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• A summary of the key issues and your thoughts about important aspects of an analysis or recommendation.
• A contextually grounded inquiry into aspects of the case that you would like to know more about. For example, your reflection could articulate questions you have about the technologies involved, the organizational response to the problem, or the industry context in which the case is set.

ROKU, THE NETFLIX SUBSIDIARY THAT CAME T0 DOMINATE STREAMING Roku manufactured streaming devices and offered consumers a centralized platform to view Internet-based video content. The company was created in 2008 as a spinoff of the video streaming box division within Netix Inc. (Netflix). Reed Hastings. founder and CEO of Netix. wanted the service to be available on other streaming devices. Netflix having its own hardware division would jeopardize this goal. Roku eventually went public nine years later. in September of 2017. after an unsuccessful attempt in 2014 and takeover attempts from Intel C'o1poration (in 2012) and Amazon (in 2013').6 Roku's goal was \"to be the streaming platform that connects and benets the entire TV ecosystem around the world.\"7 To achieve this goal. Roku applied a threefold strategy: scale. engagement. and inonetization.'3 Business Model In 2021, Roku generated $2.8 billion in revenue from its two major business lines: the physical player and the digital online platform. The player earned revenue from Roku's hardware division which generated $480 million with a negative gross margin of 10.9 per cent. The platform earned revenue from three major verticals: revenue sharing. advertising and operating system (OS) licensing. The division generated $2.3 billion in 2021 with a 63.9 per cent gross margin (see Exhibit 2).9 Page 2 W33320 Roku's revenue-sharing agreements entitled the company to a portion of the subscription revenues generated from users who registered for streaming services through the platform, as well as pay-per-view purchases and rentals. Advertising revenues were generated from various sources, including advertisements viewed on Roku's home page, advertising-supported video-on-demand (AVOD) service on The Roku Channel, featured placement on the Roku remote control device, and the use of Roku's proprietary advertising infrastructure. OS licensing revenues were earned from licensing fees generated from smart TVs that used Roku's OS, minus a portion of advertising revenue from advertisements viewed on those particular smart TVs. 10 Product Line Roku offered seven streaming devices, ranging in price from $29.99 to $179.99." Roku's Streaming Stick 4K was considered one of the industry's top devices due to its reasonable price level, long-range receiver. easy-to-use interface, and breath of streaming services available within the Roku OS." In addition, Roku offered smart TVs manufactured by partner electronics companies such as TCL Technology, Hisense Group, Koninklijke Philips N.V., Sanyo Electric Co. Ltd., Element Electronics, JVCKenwood Corporation, RCA Corporation, Magnavox, Westinghouse Electric Corporation, and InFocus Corporation, and Walmart Inc.'s private label Onn."The company's early partnership with smart TV manufacturers allowed Roku to benefit from the name recognition of large television manufacturers, while increasing the reach of its OS. 14 In the United States, Roku had over 61 million users. The Roku Channel Launched in September 2017, The Roku Channel provided free advertising-supported access to television shows, movies, news programs, sports events, and live television programs over the Roku OS, Android OS owned by Google LLC (Google), Amazon's Fire TV, and Apple Inc.'s iOS. The channel consisted mainly of licensed content from other media companies, as well as in-house productions. Roku entered the content production industry in 2020 with the acquisition of the Quibi streaming platform and later This Old House Ventures LLC. With licensed content, Roku followed Netflix's original strategy of gaining the rights to back-end library content that was not considered important enough for media companies to include in their own streaming services. Roku also partnered with free advertising-supported television (FAST) competitors such as Pluto TV and XUMO to feature channels powered by the services on The Roku Channel platform. Overall, The Roku Channel was among the top five services on the Roku platform, reaching an estimated 80 million households by the fourth quarter of 2021.21 Quibi Quibi was a mobile-based streaming service launched in April 2020 that featured a catalogue of short (up to 10 minutes) original videos designed for on-the-go viewing. The service was shut down in October 2020, after only six months in operation, due to low viewership caused by various factors, including the outbreak of the COVID-19 pandemic earlier that year." Roku acquired Quibi in January 2021" for less than $100 million to jump-start its entry into original content production." Quibi was unsuccessful as a standalone service, but its programming (rebranded as Roku Originals) became one of the 10 most-watched programs on The Roku Channel from May 20 to June 23, 2021.25Page 3 W33320 This Old House Ventures LLC This Old House Ventures LLC was a home improvement media company with over 1,500 episodes of "This Old House" and "Ask This Old House" that Roku acquired for $98 million in May 2021.2 Despite Roku's ownership of the content, Old House programming also continued to stream on other FAST platforms. Advertising Capabilities Roku operated the self-serve advertising-buying platform One View, which combined audience identities and advertising inventory within The Roku Channel and other streaming services to develop targeted advertising insights. Roku also invested in the further development of its advertising capabilities. In 2019, the company purchased DataXu, a firm that specialized in linking individual customer data across all the devices they used for streaming. In 2021, Roku purchased Nielsen's video automatic content recognition and dynamic advertising insertion technology." Roku also entered into partnerships with the Funny Or Die Branded Entertainment division to produce innovative, interactive, and creative advertising and experiences via the Roku Brand Studios and Shopify, to help direct-to-consumer and small-medium businesses enter into streaming advertising. Advertising on The Roku Channel accounted for over half of Roku's total advertising revenue." After 2018, revenue from Roku's platform increased exponentially (see Exhibit 3).34 Competition within Streaming Devices Roku's streaming device, like its competitors, consisted mainly of an electronic tool that converted ordinary television sets into smart TVs. The conversion provided the user with access to a range of digital applications and channels for viewing Internet-based content on a television set. Fire TV and Fire OS Released in 2014, Amazon's line of Fire TVs evolved to include five devices. In addition, television sets using Amazon's Fire OS reached over 50 million users." Within the Fire OS, Amazon products were featured, including Prime Video and Amazon Music. Amazon's virtual assistant technology Alexa was also used in Fire OS to provide a voice-based remote control device." Prices for Amazon's Fire devices ranged from $29.99 for the most basic service to $119.99 for Amazon's hands-free streaming Fire TV Cube.37 Amazon's smart TVs were manufactured both in-house and by manufacturing partners such as Pioneer Corporation, Toshiba Systems, Inc., and Insignia Corporation."In January 2022, Amazon further expanded the reach of its streaming devices through partnerships with automakers Ford Motor Company, Bayerische Motoren Werke AG (commonly known as BMW), and Stellantis N. V. for the creation of in-car streaming devices.$9 Apple TV In 2007, Apple Inc. entered the streaming device industry with a clear value proposition: storing television shows and movies, as well as sharing media pulled from the user's Mac computer onto the television set.40Page 4 W33320 Since then, the company invested little funding to improve the Apple TV hardware or OS, but remained in the high-end segment of the market. Apple TV devices, which ranged in price from $149 to $179,4 primarily appealed to Apple brand enthusiasts. Users could buy movies, television shows, or subscriptions to the Apple TV+ streaming service, which provided a limited library of exclusive content. Vizio Inc. Founded in 2002, Vizio Inc. was a US-based smart TV and sound bar manufacturer. Vizio Inc. produced its own SmartCast OS that included the exclusive WatchFree+ FAST service, which was similar to The Roku Channel, offering over 250 free channels and 5,000 titles on demand." With only 16 million active users, Vizio Inc. was a minor player within the streaming device segment, with little negotiating power against major media partners." The company's smart TVs retailed from $129 for a 24-inch (60-centimetre) D-Series HD Smart TV to $2,000 for an 85-inch (200-centimetre) P-Series smart TV.* In 2021, Vizio Inc. generated $2.1 billion in revenue. Of that total amount, $1.8 billion came from devices and $308.7 million came from the company's Platform+ division, which consisted of the SmartCast OS and the Inscape data intelligence service.46 Other Competitors Google retailed a line of streaming devices under its Chromecast brand, priced between $29.99 and $49.99. The devices, which used the ChromeOS, were also available with smart TVs made by Sony Group Corporation and TCL Technology. Samsung Electronics Co. Lid. (Samsung) manufactured a wide range of smart TVs that used the company's Tizen OS. Users could connect to the company's SmartThings technology to control various smart devices and appliances throughout the home.* Samsung was one of the first device manufacturers to launch its own FAST TV Plus platform, which was home to over 200 channels in the United States."Samsung smart TVs ranged in price from $599.99 to $8,000.$1 THE STREAMING INDUSTRY The US streaming service industry was expected to generate $51.5 billion in revenue in 2022, which reflected an average annual growth of 18 per cent since 2017. Industry revenues were projected to grow at a compound annual rate of 12.2 per cent through 2027. The industry was divided into two main categories: linear streaming (61 per cent) and non-linear streaming (39 per cent).> Linear streaming operated similar to conventional live television, providing viewers with access to pre-set programming on a variety of different channels. Non-linear streaming offered users on-demand programming. Within these major streaming services, companies used both AVOD and subscription-based video on demand. Major Industry Competitors YouTube YouTube was a platform owned by Alphabet Inc. (the parent company of Google) that connected content creators of all types with viewers (or consumers) through free video content. The service generated revenuePage 5 W33320 from video advertising that could play before, during, and after the free video content. A portion of the advertising revenue was paid to the content creator. On average, YouTube had over 160 million users per month. In 2021, YouTube generated an estimated $28.8 billion in global revenue." YouTube also offered a premium service, simply called YouTube Premium, which was an advertising-free option with offline access to YouTube and YouTube Music for $11.99."Its linear streaming service, called YouTube TV, was priced at $64.99. Similar to traditional cable television service, YouTube TV offered 85 channels and a cloud-based digital video recorder." Netflix Founded in 1997, Netflix was the pioneer of the video streaming industry. The company offered a paid subscription model, which provided users with access to a library of both original and purchased content," priced at $10 per month."In 2021, Netflix generated $12.9 billion in revenue.In 2022, Netflix's estimated US subscriber base was 169.3 million users." In the first quarter of 2022, Netflix began facing challenges, registering the company's first-ever net subscriber loss of 200,000 global users. Analysts estimated that losses would continue to reach over one million users by the end of 2022. Netflix cited reasons such as the suspension of services in Russia, password sharing, and the platform's content release schedule for its losses, while industry experts pointed to increased competition, inflation, and high customer penetration.- Disney+ and Hulu The streaming service Disney+ was launched by The Walt Disney Company (Disney) in 2019. It primarily featured keystone Disney brands such as Marvel, Star Wars, Pixar, and National Geographic. The service also offered users next-day access to a variety of Disney-owned cable channels including ABC, NBC, FX, Freeform, and Fox, all for $8 per month. As of July 2022, Disney+ had 44.2 million subscribers in the United States and in Canada. 4 The streaming service Hulu was founded in 2007 as a joint venture between News Corporation and NBCUniversal Media LLC (owned by Comcast Corporation). The venture was later joined by Providence Equity Partners L.L.C. and Disney, which purchased a majority 67 per cent stake in 2019. In addition to its non-linear service, Hulu offered the linear service Hulu + Live." A standard subscription of the Hulu streaming service was priced at $14 per month with advertising when bundled with the services Disney+ and ESPN+, or $20 per month for a bundle without advertising. As of July 2022, Hulu had 46.2 million global paid subscribers, of which with four million users were subscribed to Hulu + Live. In 2021, Disney generated $16.3 billion in global revenue from Disney+, Hulu, and (to a lesser extent) ESPN+. The company's management estimated that Disney+ would not break even until 2024.69 Other Streaming Platforms Amazon Prime Video offered subscribers access to Amazon exclusive content, as well as content from other providers, as a part of its $9 monthly subscription to the Amazon Prime delivery service. Amazon also offered a video rental store through its Prime Video platform. "The goal of this streaming service was to increase subscription to the Amazon Prime service.71Page 6 W33320 HBO Max was a digital version of the Home Box Office (I-IBO} premium cable content. which was owned by IWarner Bros. Discovery Inc. The service included content from DC Comics Inc. and Studio Ghibli Inc.. which were also owned by \"Warner Bros. Discovery Inc. As of August 2022. the company's extensive library attracted 92.1 million subscribers.?2 The service was priced at $10 per month for advertising- supported content and $15 per month without advertising.B \\Varner Bros. Discovery Inc. was formed in 2022 with the merger of Warner Media (formerly a subsidiary of AT&T Inc.} and Discovery Inc.. which was expected to lead to a combined HBO Max and Discove1y-t.T4 The streaming service Discovery+ was home to a wide range of interest and hobby-based unscripted content. reaching 22 million viewers worldwide by the end of 2021.\" NBC Universal Media LLC 's Peacock streaming service (named for the company's peacock logo} featured a breath of content from the television networks N-iC. * i. Bravo. and Oxygen. Owned by the US cable company Comcast Corporation. Peacock's basic service was free but access to Peacock Oliginals was restricted. For $5 per month. users could access the premium service option. which included advertising and was offered for free to customers of Comcast C orporation's cable television service. A version of the service without advertising was priced at $ 10 a month. T6As of February 2022. Peacock had 13 million paid subscribers and 28 million monthly active users.\" Specialty Streaming Services Specialty streaming services were also known as long-tail or niche services. They consisted of streaming services that were focused on a single audience or content category. Popular examples included Shudder. Sundance Now. Alx-IC+. and BritBox. From 2019 (second quarter) to 2021. the compound annual growth rate in this segment was 7'4 per cent. far outpacing the average rate of established players of only 38 per cent. The rising popularity was attributable to the curated. interest-based offering of these specialty streaming services. which provided a more refilled and loyal target market and resulted in lower churn rates;8 AVO D AVOD services provided streaming content interspliced with advertisements in both subscription-based and free formats. This segment's main competitors included The Roku Channel. Tubi (acquired by Fox Corporation). and Pluto TV (acquired by Viacom Inc)?9 Unlike subscription-based services. which often focused on high-profile content to draw customers. AVOD used a volume strategy to provide a wide range of "everyday" content to users that tended to be older and in lower income levels.80 AVOD was projected to grow from 140.1 million US users in 2022 to 151.5 million US users in 2026-.31 This growth was expected to be supported by the transition of conventional streaming services toward advertising-supported subscription tiers. The goal was to combat price wars and the increasing rate of subscriber chum.81 In March 2022. Disney+ announced the launch of its AVOD tier. followed in April by a similar announcement by Netflix.\" Content Spending In 2021. global content spending. which included investments in both broadcast and streaming television. reached $220 billion. which was 14 per cent higher than in 2020. C omcast Corporation (with 22.7 billion) and Disney (with 18.6 billion) were the largest spenders. Sports rights comprised approximately one-third Page 7 W33320 of those investments. Netflix came third. generating 6 per cent of global content spending and 30 per cent of content investments directed toward streaming services (see Exhibit 4}.84 According to a study by Ampere Analysis. AVOID services that invested the most in original content registered the highest growth rate in terms of users. Between the third quarter of 2020 and 2021. when Tubi first introduced 20 original programs. its monthly user rate grew by 164 per cent. Although original content investment was correlated with annual growth. most AVOD services lacked the scale and resources to make the level of large-scale investment that subscription-based companies could afford.85 In 2022. Roku was expected to spend approximately $1 billion on both licensed and original content};6 Challenges in Content Production As a reaction to increasing competition. many industry players opted for content exclusivity. This option provided a differentiated advantage. but it also shrank the availability of licensable content. sparking increased investment in original content production. In addition. high levels of content exclusivity resulted in increased customer dissatisfaction and churn. Streaming services were experiencing an average churn rate of 37' per' centup to 46 per' cent for Gen Z users. Increased industry competition also created price pressures that drove down subscription fees.\" Unlike the music streaming industry. which managed to render obsolete former pirating services (e.g.. Napster}. increased fragmentation within the video streaming segment was creating a resurgence of video piracy.gs In the first few months of 2021. users visited piracy sites 132 billion times. for a 16 per cent increase over 2020. Compared with streaming platforms. pirating websites provided consumers with access to a wide libraiy of advertising-free content and reduced the need to spend $3 to $10 each month on a service to access one particular television shows": CURRENT STRATEGIC LANDSCAPE Opportunity within Advertising US viewers aged 18 to 49 used streaming video for 55 per cent of their television viewing. but only 22 per cent of television advertising budgets were allocated to streaming. The gap between consumer viewing habits and advertising expenditure was expected to narrow over the next few years to make television streaming one of the fastest-growing advertising mediums.90 Aggressive Negotiation Tactics In early 2020. Roku gained a reputation as an aggressive negotiator. Due to Roku"s disputes over revenue- shar'ing agreements with NBC'Univer'sal Media LLC' and l-Varner Bros. Discovery Inc.. neither of these companies allowed their newly released streaming services to be available on the Roku p latform.91 In April 2021. Roku also emailed users about access to YouTube TV being suspended due to anti-competitive demands from Google. Roku claimed that "Google is attempting to use its YouTube monopoly position to force Roku into acce ting pr'edatoiy. anti-competitive. and discriminatory terms that will directly harm Roku and our users.\" 1 This statement was issued by Roku in response to YouTube TV requesting special access to Roku's customer search data.'33 YouTube responded to Roku's statement with its own clarication: "Roku often engages in these types of tactics in their negotiations. We are disappointed that they make baseless claims while we continue our negotiations."94 Page 8 W33320 Limited Geographic Exposure I11 2021. Roku held the market leadership position as the top television streaming platform in the United States. Mexico. and Canada in terms of hours streamed. Although Roku's products were available in over 20 countries. the Roku OS was limited to only six of those countries. and the company had a low market penetration rate.95 In 2021. Roku held only 8 per cent of the European market. behind Samsung TV at 19 per cent. and Amazon Fire TV and LG TV both at 10 per cent?6 Historically. it had taken Roku approximately three to four years to capture a significant share of a new market and start monetizing the platform. Therefore. Roku's management tended to prioritize monetization in the United States. rather than building scale in international marketsgl Expanding the Product Line In October 2022. Roku launched a partnership with \\Valmart Inc. to sell smart home devices including cameras. doorbells. lighting. and plugs. The partnership aimed to "make the smart home as affordable and easy to use as [Roku] has made smart TVs for millions of consumers." To produce these devices. Roku partnered with Seattle-based Wyze Labs Inc. to white label smart home hardware. Roku used its expertise in software to connect these devices with its OS?43 Smart home devices provided Roku the opportluuty to cross-sell products. increase customer interactions with the brand. and jump-start stagnating player revenues. However. that market segment was already competitive and dominated by the US electronic security company ADT Inc. and by the smart home and security company Ring LLC . owned by Amazon.99 Overview of Smart Home Industry In 2022. smart home devices generated $31.5 billion in revenue and were expected to grow at a compound annual growth rate of 11.2 per cent through to 2026. Over the same period. smart home devices were expected to increase their reach in US households from 43.8 per cent to 62.7 per cent. On average. households spent $546.50 on the installation of smart home technology. which provided smart home companies with high-margin revenues per customer.100 Potential Acquisition In 2022. news reporters speculated about the potential acquisition of Roku by the company's former parent. Netflix. Roku"s robust advertising capabilities were expected to help boost Netflix's entry into the AVOD segment.101 These reports proved to be false. However. acquisition by a major company could potentially be an effective way for Roku to improve its profitability and market position. ROKU'S DILEMMA Despite higher viewer time 011 the Roku platform and average revenue per user. Roku's profitability rate was dropping. Before the outbreak of the C'OVID-l9 pandenu'c in early 2020. the company had posted losses of 15 cents per share. During the pandemic. the company's performance improved to reach 50 cents per share profitability. By the second quarter of 2022. however. Roku was again facing lossesby this Page 9 W33320 time. of 82 cents per share.102 These losses were caused by investments in content production coupled with dwindling advertising investments. Approximately two-thirds of Roku's advertising revenues were generated by short-term contracts. which made Roku an easy target for advertisers to cut their spending when economic conditions ivorsened.103 Roku was also facing increasing competition. Google was raising its investment levels in streaming devices. Samsung was becoming an increasingly strong rival. and C'oincast Corporation had entered into a joint venture with Charter C onmmnications Inc.104 The new venture provided lLigh-speed broadband services to over 200 million US consumers. Increasing competition was posing a major threat to Roku's market position and growth opportunities.105 WHAT NEXT To maintain its position as the television streaming market leader. Roku had to drive long-term profitability. Tie question was how the company could achieve that goal. Should Roku invest further into its advertising capabilities. despite the don'ntlu'n in advertising demand? Should the company continue to practice aggressive negotiation tactics to earn more revenue from its streaming service partners? Should Roku reduce its dependence of US markets by investing further in international expansion? Should the company look for a strategic merger or acquisition? Should Roku continue to expand its product offering? Should Roku bring its new product manufactlu'ing in-house? The company had to make a decision to avert potential market losses