku Channel. It seems to be the first deal of its kind [indiscernible] TRC, does it lead to a material change in contract and a change in rev share splits between the parties? Do you monetize the [ad inventory in] these properties? Or does it benefit only [a group of the] content distribution line item?
Okay. You cut out there, but I think it was the Paramount Plus deal, in adding that to The Roku Channel.
Yes. Is the economics somehow different than the ones that came before?
Yes. So without getting into that specific deal, of course, so people may not know, The Roku Channel, its heart and soul is free ad-supported TV. So that is definitely the predominant engagement vehicle for consumers in The Roku Channel. But we also have what we call premium subscription, which is embedded SVOD services within The Roku Channel. So for example, SHOWTIME’s there. There are several others as well. We just added Paramount Plus, which is great.
We think, again, that there’s a lot of viewership there. There’s some good consumer benefits within premium subscriptions, where you can — you’ve got sort of one place where you can add and subtract for your SVOD services within The Roku Channel. We give you 1 monthly bill. And so there’s a lot of great benefits from that.
So we just added Paramount Plus, and we do have many services that are leveraging that premium subscription, and they’re driving a lot of viewership and a lot of subs there that they haven’t been exposed to in their third-party apps that are already existing.
So we think that’s a great model for those SVOD players, and we’ll grow that. I wouldn’t point to anything specific on that deal that’s really different. But it is — it does show you that there’s a good home for SVOD services on the premium subscription side in TRC, especially as it continues to grow, right?
And the other thing we haven’t talked about, which I think is we’re really pleased with the stat, is that The Roku Channel is now top 5 on the platform, both in terms of reach, which it had been for a few quarters in a row, but then also now, in terms of overall engagement levels, it’s top 5 as well now. So it just shows you that flywheel is working very well, whether it’s free ad-supported TV or a pool on the SVOD side as well.
Yes. Another question from the audience, Steve, long again. Can you speak to the increase in your remaining performance obligations balance, an increase from $1.1 billion to $1.4 billion from December to March 31? This was the largest increase in the balance ever outside the 2 quarters early in 2021, when new SVOD services were launched. Is there anything to call out here in terms of new service or an accounting nuance? Or is it normal course of business?
Yes. So on the RPO, they can be a bit lumpy. So if you think about what’s in there, these are material deals largely around the content distribution deals. And so what usually happens is, in that question, reference year, let’s call it a year, 18 months ago, when you had a lot of [new] services, you saw that line item basically pop up because we had a material new deal. And so we are estimating the lifetime value of that deal. It could be a couple of years. Some of our deals are even longer than that now.
And so you tend to get a pop when you have a new service like that. And then, over time, that will whittle down just as the deal gets longer into its tenure. And then what you can also have is if you have a renegotiation or an extension of the deal, then that can add more value into that line item.
And so, usually, what you get are stair steps up, if you have a big renewal and extension or a new service, and then it tends to whittle down if you don’t have that. Now we have a portfolio of lots of material deals, right? And so it tends to bounce around. I mean we’re always doing some renewals. Some are more steady-state, some are big step-ups. And so that’s why there’s a little bit of volatility in them.
Okay. Great. That takes care of our questions from the audience. I want to ask you about dongles versus smartphones — smart TVs. So Steve, one of the big, I would say, contentious debates going on in Wall Street around streaming is that dongles won’t be necessary because everybody just bought new TVs, and so everybody is just going to get their smart TV, get all their — use their smart TV and not have dongles.
So that isn’t true in our house, but I would like your explanation about why dongles are a thing in 5 years, which is about half of your total active accounts are on the dongles that you guys sell, not on the smart TVs you sell. Could you speak to that?
Sure. Yes. I think I’ve been at Roku 7 years and counting. And I think even when I started, people were saying that the player side of the business was dead, or I occasionally joke about writing a book called “Peak Dongle” or “Peak Player.” But look, I think the — in terms of looking forward, you’ll have more and more best-in-class licensed operating systems on the smart TV side, and that use case will definitely move towards the streaming TV front.
But the player side of the business is still very important. And for us, it’s a great part of the value proposition for a couple of reasons. One is we’re still at a point in the transition over. Despite the fact that the Roku TV program is mid-30s number 1 licensed operating system in North America and number 1 overall licensed — or number 1 overall smart TV platform in the U.S., there’s still a lot of TVs out there that don’t have a great operating system.
So we know from our data that even people buying some new TVs, they’re attracted to the new TVs because of the brand or the picture quality, and they realize the operating system just isn’t up to snuff and so they will put a streaming player on top of even a brand-new TV. That does still happen quite a bit.
The other thing I’ll say is even when you have a good smart TV that a lot of the manufacturers aren’t upgrading the operating systems, and so you have the case where you’re going to have a TV for 6 to 8 years. And so 3 or 4 years in, you might add a dongle if your operating system isn’t being updated properly to add more features and performance to your TV. It’s just such a low-cost way to do that when you’re not willing to step up to a brand-new TV.
And then, certainly, throughout the world, and again, I think we have a very U.S.-centric view, streaming is very early days in most other countries in the world, right? And so there are massive amounts of TVs out there, whether they’re old school, dumb TVs, or whether they’re smart TVs with bad operating systems. And so — and it’s a very kind of low-cost entry point into streaming. And so I don’t think the player business is going away.
What we’ve seen, over time, is that the percentage of new customers that are coming on to the Roku platform is shifting over time to TVs, notwithstanding some of the supply chain blips that we’ve seen, the industry had seen. But in general, the world is moving that way, but it doesn’t mean the players are going away anytime soon.
Super helpful. That’s super helpful. Okay. I will call it there. We don’t have any more questions in the audience, and we’re a little over time. Steve, thank you so much for being with us. Really enjoyed the conversation.
Okay. Yes, thanks, Laura. It’s great talking to you, and thanks for hosting.
Roku, Inc. (NASDAQ:ROKU) Needham 17th Annual Technology & Media Conference May 16, 2022 1:30 PM ET