Inside Roku's battle to control the future of TV advertising - and why it better watch out for Amazon
- Roku's future is in advertising, and it wants to own as much of the connected TV ad ecosystem as possible.
- That's leading Roku to throw its weight around with publishers and advertisers - borrowing tactics from the "walled garden" playbooks of Google and Facebook.
- The streaming TV company has a strong position. But Amazon is gaining steam with Fire TV and could build an equally powerful 'OTT' ad infrastructure.
Roku has made it very clear of late. The company best know for selling inexpensive hardware to help cord-cutters stream video on their TVs sees its future as an advertising company.
And to secure that future, Roku is playing hardball with partners and advertisers, say people who work directly with the company.
- Specifically, it wants to control as much of the advertising infrastructure on its devices (and smart TVs that employ its software) as possible, including the data used to target people with ads as well as the data derived from individual apps.
- Roku would also like to sell as much ad inventory on Roku apps as it can.
- And generally speaking, Roku would like ads and apps and tracking mechanisms to be built using Roku's proprietary technology. In other words, they want things to work their way.
Over the past few months, Roku has gotten more demanding with some partners, people familiar with the matter say. This aggressive elbow-throwing is rubbing some the wrong way, as it smacks of classic "walled garden" behavior, the kind of "it's our platform/our data/our rules" muscling that Facebook and Google are known for.
Roku is a crucial player in the very nascent 'OTT' ("over the top") ad space, but it's hardly got the clout Facebook or Google have in digital advertising. In fact, Amazon is coming on strong in this market, as sales of its Fire TV product surge.
Still, Roku is seen as having a huge early lead in OTT ads. And for now, that means it can throw its weight around.
"They are the biggest player in the space," said Jason Burke, VP of strategic development at Clypd, an ad tech firm that work with big TV networks. "So they can somewhat get away with having equal or higher walls than those other guys."
The stakes are huge. As Google has demonstrated, the company that controls how ads are delivered, tracked, targeted and sold can play a massive, if not dominant role in how a market evolves.
Whoever can do that in connected TV would seemingly have a massive opportunity.
Connected TV is seen as the holy grail of advertising
While linear TV viewing continues to slide, causing advertisers to pull back on traditional TV ad spending, 'OTT' is seen as holding huge potential for the ad business.
True, loads of people use Rokus and Apple TVs and Amazon Fires to stream non ad supported content from the likes of Netflix, Amazon and HBO. But ad-supported OTT is growing fast. as more people stream sports on apps for networks like ESPN or NBC or binge scripted shows on apps for networks like AMC or FX.
The video ad tech firm Innovid says that this past May was the first time it tracked more ads delivered on TVs than on desktops. Of all the video ad inventory Innovid sees, 27% of it is being delivered on smart TVs, up from roughly 10% 18 months ago.
The great promise of 'OTT' ads is that they theoretically combine the best of TV and digital media. That is, these ads appear on big TV screens in the living room, offering advertisers large canvas and sight, sound and motion to get their messages across.
And because they're delivered over the internet, OTT ads can theoretically use data and targeting to deliver individualized messages to consumers.
The industry is a long way from fully supporting that reality, but the growth is promising.
According to eMarketer, TV ad spending in the US is expected to slip by 0.5% to $69.87 billion this year.
Meanwhile, OTT spending is on the rise. Roku's US ad revenue is projected to jump by 93% this year to $293 million, per eMarketer. Again, relatively small, but growing fast.
It helps that Roku, thanks to its 20 million-plus users, has a commanding share of the ads delivered, according to the analytics firm Pixalate.
The Roku Advertising Framework
In many ways, Roku is a device company that is also an ad tech company. It has built a proprietary platform, the Roku Advertising Framework, designed to help publishers make money and advertisers to reach OTT viewers effectively.
As part of that framework, Roku sells ads for many of the publishers on its platform. In fact, in its most recent earnings report, Roku's 'platform' business accounted for 55% of its revenue.
In some cases, Roku insists on selling 30% of a publishers ad inventory for an app if they want to be distributed on Roku devices. There's even talk in the industry that Roku may look to charge smaller publishers for distribution. Roku declined to comment on that point.
Not every publisher agrees to this type of arrangement. Hulu, for example, doesn't let Roku sell any of its ad inventory. But many others, like Pluto TV, Tubi TV, and Crackle do.
Plus, Roku has its own channels that carry ads.
And in recent months, Roku has pushed for more concessions from its publishers, while also not keeping them in the loop on changes, say partners.
"They have a tendency to own as much as they can," said one app executive. "Partners do not like working with them. They do try to strong arm. And they are very important."
Maybe that's just good business, others argue.
"Roku has built the only good ecosystem in the connected TV space," said Tal Chalozin, CTO and cofounder at Innovid. "They've enabled monetization and have done an amazing job. So they deserve a lot of credit. And they charge a nice fee for it."
WinAbode
Roku bills itself as publisher friendly
Scott Rosenberg, Roku's SVP, Advertising, said that Roku has worked hard to build an ad ecosystem that works well for publishers. He pointed to the company's work with Nielsen and other third party researchers as evidence that Roku tries to deliver on its partners' needs.
"Contrary to a lot of platforms, we are very invested in making sure that our pubs are successful," he said. "That's a differentiator. A lot of other platforms don't offer marketing tools to help them grow their audience, for example."
To be sure, there are media companies that are very pleased with their Roku distribution.
"I think we're really progressive,"Rosenberg said.
Who's data is it anyway?
Consumer data - whether it's who people are, what they do on the web, their age, sex, location, shopping preferences - is the lifeblood of digital advertising. It's what makes Google (who knows what you search for) and Facebook (who knows what you like) so powerful.
So whichever company controls the data that is used to target and track what goes on in OTT should have huge clout.
Roku would like it to be Roku.
"They have to win this battle," said a top ad buyer. "If they can force the ad community to rely on their identifier, they can make money on every single ad on the platform."
Specifically, Roku wants publishers and advertisers using its anonymous device ID rather than other sources. And every time a person visits an app, a different device ID is generated. So marrying up data across apps is difficult, as is connecting the dots with what consumers do on other platforms.
For publishers, this means that Roku often knows more about how people consumer their content than they do.
For apps like Hulu, or NBC Sports, users likely og in to use these apps. So these companies are able to collect decent viewership data. But for many other publishers, they're relying on Roku's permission to extract data on viewing patterns or audience makeup. Some say you can pay to get access to more data.
That's led to tensions on some fronts.
"What this potentially does is it ties an arm behind the media seller's back," said one ad sales executive.
"There attitude is, 'if you don't like it you're off the platform,' said one media CEO. "A lot of people don't like them."
Besides battles over ad sales control, some larger media companies wonder whether Roku appreciates the role that media companies play in its success. "We're helping them sell a number of devices," said one media executive. Yet with these tech companies, "there's constant disregard for the value of IP."
Identity is the key to Roku's future
Advertisers want to be able to use all sorts of data, including their own customer files, to target people with ads. For instance, a bank might want to run certain ads at people that are already customers and different ads aimed at prospective customers.
These kinds of brands also want to evaluate ad campaigns across channels, so they know how many people they reach on TV, the web, and other channels, and how often they reach the people they are trying to target.
Ad buyers say Roku doesn't make that easy. "Looking holistically across ad campaigns is a huge challenge in this space," said one ad buyer. "They've never been willing to help."
And some contend that Roku may hide behind user privacy concerns in keeping some advertiser' data needs at bay.
"What we've seen lately is that Cambridge Analytica plus GDPR is giving big powerful places the license to be walled gardens," said Tracey Scheppach, CEO of Matter More Media, which specializes in targeted TV ads.
A walled garden stance may limit Roku's growth over time.
"I applaud Roku, they've put a lot of effort into building an ad platform," said Michael Bologna, President of one2one Media, which specializes in advanced TV advertising. "Siloed single approaches only last so long and go so far."
Roku for its part doesn't agree that its been difficult to work with when it comes to data or targeting. Rosenberg said the company has demonstrated a willingness's to integrate with outside research firms and ad tech purveyors to help brands reach the targets they want.
At the same time, Roku won't compromise on its customer relationships.
"This is about honoring a customer," Rosenberg said. "Our data never leaves our house. We're very, very protective of it. We dont want to sidestep user preferences. That's our guiding light, that the consumer is in control."
"One of the most basic challenges marketers face in an increasingly fragmented market [is reconciling data across devices]," he said. "It's a hard problem, and we don't have a short answer for it."
Amazon is coming
Roku's position may just be really good business. The company sees an asset it uniquely controls, and it's looking to make the most out of that advantage. Again, much like Google and Facebook do.
The difference here is that Facebook and Google's market shares are much more defensible. Roku's growth has been a terrific story. But Amazon's Fire TV product is stealing share fast.
And while ad buyers say that Amazon's TV ad business has been nascent, the company is working on its own OTT ad network, say people familiar with the matter.
As its demonstrated in the past, once Amazon gets serious about something (like say, digital advertising), watch out.
"The picture is changing so fast due to Amazon," said one digital publisher. "Roku is under huge pressure."
What's next for Roku?
Roku's ride as a public company has been up and down. The company's recent embrace of advertising seemed to please Wall Street. Yet continuing its growth won't be easy, as Amazon and other contenders like Samsung push for market share.
Meanwhile, when it comes to OTT advertising, the industry's two dominant players won't stand pat. Could Google or Facebook ever make a play to acquire Roku?
It's purely speculative in this case, but buying Roku might be an easy entry point into the nearly $70 billion TV ad market - a market both companies crave cracking.
"Roku has ad tech and ID, but it also has relationships with TV networks that Google, Facebook and Amazon don't have," said Clypd's Burke. "A buyer would inherit that."
The fact that Roku is public complicates matters. And in Google's case, it already does manufacture an OTT device in Chromecast.
Some don't see Roku having any interest in selling. Others see Facebook as a natural acquirer, given its interest in TV ads and the fact that it doesn't make any OTT hardware.
"They could overnight put Facebook Watch on every Roku TV," said Bologna.