As Roku grows, it’s moving towards pay-to-play for successful channels

With 1,800 channels and growing, Roku is easily the largest TV app publishing platform. The company’s set-top boxes have long been embraced by both industry heavyweights like Netflix and small rural churches alike, all looking to reach an audience without the need to strike deals with cable companies. But as Roku’s audience is growing to 10 million-plus devices sold in the U.S. alone, the company is increasingly looking to strike commercial deals of its own, which can catch some publishers by surprise.

I’ve had conversations with a number of publishers who have channels on [company]Roku[/company] recently, all of whom declined to go on the record because of their existing business relationship with the company. They all had been approached by Roku to strike a commercial deal in recent months, and not everyone saw this coming. “They called out of the blue,” said one publisher, and I’ve been told more than once that Roku representatives were pretty aggressive in their demands for revenue sharing deals, asking for cuts of advertising, subscription and transactional pay-per-view revenue. “They are acting like a cable company,” said one publisher.

Roku’s, Stephen Shannon, general manager and senior vice president of content and services, acknowledged that Roku has been initiating these kinds of conversations with publishers that are commercially successful on Roku. “Any time a business is becoming more material on revenue, the partnership gets more sophisticated than the click-through agreement” that publishers first sign to get their app on Roku, he said. He explained that Roku has a variety of revenue-sharing agreements with publishers in place, adding that these deals by nature vary from publisher to publisher.

[pullquote person=”Stephen Shannon” attribution=”Roku GM & SVP of Content and Services Stephen Shannon”]”We don’t just arbitrarily kick people off the platform because they don’t give us money.”[/pullquote]

Some arrangements with ad-based video services, for example, involve publishers letting Roku sell a percentage of their ad inventory. Subscription services may pay whenever Roku redirects a customer to a Roku-specific landing page on the web, or when the company helps to sign up a customer directly within the channel itself. Paid channels or transactional video services may give Roku a cut whenever a customer makes a purchase. Arrangements vary by publisher and business model, said Shannon: “We have a lot of different deals.”

In exchange for striking a deal with Roku, publishers tend to get varying levels of promotion, which may include being featured on the Roku website or within the channel store. “If you are not promoted on Roku, it’s hard to get an audience,” Shannon said.

And if you don’t want to give Roku a cut? “We don’t just arbitrarily kick people off the platform because they don’t give us money,” he said. However, it seems like that point may sometimes get lost in conversations Roku is having with publishers. One told me that Roku representatives left unclear what would happen if a deal wasn’t struck. Another was under the impression that he wouldn’t be able to publish any updates to his channel if he didn’t sign.

Shannon didn’t directly comment on those examples, but said that the whole process could use some transparency, something that I also repeatedly heard from publishers. “Admittedly we have some work to do to make these things more clear,” Shannon said, adding that an initiative with that very goal was underway within the company.

[pullquote person=”Stephen Shannon” attribution=”Roku GM & SVP of Content and Services Stephen Shannon”]”We are an internet services company.”[/pullquote]

It’s also worth noting that all the publishers I talked to, despite reservations about the way the company has been handling these kinds of deals, value Roku as an important platform for their businesses. Roku customers are seen in the industry as a lot more active and open to trying new apps and services than customers of smart TVs, which happen to have a built-in app platform that a customer may or may not ever use. Publishers also told me that they have had some very similar negotiations with other device makers who are looking to cash in on the growth in online video as well. “I don’t blame them,” said one of these publishers.

The move towards revenue sharing agreements is in part due to the small margins in the consumer electronics space. Selling a $50 streaming box, or even a $500 TV, simply doesn’t leave a whole lot of room for profit. Roku executives have long said that their hardware does generate profits, but that services are where they see its biggest growth.

Shannon echoed these comments this week. “We are an internet services company,” he said, adding that Roku expects services to be “the largest contributor of profits” in the long run.