Streaming TV is a better product than legacy TV. Streaming is cheaper, is on demand, and has better content quality and choice for the age cohort that matters- namely everyone under the age of 65. In the future, all cable TV hours being watched right now will go to zero. All of it. It will all be replaced by streaming services. The entire TV industry will be based in streaming.The whole thing.

All the world's TV content will gravitate to where it can be accessed with the least amount of friction. That access point will be Roku's connected-TV operating system. Why? Because Roku is already the brains behind most smart TVs and because it's where most consumers start watching TV today. Convergence and flywheel effects will ensure that Roku walks away with the dominant TV streaming operating system.

Both the customer and the people making money off of the customer benefit by TV moving to streaming. The customer benefits by having their TV bill drop from about $75 per month to around $34 while also getting multiple streaming services that are more customized to their tastes and have less fluff that they don't need. They can watch what they want, when they want, on whatever device they want.

The people making money off the customer (advertisers) love streaming too. To run a great TV ad, you need to figure out the best audience for the ad. With streaming, you have more ways to define these audiences compared to traditional TV. In the linear TV world you have to wait for monthly reporting numbers and then extrapolate what ad lead to what sale. This is a probabilistic method- essentially 'best guess matching' of data points in order to argue that a particular piece of media drove a user to buy something.

Much superior is using a deterministic method. Now that content lives in a digital context there is a direct means of measuring what content lead to a specific purchase decision. This is performance-based marketing; where your goal to elicit a direct action and you only want to serve the highest value ads to the most targeted audience. Brands are willing to spend on expensive cost-per-impression viewers when they can legitimize the ROI, and Roku can prove the ROI because they know who their customers are.

Advertisers want net new engagement. They don't want the same people on the same screen sending them the same advertisement. That's called message wear-out; where every day between a certain hour I see the same ads- it usually leaves a negative affinity and typically leads to negative brand engagement. This happens all the time in linear TV because the advertisers don't know enough about the users to ensure against message wear-out.

Roku has executed mercilessly on this strategy: get as many streaming devices into as many homes as cheaply as possible, and monetize them through advertising. That's what they've been up to for the last decade, and they've been damn good at it, now reaching 55 million active users. This has led to Roku becoming the No. 1 smart-TV operating system in the U.S., found in 38% of smart TVs sold last year.

Being in the most households means that all the major subscription services want to be on the platform, including Netflix, Prime Video, HBO Max, Hulu, Disney+, Peacock, Pluto TV, Tubi TV, and thousands of lesser-known channels. More entertainment options means more people watching, and more eyeballs attracts advertisers. Advertisers willing to spend means more channels consider it mission-critical to be on the Roku operating system, more channels means more viewers, and thus the flywheel turns into a perpetual motion machine.

One of the main criticisms of Roku is that there's nothing special about the operating system's technology. Another big company like Google, Apple, or Amazon can make their own streaming TV operating system and eat Roku's lunch.

But that ignores the idea of convergence which has shown an interesting pattern in past operating system battles:

In all of these instances, the market converged on one or two operating systems and that was it. Is there anything defensible about the technology behind internet search? No. What's defensible is that everyone is using it.

An operating system enables all the basic functions of a platform. Once it is established as a standard it is expensive to replace- not because it's hard to copy, but because so many other important services have been built on top of it with assumptions about how they're supposed to connect.

The value of the operating system isn't internal to the code, but simply the fact that other people rely on it to not change. Its literal value is that it can be relied on to not be replaced. Talk about a nice spot to be in.

Why Roku is Irresistible to Streaming Services

Streaming services are doing everything possible to get more people to sign up. Roku is an excellent lead generation tool for them because their cross-platform search is phenomenal.

You type in any actor or any show and your results are pulled from whatever streaming service has that piece of content. If you want to watch it then you can sign up for that service directly from Roku. There's also valuable advertising real estate inside the platform- there are large billboards on the side-half of the screen that premium streaming services pay for to try and drive people to pay for them. Disney+ will pay for that space to advertise whatever the latest big movie release is.

Only 30% of the population has shifted its full attention to streaming. That means there's still 70% more to go. And that's not even considering population growth and younger audiences moving to streaming. It's still early in the shift to connected TV.

International expansion is one of the biggest risks for Roku long-term.

Eventually Roku will need to expand past the US and into international markets. This is a big task with lots of execution risk. Roku will need to gain new users, build new relationships, and sell TVs in markets that they haven't penetrated yet. There could be a delay in them being able to monetize internationally. If that happens while growth in the US starts to level off or decline, there could be a big drop in overall growth and a large repricing of shares.

But, Roku has some things going for it when it comes to international expansion. While a streaming service like Netflix has to create all new content for new regions (because of language and content preferences) Roku is just an agnostic host of content services. Roku can partner with whatever popular regional content provider wants to be on the best TV operating system in the word.

Roku is down 26% in the last month, mostly because at their August 4th earnings call they reported that streaming hours were down. But this isn't something to be worried about. People are out and about after Covid, so it makes sense that the streaming industry as a whole is getting less love now than when everyone was locked up last year. Still, Roku is finding ways to grow its presence. While the industry shrank 2%, Roku still grew 18% over the last year.

Roku has the potential to be the next truly massive operating system. And that's why I'm long $ROKU.