Roku's New Way to Make Money

A couple watches TV

Roku 's (NASDAQ: ROKU) ad-supported streaming service, The Roku Channel, is branching out to offers users more (for a price). Fulfilling a promise made in early January, Roku has rolled out the first premium subscription options for The Roku Channel. The move positions The Roku Channel to be an important new earner for Roku, and it suggests that streaming subscription hubs like the ones cultivated by rivals Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL) aren't going anywhere.

The Roku Channel past and present

Roku offers the most popular streaming platform on the market. Its Roku devices offer users of subscription streaming services an easy way to access all of their content through one interface. Until relatively recently, Roku was content to organize content rather than provide it. Then came The Roku Channel, a free app for Roku's own platform that gave streamers access to free on-demand content that Roku licensed from media companies or other free ad-supported streaming apps. The Roku Channel was available only to Roku users.

Now, Roku is looking to do more with The Roku Channel than offer free content to Roku users. In addition to that free content (which isn't going anywhere, Roku says), The Roku Channel will now offer content from premium subscriptions like Showtime -- provided, of course, that viewers pay for those premium subscription services. Roku will allow users to sign up for such premium subscriptions right there in the Roku app, and it will take a cut of the subscription fees. The Roku Channel will serve as a subscription hub, offering convenience to users while taking cash from subscription services.

Profits and priorities

Turning The Roku Channel into an income generator makes sense for Roku,.

Roku has a big user base and a proven platform, but it also has more profit-related headaches than its competition. The next-biggest presence in the streaming device and platform market is Amazon's Fire TV family of devices, which Amazon can use to promote its own streaming video subscription service (Amazon Prime Video, which is part of the Prime subscription program) and its marketplace for video rentals and purchases. Amazon has used hardware as a loss leader before . That doesn't seem to be the strategy with Fire TV products, but Amazon certainly has extra ways to make money off of its platform once the devices are in the hands of users. Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) can do similar things with its Android TV platform, which makes it easy for users to buy and rent videos from the Google Play Store. Apple TV surfaces iTunes, of course.

Directing traffic to money-making apps isn't the only way to monetize a streaming platform , but it's an effective one, and Roku doesn't have the option. So Roku has made finding other revenue streams a priority. That has meant making more from ads. It also means turning The Roku Channel into a money-maker.

Parallel paths at Amazon and Apple

Roku isn't the only company using an app or a platform to try to get a cut of streaming subscriptions.

Apple has made big bucks via what critics call the "Apple tax," taking a huge cut of subscription fees when users sign up to pay for services through Apple. That strategy is largely reliant on iOS users, and it took a big hit when streaming giant Netflix (NASDAQ: NFLX) ditched the program .

But the Apple tax is getting new life through Apple's TV app. The TV app, like The Roku Channel, began life as an app that aggregated free content from other sources. Then, just as Roku is doing now, Apple started adding content from paid premium subscriptions and inviting users to sign up for those add-ons. Amazon has a subscription hub of sorts, too: Amazon Channels, which allows users to sign up for services like Showtime within Amazon's marketplace.

The Roku Channel and the future of streaming

As Netflix's shutting down payment via Apple demonstrates, not all services will permit this new business model to cut into their profits. AT&T 's (NYSE: T) HBO was among the premium services missing from Roku's launch of premium add-ons, and it wouldn't be shocking to see that service continue to hold out. But for other services, especially smaller ones, hubs like The Roku Channel could help attract customers and streamline billing -- making the "tax" worthwhile and the hub model a sustainable one.

Roku's move is smart, and it helps illustrate a growing trend. Just as streaming platforms organize access to streaming content from multiple providers, they can streamline billing -- and, in the process, turn their entertainment hubs into hubs for profit, too.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Stephen Lovely owns shares of Amazon, Apple, AT&T, and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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