Roku’s Strategic Mistake By Going to Make TVs over being Streaming Operating System for TVs

As an MBA student, which one is a better business model?

A: Hire 10 great movie producers to produce 200 short videos for your digital platform over two years (Quibi like). (Quibi was a media company that developed media content designed for smartphones)

B: Allow tens of thousands of amateur creators, and use an AI to select the best videos daily, and distribute them massively in your platform (Tiktok like).

When Quibi launched, I wrote that it was a bad idea; yes, even though eBay and HP former CEO (Meg Whitman) was in charge, along with legendary producer, Jeffrey Katzenberg: “In 2000, Option A would have been a good business because the computing resources to run AI and crunch the numbers were not (commonly) available for Option B. But with cloud computing and the age of AI here, Option B wins. The probability of getting a hit video compounds in Option B while A is limited by the insights of just 10 people; virality is key for short movies. That is why Tiktok will remain a better business than Quibi”. Quibi had since collapsed.

This takes me to Roku which makes streaming software for TVs. The company now wants to make TVs. To understand this business, consider Taiwan’s TSMC which fabricates microchips for hundreds of companies around the world. Those companies merely design while TSMC fabricates. With that strong customer base, the probability of winning and having orders is close to “1” since all those design companies like Nvidia, ADI, TI, etc will end up coming to it, irrespective of who has the best circuit. Contrast  with old Intel which had a closed foundry (not sharing with any other firm); if Intel is off by design, its foundry will not have orders. In other words, if a product is not selling well, Intel will not have orders to use its expensive foundries. (Intel has recently opened its foundries for competitors to use, becoming like TSMC in the contract manufacturing business)

A third of all new televisions sold in the U.S. run Roku’s streaming software. Now the company is jumping directly into the small-screen space by launching its own line of Roku-branded TVs. Roku will offer 11 models, ranging from a 24-inch TV ($119) to a 75-inch screen ($999). The move into TV hardware “has been rumored for some time,” The Verge notes; rival Amazon began selling Fire-branded sets in 2021. Roku will need to move carefully to avoid alienating existing makers of Roku-loaded TVs, which could shift to the Google TV platform.

Roku software runs on 30% of new TVs sold in the U.S. Largely, it was emerging as a convergence for most TV makers. But as it moves to make its own TV, this will happen: most TV brands will move to other software brands, especially Google TV. When that happens, Roku has to win the TV hardware market (extremely tough) for its software to be relevant.

I do think Roku made a mistake on this playbook; you win on bytes, not atoms these days. Selling TVs seems off when you see the emerging convergence around software operating systems. As Android is to multi-vendor smartphones, Roku was poised to become the same in the TV world. But now, it has dropped its future; bad call there.

Yet,  I understand the pressure when your unit share has traded at $440 in the last 24 months, and now hovers around $40, anything becomes an effort.

Comment on Feed

Comment #1: me say if you are serious about software then you should make hardware. Wonder how this applies to them

Response: Possibly, the person was referring to Apple. The irony is that Apple was a hardware company which means it owned and had the customers before becoming an operating system in the Apple Store.  There is no record of any software company that transmuted from software to hardware and did well in the two-play consumer market. Why? Any successful consumer software company has been on some hardware. Any attempt to take over those hardware firms will damage the software. Even Google has been unable to move from being a software firm (Android) to make a great phone in Pixel.

Comment #1A: Ndubuisi Ekekwe I agree with that thesis sir.

If you start as a software company trying to win the hardware market too, it is harder. (e.g Android, Roku)

• You’re producing for other hardware companies as your source of revenue.
• You’re optimizing to be accepted by many brands
• Trying to add hardware play serves as a threat to your initial primary customers
• The consumers of your new hardware + software aren’t exactly getting any strong unique treatment because your software is available on other hardware brands (e.g. pixel, new Roku TV)

When you start as a hardware company on the other hand, there’s a clause to being able to replicate Apple’s success.

• Started as a hardware company with a strong moat (Macintosh, Ipod, Iphone)
• They had other hardware (phone) competitors in the market
• By choosing to build their own software, instead of adopting from a provider; they created a unique experience for their users and hence extra moat for their own phone
• The Clause (Their software is not open for for other hardware companies to integrate)

Tesla is the next to win the hardware -software play by continuing their leadership in the hardware (car) business whilst building their own car software.

Comment #2: As a newbie in Canada, I was having a tough time with my creditworthiness report, though minute, it was worrisome to me because I couldn’t fathom where the leakage was coming from especially as I can pay off my credit card uses and other debt obligations before due dates and other debt. This was not until I discovered a certain bank account I opened that I later disused and even delete the app. This bank kept on posting debits to the account in form of monthly service charges. Roku Tv may be a profit-eroding segment here.

Even though diversification helps to evolve and meet the demands of the times, I still think this idea is not a very ideal one especially in this era where competitiveness is extremely high in the marketplace.

If you find a niche, and you are able to grow it to a category king, build and sustain it (thanks to the Tekedia Institute’s mMBA). This will be tough with Sony, LG, Panasonic, and Hisense, just to mention a few. And if Roku TV has its parent company software segment as its main OPS, it may create a sense of choice limitations in consumers.

My Response: “If you find a niche, and you are able to grow it to a category king, build and sustain it (thanks to the Tekedia Institute’s mMBA).” – great perspective Alexander Oloriegbe (MBA student – Healthcare), Bsc. I am very happy that Tekedia Mini-MBA is expanding our business lexicons. We like having you here.

Comment #3: In every ecosystem, the OS is no doubt revered because she is the land. But it is the builders with the most popular housing estates that control the community. for without the builders, she would be a barren wasteland.

This scenario can be likened to the much hyped metaverse. No matter who first succeeds with the metaverse OS, it will be controlled by those who build the hardware gateway to it.

I hope Roku learns from the travails of Google with the Pixel and makes a U-turn to save what’s left of their business. Great Analogy, Professor.

Comment 4: Amazon, a competitor is already doing the same, is almost inevitable for Roku. Otherwise they might become another Nokia.

My Response: Amazon may not be a good example since Amazon has Prime which requires at least $120 per year membership. Amazon does not make money on the Fire business (it wrote down $billions) but it makes up on those membership fees.  It makes $25 billion from those memberships yearly and uses that money to subsidize everything, from TV to sports games! Roku does not have membership and will need to make money on its TV, and that complicates its business model.

Comment 5: It’s actually important to understand the workings of dependencies in the business world and build your model around it. I would rather remain in business, grow my numbers while servicing others and have them depend on me than going into their space, becoming a competitor, losing the market and dropping GMV. Know your place and appreciate it else you get pushed out of business.

Comment 6: Ndubuisi Ekekwe not only that, they’ll be taking on (or trying to take on) heavy CAPEX investment that either they cannot afford in the long term, cannot access, or are not structurally geared up to manage and mitigate risks. It’s like Tesla and making cars. Now VW has the ID range out in the market at a better price point, I feel it’s only a matter of time before Tesla may need to pivot into making EV platforms and leave the car makers (who have economies of scale and the distribution network) to make the overall car.

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