Few consumer trends of the past decade have been as pronounced as the shift away from the broadcast, “live” model of programming to the video-on-demand (VOD), or streaming, model.

Since launching its streaming service just 10 years ago, Netflix (NFLXNetflix ( now boasts almost 120 million subscribers worldwide, streaming one billion hours of content every week! Amazon’s Amazon Prime Video service (launched in 2011) is estimated to have about 40 million subscribers, and Hulu (est. 2007) has close to 20 million.

And this is just the subscription video services. The streaming model also applies to the “a-la-carte” channel services (Sling, PlayStation Vue, DirecTV NOW, etc.), “freemium” channel-specific apps (from the individual broadcast and cable networks), and of course, ad-supported streaming video such as YouTube and its 1.3 billion users and 5 billion video views a day.

That’s a lot of video. To access these, consumers use applications for each of the different services. Applications – or “apps” – are installed on top of an operating system (OS) which the user interacts with.

Ok, so you probably knew all this right? When you want to stream Netflix, you open the Netflix app on your phone, or press a button on your TV or set-top box remote to launch the app.

But have you thought about the OS which runs the app itself? If you run Netflix on your iPhone, you are using iOS. If you run it on your Apple TV, you are using tvOS. On your Samsung TV? Probably an OS called Tizen. On a ChromeCast? You are using Android. And so forth.

I bring this concept up because understanding where the OS fits in is key to understanding the business model of today’s highlight stock, Roku (ROKURoku (, a recent IPO and a recent addition to the Quality Growth Spell. You may think that Roku just sells those set-top boxes you see in Best Buy, but that’s not the case – not at all! Let’s take a look at the business and see if we have an interesting investment candidate here.

Roku’s Business Model Is Not What It Seems

If you are like me, when you saw Roku was going public your initial reaction was probably “Meh, a commodity hardware maker? No thanks.”.

It is true that Roku gets over half (56%) of its revenue from selling its “Streaming Stick”, “Roku Express”, and “Roku Ultra” hardware streaming devices. It’s also true that these are cutthroat commodities, with Roku earning under 10% in gross margin on them. Many competitors like Google and Amazon likely sell competing hardware at a loss. Certainly, there is no money to be made on this side of the business.