Amazon steps up efforts to contain Roku's growth

Roku (NASDAQ: ROKU) and Amazon (NASDAQ: AMZN) 69% of the US market for streaming devices in the first quarter of 2019, according to Parks Associates. Between the first quarters of 2017 and 2019, Roku's share rose from 37% to 39%, while Amazon's share increased from 24% to 30%.

Roku's resilience has dispelled fears that Amazon's new Fire TV and Fire TV decoders will slow down its growth. However, Amazon has recently introduced a wide range of new Fire TV devices – including a new Fire TV cube, an Anker's Fire TV Edition sound bar and 15 new Fire TV Edition products – to increase the pressure.

Source of the image: Getty Images.

Roku also launched two new audio products – the Roku Smart Soundbar and the Roku Wireless Subwoofer – that followed its initial expansion into the audio market with its Roku TV wireless speakers last year. Let's take a closer look at this growing battle and determine whether or not Amazon can contain Roku's growth.

What is the game plan of Amazon?

Roku stays ahead of Amazon in the US, but Amazon says its Fire TV devices have over 37 million users worldwide, which is more than 30.5 million global users than Roku announced last quarter.

Amazon sells its Kindles, Fire TV and Echo speakers with very small margins or losses to allow users to integrate into its Prime ecosystem. That's why it invests billions of dollars in its video streaming and music platforms and expands its smart home ecosystem with smart bells and appliances powered by Alexa.

Amazon recovers these losses by further reducing revenue per primary user. In addition to the annual subscription fee of $ 119, core users spend an average of $ 1,400 per year on Amazon, according to the firm CIRP, against only $ 600 for non-members.

The firm estimates that 82% of US households now have a premium subscription, and Amazon now operates this massive user base to challenge companies such as Roku, Spotify, and Netflix. Amazon is not afraid to spend a lot of money disrupting these markets, as its revenues are driven by the growth of its higher-margin Amazon Web Services (AWS) cloud platform.

Source of the image: Amazon.

Why Amazon is struggling to contain Roku

Roku is a tough thorn with Amazon for two reasons: it has a leading edge in the market for streaming devices, and it's not tied to a single ecosystem like Amazon, Apple, and Google& # 39; s devices – making it an attractive partner for third party hardware manufacturers.

In order to address the saturation of the streaming device market, Roku has reduced its reliance on hardware sales and has expanded its software platform, consisting operating and an application for third-party devices, generating revenue from advertising and content partnerships. As a result, revenue from the Roku platform increased 86% per year in the last quarter, marking its strongest growth in four quarters:

Source: Roku Quarterly Reports. YOY = from one year to the next.

This acceleration indicates that Amazon's previous attempts to contain Roku's growth, like its partnership with Best buy to sell Fire TVs last year, do not work.

Roku's player sales also increased sequentially and annually in the second quarter, as it sold a higher number of cheaper devices, indicating that its higher margin platform business allows his player activities counter Amazon's revenue loss strategies. Its diversification into new markets, such as wireless speakers, could reinforce this growth and counter the growing expansion of Amazon in homes connected to the Internet of Things.

Will Amazon's latest efforts move the needle?

The most exciting new product of Amazon is the new Fire TV Cube, which offers hands-free voice commands via Alexa, upgraded hardware and a closer integration with a multitude of smart home devices.

This $ 120 device, which essentially merges the TVs Fire TV and Echo, could be of interest to consumers who have not yet bought one or the other device. It could also be an interesting upgrade for consumers who still use older versions of both devices or the first-generation Cube.

However, I do not think the flood of new Amazon devices is slowing down Roku's growth. Instead, I think they're going to reinforce its existing market share and possibly move users away from less popular platforms such as Apple TV and Chromecast.