Hardware is hard, goes the Silicon Valley cliché. The statement seems to prove true time and again: Promising hardware companies routinely fail due to production and manufacturing challenges, high burn rates, unsustainable profit margins, or an inability to successfully navigate the retail and marketing worlds. Roku, the world’s most successful set-top box maker, has managed to defy those odds—but, apparently, not as a hardware maker.
“We don’t really make money… we certainly don’t make enough money to support our engineering organization and our operations and the cost of money to run the Roku service,” CEO Anthony Wood told The Verge in a recent interview. “That’s not paid for by the hardware. That’s paid for by our ad and content business.”
The admission was surprising: By many measures, Roku has shown the signs of a flourishing hardware company. It has been in the internet streaming-box business since 2008 and now sells a suite of products, including wireless speakers and streaming TV players. Roku had 20.8 million users as of May, and its viewership grew 47 percent year over year. It seems like it should be a profit-making hardware machine. But with most of its products priced under $100, Roku’s meager profits come from its ad deals.
It’s a stark contrast to Apple, which just became the first company to hit a trillion-dollar market cap. Thanks to superior control over its supply chain and premium device prices, Apple is able to command some of the highest profit margins in the industry on sales of its products. On the iPhone X, Apple has a profit margin of 64 percent; for the iPhone 8, 59 percent. For most companies, these margins—the difference between what it costs the company to make the product and the price it sells it for—are unheard of. When CEO Tim Cook was Apple’s senior vice president of worldwide operations, he negotiated better deals, reduced Apple inventory, and slashed the number of suppliers Apple worked with, a series of moves that have helped Apple’s profitability.
Apple is the poster child for hardware manufacturing success, but it’s not the norm. Many hardware makers rely on alternative revenue streams from advertising or cloud services.
Some smaller companies have found that the best way to maintain a constant revenue stream is through a subscription service. Smart home product maker Hive went this route, allowing consumers to access a package of its products. (Its “Welcome Home” package, for example, includes two smart lights, a smart plug, a motion sensor, and a hub for an $8/month subscription.) Others, such as Netgear and its Arlo home security camera, require a paid subscription for extended cloud storage of video footage ($100/year for 30 days of storage, $150/year for 60 days of storage).
Larger companies such as Amazon and Google are increasingly known for their home gadgets, but they aren’t relying on them for revenue. Amazon’s Echo smart speaker catapulted into the holiday season’s best-selling gadget gift due to its bargain prices, but Amazon Web Services, its cloud storage provider, is responsible for 73 percent of the company’s profits. (It’s also worth noting that these companies were already sizable before they embarked on hardware.)
Most hardware manufacturers—even big ones—can’t command Apple’s level of supply chain wizardry, so they supplement their core consumer-facing business with something else that’s more profitable: ad sales, data storage, or subscription services. Roku may be the latest to admit to this evolution in its financial strategy, but it’s something a growing number of successful hardware businesses are adopting in order to stay afloat.