It is the received wisdom that hardware suffers from low margins but platforms, where everything from apps to content are sold in an online marketplace has much higher margins. That is why so many startups I see are trying to become platforms. But it isn’t easy, as platforms by their nature are two-sided marketplaces, where the middleman has to satisfy both buyers and sellers while also maintaining the platform software and paying hosting and bandwidth cost.
By what’s at least one order of difficulty greater is transitioning from a hardware maker to platform provider, a feat recently achieved by streaming TV set-top box maker Roku. The article on The Motley Fool by Rick Duprey, Roku’s Transition Is Paying Off in a Big Way lays it out. The sub-title tells the story:
Moving away from being simply a hardware maker could have been risky, but instead it is becoming hugely profitable.
Other tech companies — like GoPro and Snap — that have attempted the same maneuver and stumbled hard can only look on in envy. TiVo said it would stop selling hardware altogether last year.
Roku has now become a content aggregator. Its advertising supported Roku Channel has quickly become one of top channels on Roku devices, based on hours streamed. Much like iTunes, Roku aggregates video and sells the set top box. Roku ended 2019 with over 27 million active accounts, having added 8 million last year alone, which led to the number of streaming hours rising 9.2 billion year over year to 24 billion.
Roku has adopted the Gillette razor business model of practically giving away the device to sell the ad-supported content. Fourth-quarter gross margins on players were just 2.4%, a 75% decline from the year-ago period. Margins for its platform business, on the other hand, stand at around 75%.
There are two lessons for founders in the Roku story: one, yes the margins on contents and software are far greater than those on hardware, and two, while it’s best to build a platform from day one, Roku has demonstrated that hardware makers can transition into platform providers given the will and the means.