Roku shares are rising as it tussles with big media — a top Roku executive lays out its strategy

Published Fri, Jul 17 20208:21 AM EDTUpdated Sat, Jul 18 202011:19 AM EDT

A View from the Top is a Q & A series exclusively available on CNBC Pro . Alex Sherman will regularly speak with a new business leader about decision-making, investing and industry news. Roku is having a moment. The aggregator of digital video is locked in a stalemate with two of the largest U.S. media companies, Comcas t's NBCUniversal and AT & T 's WarnerMedia, to carry their new streaming applications, Peacock and HBO Max, respectively. The disagreements between the programmers and Roku are complicated but important because they'll set up the infrastructure of how content companies and platforms will share revenue in the new world of media. Peacock and Roku are arguing over how much inventory is shared between the services, whether Roku should pay a wholesale fee for that inventory, whether or not Roku's advertising technology integrates with Peacock, and potential restrictions on how Roku sells ads so it doesn't compete with NBCUniversal's own ad sales department, according to people familiar with the matter. The battles aren't slowing down Roku shares. In fact, the stock is up 30% this month alone, bringing its gain for the year to 14%. Roku's Scott Rosenberg leads the company's media business, overseeing ad sales and distribution as senior vice president and general manager of its platform. He is one of the key executives driving Roku's strategy and negotiations with content companies. Below he tells CNBC: NBCUniversal has been asking for nearly all of Peacock's advertising inventory, a nonstarter for Roku, which wants at least some of it to sell on its own. NBCUniversal and WarnerMedia are stuck in a legacy television mindset, where declining subscribers leads to a zero-sum game in negotiations, instead of growing together with Roku. Covid-19 advertising declines will accelerate the unraveling of the cable bundle as TV ad dollars shift to streaming and the cable companies look to drop more channels. Here's the full Q & A: (This interview has been lightly edited for length and clarity.) Alex Sherman, CNBC: Roku is a relatively new business. I bet there are investors reading this who know Roku from the boxes you sell but you don't understand all of the different revenue streams you have. Do you mind walking people through the different ways Roku makes money? Scott Rosenberg, Roku's SVP / GM Platform Business: Sure. First off, we're a TV operating system company. We put that operating system in two places primarily: One is the branded set-top boxes or sticks that you mentioned. The other is built directly into televisions. About one-third of smart TVs in the U.S. shipped with the Roku operating system built in. That means you go down to a Best Buy or a Walmart, about a third of the time, you're walking away with a TV that has Roku built in. We have about a dozen brands -- TCL was our first partner, Sharp, Hisense -- there's a long list of partners that embed the operating system. That's in the U.S. We've also launched in other markets and TVs as well this year. The business side of that is very interesting. Basically, TVs are going the way of smartphones. Smartphone manufacturers used to make their own operating system and then eventually the business converged on two operating systems -- [Google] Android and [Apple] iOS. That's our view on what's going to happen to the TV business. That's really important to us from a user acquisition perspective because about half of the users that come into the Roku ecosystem do so now through smart TVs. So just when you think about Roku, the first part of our business model is to get the user into our ecosystem and streaming by a device powered by our operating system. The second part of the business model is engaging and monetizing that consumer. That's all the content we put on to the platform and all the ways that we partner with content providers to monetize consumers' attention. And the main ways we do that are subscription services, purchases and rentals of individual movies and TV shows, and advertising. Just to jump in for a second -- when you strike a deal with a TV manufacturer, is there any money exchanged in that partnership? Is there a revenue share going on if a person buys a TV with Roku in it? Generally the value exchange there with the TV manufacturer is we help them build a smart TV OS with the No. 1 streaming platform. Because of the way we built our technology, they can typically do this for cheaper than building a proprietary solution. So they get to go compete aggressively with Vizio, Samsung and LG. If you see what TCL and Hisense have done with their market share , you can see they've been very successful with this strategy. So the primary value exchange is TV manufacturers bring a more compelling and cost effective smart TV to the market to win business. The primary value to Roku is another user that we monetize through the services and the content. So there's no money exchanged in those deals? I don't want to get into the specific details of those deals, but I would say the value exchange is primarily the things I mentioned. They get a great OS for free or close to free, we go into together in marketing, and we're able to get accelerated user acquisition. It's a partnership model that works very well for OEMs and Roku. And the TV manufacturer keeps all of their revenue on a sale. That's their product. OK, and then to clarify how you make money on the content -- some applications have advertising, some are subscription only -- can you just walk through how you decide on appropriate value shares for media companies that have their content on Roku? Sure. It's fairly straight forward. If the service has a subscription or a transaction component, we will get a cut of that. So if the service is $10 a month, we will get a percentage of that. If it's an ad-supported service, we look to participate in the sale of ads in that application. In some cases, the apps are both ad-supported and subscription based. And you have some standards here, right? You take a standard 20% cut on content or subscription applications sold through the Roku Channel store and then you aim to take 30% of an app's ad inventory? Yes. Those are our public terms. Peacock and HBO Max battle In addition to that, are you factoring in the perceived popularity of an app at launch? In other words, if you know something like Disney+ is going to be a mega-hit with consumers, you may ask for less because of the obvious value it brings to Roku? Oh, of course. We are a consumer company first and foremost. We are in the business and winning because we start with the consumer. That means providing a great product with any kind of content a consumer may want to watch. Our strong bias is to distribute everything. Now, when that breaks down is when we have partners where we just can't agree on a reasonable value exchange. I expect that's where you're heading with this. Ha, yes. Yes. Our strong bias is to provide consumers everything they want to watch. Of course there are parties that come to the table with a very strong proposition and a lot of leverage. Maybe we have a bigger, broader relationship with them in terms of carrying a lot of their company's applications. Then there are apps that aren't as popular or maybe haven't previously had a relationship with Roku. Absolutely, that plays a role in the dynamics of whether a deal gets done. I do think, though, that Roku has demonstrated our goal is to carry a broad array of apps, recent disputes not withstanding. Basically, we carry everything. It's important for us to do that. So why hold out against Peacock and HBO Max? I won't comment on specific deals in detail, but our view is we want those services, and they can do exceptionally well as part of Roku's offering. We can play an essential role in their OTT success story. We've got a huge user base, the No. 1 user base, and in particular, an avid user base seeking free, ad-supported content. But it's important for us to strike a deal that creates mutual value. I think that's what sets these deals apart from legacy programmer-cable operator type deals that operate sort of like a zero-sum game, where one party wins and the other loses. I think you captured this in the story you wrote already . This is not a zero-sum game. All these services are at the starting point. So the best, winning recipe is a model, an economic relationship between the parties where we're both winning, we're both earning as we drive the success of these apps. That's what we seek and ultimately, in some cases, it takes us a little longer to get there with the parties. Some of these parties have unfortunately approached negotiations as a zero-sum game and have driven the economic value down for us to a point where it's not compelling for platforms. Just to clarify, when you say zero-sum game, why are you saying with Roku that this is not a zero-sum game when it is with pay-TV providers? In linear, viewership is pretty well capped. In fact, it's declining. So dollars into that ecosystem are fixed or declining. So a dollar that an operator, say, a Comcast, gives up to a programmer is a dollar that's lost by Comcast and gained by whomever it is. Discovery, whomever. Whereas in OTT, all of these services are in launch mode and in growth mode. So a close partnership with the platform that itself is growing very quickly and has the home screen and all these marketing tools to help them grow is an essential ingredient to be successful in these new OTT services. Content apps doesn't exist in a vacuum. They have to be carried by big platforms and have to be promoted heavily to users who have more choice than ever. Why are users going to choose to watch Peacock at a given moment over any other service? They have to be persuaded. There are a lot of services competing. Our feeling is a close partnership between the content provider and the platform is essential for success. Just to get pointed, it's unfortunate that Comcast has not been willing to entertain reasonable, fairly standard industry terms and not launch on Roku at a time when streaming is surging -- especially ad-supported streaming. I think one of the reasons Peacock has resisted from striking a deal is they want more control over the ad inventory. NBCUniversal executives have publicly said they expect to make $6 to $7 in average revenue per user for Peacock. Much of that comes from advertising revenue. They came into discussions with platforms assuming they'd have control over their own ad inventory. I think some at NBCUniversal may see Roku's ask for taking away some of that ad inventory as too large. In other words, Roku wants too much. Why, in your opinion, is that an unreasonable or shortsighted viewpoint? I don't think that position, broadly stated like that, is unreasonable. I think a service like that should actually seek those things. It's a question of what it actually puts on the table is material or interesting. I think there's a difference between deriving a majority or a large portion of the economics and deriving all of it for yourself. I don't want to get into the specific deal terms, some of which you alluded to in your last article, but it isn't a binary thing in our view. It's just a question of whether the value included in the deal is acceptable. And just for clarification purposes, the Roku argument here is, yes, you have to give up a little bit of your ad inventory, but you need us because we provide you with distribution to millions of people, and the sum total of the value of our distribution is worth it for you to give up some ad inventory. 100%. Well said, and much more efficiently said than I said it. Do you want 100% of a small pie or 85% of a much, much larger pie? I just think it's shortsighted for any service to approach platforms with a zero-sum mentality. They need to be in growth and acquisition mode. Conversely, for the services that have made it into platforms, like Disney, I think the upside is huge and obvious. Disney leaned in very heavily everywhere, on all platforms. The results for them speak for themselves. It's an approach, an orientation -- ultimately, I do think we'll find a path with Peacock and HBO Max, but there has to be strong incentives on both sides. I guess the ultimate question from the Roku perspective is -- you said it yourself -- 'we carry everything.' So, if that's the brand image, 'we carry everything,' is it really harmful for Roku that, at least as of today, you don't have two of the most significant streaming services out there? Can you live without these two apps, because you have competitors too? Yeah. I mean, we're prepared to do that. Ultimately we believe our proposal is reasonable and mutually beneficial. A model where the content provider takes most or all of the economics is simply not persuasive and not a successful recipe. And just to circle back to HBO Max, that's a service that doesn't have advertising today. I know they've said one day they will have it. From a high-level perspective, why hold out against a service that doesn't have advertising? Does it have to do with the amount of revenue Roku takes as its cut? Obviously the issue there are different from Peacock. Again, not getting into specific details here, but it could be about the core economics of how subscription revenues are shared, and also how you get paid -- not just the percent but when and under what circumstances. Also, the HBO branding and consumer strategy is a complicated one. They're trying to effect a fairly complicated transition of users out of a channels or a buy-through model [bundling with cable] into a direct-to-consumer model while keeping both. That sets up a lot of complication for the consumer to figure out, when they're subscribing over here and authenticating somewhere else. I'm in the business, and I had to look at it a couple times to get it right. I appreciate the challenge they're up against to pull that off, but I think we, as a platform, are in a position to help them do it. That is why we're here. It is our goal to carry these services. That's our most important job, after serving the consumer -- helping these services launch and be successful. When we do that, we just reinforce the virtuous cycle of people moving to streaming. The more apps available to stream, the more customers will cut the cord. In other words, part of what's bogging down the HBO negotiations is potentially unique to HBO, given what they're doing with HBO Max. I think that's right, although I will say that Peacock has elements of that as well. Peacock already has subscribers through Comcast. It's a three-tiered model where if you subscribe through Comcast you can authenticate against your cable subscription and get Peacock Premium [with ads] for free. It's got some of the same elements, trying to keep your foot in the old model while building a new model. How many consumers are going to accidentally sign up for Peacock and then realize they could have just authenticated with their Xfinity credentials? It's a complicated consumer proposition. It does complicate the commercial terms as well, because it means different types of users are going to come into these apps with different privileges. Does that then become a technology question? Is Comcast looking for Roku to alert customers if they're trying to sign up for Peacock but already have access to it for free? Yeah, there are always technology issues around how the app gets built and how authentication works. But I don't think those are the foremost issues here. Those issues are solvable and have been solved by the right relationships between the parties. Streaming future Let's talk about the streaming world more broadly. There are still about 70-80 million U.S. pay-TV households out there. Give me your best guess about the transition away from cable and toward streaming. Is it going to be a relatively slow march away from cable where it's 10% every year and 70 million becomes 63 million becomes 57 million or whatever, or do you feel like the damn will break at some point, and there's just a mass exodus one year where everyone jumps ship. Yeah, tipping points are always easiest to observe after the fact. I think we are already past the tipping point. I think if you look at the exodus out of pay-TV services. In the early years of the Roku business, people said, this isn't material. I don't think anyone argues that anymore. I think the exodus is very significant. I think interestingly on the advertising business, the dollars haven't exited the traditional model as fast as the consumers have. Not yet. But as that happens, and I think Covid-19 accelerates that, I think the traditional model gets even more challenged. The math doesn't work. MVPDs [multichannel video programming distributors] can't charge you for channels you don't watch that are simply not making enough money in advertising. I do think there's possibly an accelerative factor for even more people to leave the cable bundle as the ad-related impacts kick in and as money leaves linear television for OTT. So, in the pandemic, the overarching storyline regarding advertising is how all these companies have tightened their belts. Media companies across the U.S. have seen dramatically lower revenue from advertising. But Covid has been a positive for the streaming world because everyone has been at home, and streaming viewership is way up. Are you guys seeing that the overall dynamic of the pandemic has actually been positive for Roku compared to pre-pandemic? The ad business overall is very challenged this year. That's a universal phenomena. We said in our last earnings call that we think the disruption will accrue to streaming. For many years now the spending by advertisers in OTT has lagged consumer viewing. Over 30% of viewership is now happening in streaming. During Covid, for adults 18-34, Nielsen had a stat that said half of that demographic is watching on streaming now. But the money kept flowing to linear because it's a well-oiled spending pattern that both buyside and sellside recognize. In comes Covid, and the TV upfronts process is in disarray. It's been delayed, it might kick into the next calendar year. So all of the legacy spending patterns are paused and being disrupted. That, combined with significant movement in consumer viewership to streaming, means that even when TV spending comes back, it's not going to come back fully. Those monies will go to streaming and to other media. There are other historical analogs here. For example, around print, print was losing audience throughout the 2000s, but it took the 2008 recession for all spending to decline. When it came back, print never bounced back. I don't think we'll see quite as dire of an effect with traditional pay TV, but I do think Covid will have the effect of permanently changing the percent of budgets that go to TV vs. new platforms like streaming where users have already moved to. That just reinforces the cycle of the traditional pay-TV model being challenged. Programmers aren't making enough from advertising because budgets are down, the MVPDs are losing users so they're reticent to pay more for programming, so now they're paying less, and programmers leave the bundle, leave linear, consumers leave the bundle as content choice declines -- it will all accelerate the exodus. Roku has frequently been bandied about as an acquisition target. But Roku's strategy is sort of a Switzerland/neutral strategy, where the idea is to be open to everyone, as you've said. Does that eliminate Roku as an acquisition target for a content company? I won't comment on acquisition stuff, but I think our Switzerland strategy has served us well because it means we can partner more deeply with them. We're not competing with anyone on a music service or a movie service. That's allowed us to carry a fuller array of content and have a more vibrant partnership with companies. Long term, who do you see as your biggest competition? We compete in a lot of different areas. We compete in the TV space against other manufacturers that make their own operating systems. We compete in the ad market for TV dollars, which is primarily competing with the legacy spending pattern -- in other words, how can we convince TV buyers to spend more money in streaming. And then we compete with Amazon, Google and Apple for streaming players -- standalone sticks and boxes. It's a complicated business. We have a lot of competitors. Are you worried about devices like Comcast Flex , where distributors issue their own devices for free and Roku becomes unnecessary over time? Well, it turns out it's quite hard to compete for consumers with a streaming devices. There have been a lot of companies who have tried over the years and come and gone. We take all of the competitive plays seriously, but we think building a cost effective high performing operating system with a wide array of content is really hard. It's not done easily. Last question -- if you're an investor, and you're trying to figure out how can I take advantage of the shift to streaming, what advice would you give? In other words, when you look at the future, what's the most game-changing aspect of the cross-section of media and technology? I'm biased. I think it's Roku. I think we're a unique proposition and have a long track record of executing and beating very big players and delivering great service to consumers. Disclosure: Comcast owns NBCUniversal, parent company of CNBC.

Roku SVP Scott Rosenberg

Source: Roku

A View from the Top is a Q&A series exclusively available on CNBC Pro. Alex Sherman will regularly speak with a new business leader about decision-making, investing and industry news.

Roku is having a moment. The aggregator of digital video is locked in a stalemate with two of the largest U.S. media companies, Comcast's NBCUniversal and AT&T's WarnerMedia, to carry their new streaming applications, Peacock and HBO Max, respectively.

The disagreements between the programmers and Roku are complicated but important because they'll set up the infrastructure of how content companies and platforms will share revenue in the new world of media. Peacock and Roku are arguing over how much inventory is shared between the services, whether Roku should pay a wholesale fee for that inventory, whether or not Roku's advertising technology integrates with Peacock, and potential restrictions on how Roku sells ads so it doesn't compete with NBCUniversal's own ad sales department, according to people familiar with the matter.

The battles aren't slowing down Roku shares. In fact, the stock is up 30% this month alone, bringing its gain for the year to 14%.

Roku's Scott Rosenberg leads the company's media business, overseeing ad sales and distribution as senior vice president and general manager of its platform. He is one of the key executives driving Roku's strategy and negotiations with content companies.

Below he tells CNBC:

NBCUniversal has been asking for nearly all of Peacock's advertising inventory, a nonstarter for Roku, which wants at least some of it to sell on its own.
NBCUniversal and WarnerMedia are stuck in a legacy television mindset, where declining subscribers leads to a zero-sum game in negotiations, instead of growing together with Roku.
Covid-19 advertising declines will accelerate the unraveling of the cable bundle as TV ad dollars shift to streaming and the cable companies look to drop more channels.

Here's the full Q&A: