- Roku's (ROKU +4.3%) news today that its investment in original programming is paying off with record streaming of its own Roku Channel suggests a strategy not unlike a formerly small player licensing anything it could get: Netflix (NFLX +0.8%).
- CNBC's Alex Sherman notes Netflix once was happy to acquire and show whatever content media companies would provide; now it spends $17B on content per year.
- Once a tiny player itself, Roku will spend more than $1B on content next year, Sherman reports.
- And many may not know about Roku's history as Netflix's offspring. Founder Reed Hastings elected to spin off the streaming video box he was developing to then little-known Roku in 2008, expecting the box would probably fail. Roku CEO and founder Anthony Wood took a part-time job at Netflix to make the device while continuing to oversee his 15 employees.
- But Hastings wanted Netflix to be available on other streaming devices including Sony's PlayStation, Microsoft's Xbox and Apple TV - and those companies thought Netflix hardware threatened their own business. So Wood received an unfinished device, patents, some 20-30 Netflix employees and cash in return for Netflix getting about 15% of Roku equity.
- To avoid conflicts of interest, Netflix later sold that Roku equity in 2009, recording a $1.7M gain on a $6M investment. "Obviously in hindsight, we missed a fortune," Hastings says; Roku is now worth nearly $45B.
- And its next move may be stealthily "eating the lunch" of content providers in the same way that Netflix did. Wood always envisioned Roku not as a hardware company but a services company. (In its last earnings report in May, Roku noted Platform Revenues that more than doubled to $466.5M, dwarfing still-growing Player revenues of $107.7M.)
- Roku takes a share of every media company's total streaming ad time and sells it - and it's building its own ad tech to better target commercials (marked by Roku acquiring Nielsen's advanced video advertising business to aid dynamic insertion).
- For now, media partners seem happy to do business with Roku, even as Roku becomes more assertive in carriage negotiations, including pushes for more ad inventory, higher app store fees, and better Roku Channel content. That strength may be tested as it squares off with Google (GOOG -0.7%, GOOGL -0.8%) over YouTube TV, with the overall YouTube deal coming due for renewal later this year.