Key Points
- Roku’s low-memory operating system gives it a cost advantage over competitors in a price-sensitive TV market, executives said this week.
- More TV manufacturers may adopt Roku OS as component costs rise, expanding platform partnerships.
- The company expects new licensing deals to increase smart TV volumes in the second half of the year.
An ongoing shortage of computer memory and related hardware could wind up being good for Roku’s operating system licensing business, executives told investors on Thursday.
In a note accompanying its first quarter (Q1) financial report, Roku said the global memory shortage triggered by enterprise users snatching up hardware to fuel their artificial intelligence platforms will entice more smart television manufacturers to license the company’s operating system for their devices.
Roku’s streaming operating system, called Roku OS, requires a relatively small amount of memory to operate, with its own low-cost Roku Express hardware using as little as 512 megabytes (MBs) of dynamic random-access memory, or DRAM, to operate. On the higher end, the company’s Roku Ultra hardware uses as much as 2 Gigabytes (GBs) of DRAM — substantially less than the amount of DRAM used in computers and servers running artificial intelligence applications — and its own line of Roku Select and Roku Pro smart TVs have memory allocations somewhere in-between the low end and high end DRAM use of its standalone streaming devices.
Other components, including microprocessors and solid state storage used in Roku streaming devices and smart TVs, are also being impacted by ongoing computer component shortages triggered by the artificial intelligence craze. But Roku’s streaming devices and smart TVs are less-susceptible to that issue, because its streaming hardware and smart TVs use cheaper, low-power chips and need relatively little storage for the downloading, installation and operation of popular streaming apps like Netflix, YouTube, Disney Plus and The Roku Channel, among others.
While Roku is keeping an eye on component costs, the fact that Roku’s operating system requires little hardware horsepower to operate means the company can keep the costs associated with manufacturing its streaming devices and smart TVs lower than others, executives told investors on Thursday.
“One of the ways we achieve lower bill of materials cost is just using less memory and also being more versatile in the types of memory we can use,” Roku CEO Anthony Wood said on a conference call Thursday. “In the TV business, every dollar matters. It’s a hugely price-competitive market.”
On that point, what’s good for Roku is also good for third-party smart TV manufacturers that license the operating systems of other platforms for their own devices. Wood said Roku expects more companies to approach the company about licensing Roku OS in the coming months as chip and memory shortages persist.
“As memory prices go up, the bill of materials advantage that we have versus our competitors gets bigger, the price difference expands,” Wood noted. “That attracts TV OEMs and retail partners, that’s good for our business. It helps us win more accounts and win more retail placements. Although there is issues around memory that we have to manage, it’s generally great for our business because it, because of our bill of materials cost advantage, which allows us to just have a lower cost than all our competing, all the competing product.”
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Those partnerships with third-party TV manufacturers remain an extremely important part of Roku’s business: TV sets made by partner companies like TCL, Hisense and Westinghouse account for the largest volume of customers using the Roku platform — moreso than the company’s own line of Roku smart TV sets.
Roku depends on those customers for other parts of its business: The company sells advertising against the home screen and menus of its Roku devices and through free streaming content on The Roku Channel, which is the second most-used app on the Roku platform. (YouTube is first.) Roku also sells subscriptions to third-party streaming apps within The Roku Channel, and its Roku Pay is used for subscription billing and management within some apps like Peacock and Philo, which earns the company various commissions.
Roku’s platform business is the biggest earner for the company, accounting for more than 90 percent of the $1.25 billion in total income earned during the first quarter (Q1) of this year. Device revenue clocked in at $118 million, down 16 percent, based on slower sales of Roku devices coupled with aggressive promotional pricing.
Hardware sales are more a secondary source of revenue than a primary one: Roku is focused on offering good streaming devices and smart TVs — through its own hardware and partner-built sets — at attractive price points to increase adoption of its streaming platform, where it earns recurring ad and subscription revenue throughout the year. Roku stopped disclosing precise customer activation and monthly user data last year, but the company says its streaming platform is used on its primary and third-party devices by more than 100 million households around the world.
Roku’s hardware sales income will likely experience more pressure throughout this year as the cost of memory and other components chips away at its device margin, executives warned investors. But with Roku’s operating system able to run on a lower amount of memory and low-power components, the company thinks it will see an upside in platform installations as the memory crisis continues.
“While we expect higher memory costs will weigh on Device margins in the second half of the year, the Roku TV OS requires significantly less (DRAM) and storage memory than competing platforms,” Roku executives said. “e believe this widening cost differential will drive more TV OEMs to partner with us.”
Roku said it is working to “expand and diversify” its licensing agreements with third-party smart TV makers, and expects to see “new partnerships to begin contributing to Roku TV model unit volume” during the second half of this year.
