Anthony Wood, 46, was born a serial entrepreneur. By 10, he was already in the real estate business building and selling tree houses to his friends. In high school, he was writing communications software and during college at Texas A&M he founded a company with 14 employees that was developing products for the Amiga. He says, “I was making good money for a student but my grades were suffering and they were going to kick me out of college.” He shuttered the company, graduated with an electrical engineering degree and moved to Silicon Valley with his girlfriend, who is now his wife.
His third company was developing audio post production software for computers that featured famous clients like the Doobie Brothers and Mr. Bill of Saturday Night Live fame. Next, he founded an Internet software company called iBand, which was later sold to Macromedia for $35 million. He says, “It was some of the core technology in Macromedia Dreamweaver, which is now Adobe Dreamweaver, the leading HTML authoring tool in the world.”
After two years, inspired by Star Trek: The Next Generation, he got the idea to use a hard drive to record shows instead of VHS tapes. He founded ReplayTV in Mountain View, Calif., and invented the first digital video recorder (DVR), launched at the 1999 International CES. The company was later bought by DirecTV. Ten years ago, in 2002, he started Roku, which means six in Japanese, a nod to his six companies. As head of Roku, he is now working toward replacing the DVD.
Roku’s devices let consumers stream content from popular services such as Hulu, Netflix, HBO GO and Pandora to their TV. The company’s new streaming stick packs all of Roku’s features into a device that’s a little bigger than a USB thumb drive. The Saratoga, Calif.-based company makes simple, inexpensive devices that connect TV screens to video that is stored in the cloud. Roku sells hardware, but it is also a distribution platform for television over the Internet. Wood says the future of TV is in Internet streaming. He talked with CE Vision about Roku’s plans.
What is Roku’s business model?
We are the leading platform for streaming video, music and games to TVs and we do that in a few different ways. One is our streaming player. Ninety percent of the streaming player market is owned by Apple TV and Roku and we roughly split it 50/50. We are expanding our platform from just the streaming players into TVs and other devices using our streaming stick.
How do you make money?
We make money three different ways. One way is we sell boxes so we make money by selling hardware profitably. Another way we make money is we have a service and content business where we get paid revenue shares to distribute and promote content. We help to promote a lot of the content that goes through our user interface because content owners don’t want to be buried in the channels. We have a lot of ways to promote content to our customers, and in exchange for that we get a revenue share. That is the fastest growing part of our business. The third is we have a deal with BSkyB in the U.K. where we are licensing technology. So we have a licensing OEM business that we just started but is going well.
Will DVRs move to the cloud?
The DVR is definitely on its way out. It’s a stepping stone product. Consumers want to access content on their own schedule as opposed to original TV that was broadcast at a certain time of day. There have been various steps in moving toward the goal of more consumer-friendly solutions. The first was the VCR but that was hard for consumers to record, and then there was the DVR which is popular now. The next step is DVR in the cloud and that is starting to happen. The final step is no DVR—just everything available on demand. On Roku there are channels like Netflix, Hulu Plus and Amazon Instant Video that are just on demand and the videos are all pre-recorded in the cloud. But you also have channels like MLB where a game is broadcast live but has features as if it were streamed from a DVR in the cloud.
How is the Internet transforming video?
Within four years I would say that the majority of TVs will stream over the Internet versus cable and satellite. Research Firm Kalgan Associates has predicted that by 2016, there will be 68 million broadband OTT (over-the-top) households and over a half billion connected devices—everything from iPhones to tablets to Rokus and Xboxes. It is inevitable that all TV is going to be delivered over the Internet. We are sorting out the various changes in business models and how pricing is going to work.
What trends do you see?
The big trends are the shift to Internet streaming and the rise of smart TVs and streaming players as a big way that customers get TV. There was this dream of the open cable box with the cable card and that is finally starting to happen. I view Roku as an open cable box because, for example, you can get HBO and it’s not controlled by the cable company and you can buy it at Best Buy. In terms of content, TV Everywhere is a big trend. It’s important for customers and the industry.
What are your views on smart TVs?
Within a few years, the majority of streaming television on TVs will be through boxes like Roku or smart TVs. There are two issues with smart TVs today. One is that most of them are very hard to use. The other issue is that they are not upgradeable, so if people keep their TV for say six years, the streaming market is so dynamic that like smartphones, you would also want to upgrade the electronics in your smart TV. The advantage of our streaming stick is it’s easily upgradeable by customers and simple to use.
How is Roku TV different from Apple TV?
We think of ourselves as the Apple alternative. There are some households that are very Apple-centric and some that have Android phones, say a Windows PC and maybe an iOS device, so we appeal to customers in these multi-platform households. We also have different price points on our models. For example, we start at $49 while Apple is $99. They also only have a few apps on their box and we have a lot more content. What they really want you to do is buy an iPad and then use Airplay. It is more of a player for the iPad whereas Roku is designed as a standalone player with more than 600 channels of content. We have a different usage model. We also work with OEMs to be their streaming platform—like the 3M Streaming Projector and Insignia, the Best Buy TV brand that is making Roku Ready TVs. Apple is not doing that.
How is the Roku Streaming Stick being received?
Great. We just launched two weeks ago. Next year is when it is really going to take off. It is going to be a big business for us.
What about Google TV?
We compete with them in our licensing business, but we are not very bullish on them. We have better price points, our product runs on less expensive TVs, we have more content, and Roku is easier to use.
What do you focus on?
One is being really simple and easy to use. Another is great value—we are relatively inexpensive. The third is having the best content selection. There is a lot of free content on the Roku, like Crackle with movies and Pandora with music.
What is the role of content?
We are more like a virtual network—we distribute content. We see three big categories. One is original over-the-top content like Netflix, Pandora and Hulu. Another category is new brands like Revision 3, which grew up as an Internet-only TV brand, or Blaze TV, which is Glenn Beck’s Internet-only network distributed on laptops and Roku. The third kind of content is from the incumbents like the cable networks. Those guys are using a TV Everywhere or authenticated approach where you sign up for a bundle from your traditional cable operator and they make it available on players like Roku. That is where there will be fraying of the bundle because competition from Hulu Plus, Netflix, Amazon Instant Video, Vudu and Crackle is putting pressure on operators to be more innovative in the way that they package their content for customers. Someday there may be a virtual MSO (multi-system operator)—maybe you will be able to buy a Roku and sign up for a package of cable from a national Internet-only allied company, but that doesn’t exist yet.
What regulatory issues impact your business?
We are in the TV business so there is lots of regulation. For example, there was just a recent rule that took effect that online video streaming has to support closed captioning. We put a lot of work into supporting it. Also the FCC is regulating broadband and we are big believers in an open Internet and net neutrality.
How much content on Roku is free versus subscription-based?
It’s a mix. In the top ten channels some of them are free, some are subscription, some are ad supported and some are both ad and subscription. For example, Netflix is number one, and that is subscription. Pandora is number two, and that is free.
How valuable are partnerships?
We focus a lot on partners. It’s a huge part of our business. We just closed a $45 million investment round led by News Corp. and BSkyB. It’s a great endorsement from the media industry.
How important is branding?
There is this interesting dynamic—say you have HBO GO, an authenticated channel that is controlled by the cable network, and they want their brand to be front and center. Then you have companies like Comcast XFINITY that is producing authenticated packages of their channels. If you want to get HBO GO on the iPad, you have to go into the XFINITY app and that is what Comcast prefers. But HBO would prefer an HBO icon on the front screen of your iPad. So they are negotiating with each other on whose brand is going to be first.
Another interesting trend is the importance of the UI (user interface) that you first see when you turn on your TV. It’s really important because that is where content gets promoted. From a business point of view, everyone wants to be the first icon on the first screen. There has to be a business deal but there are different dynamics. Some channels are more important than others so it becomes a complicated negotiation. We look at the most prominent icons and ask what our customers want because for us, it’s first about providing a great customer experience. Second is how important is the content to customers? And third, what is the business relationship? Unless we get a revenue share, we usually don’t give them out.
Do you have licensing agreements?
The licensing agreements are mutually beneficial, so we usually get a revenue share or bounties because the content companies all want distribution. We have sold over three million boxes and our sales are still growing. If you are a large content company, there are not a lot of ways to get access to millions of customers but we are one of them. There is a lot of consolidation happening and we are seeing companies pick just a few winning platforms. For example, when HBO GO launched, they only picked three platforms: Roku, Samsung and Xbox.
What concerns you most?
One is hiring. We are growing so fast and we want to hire strong people so managing that growth is a big challenge. The other is that Q4 is so important for us. Making sure that everything is lined up and that we execute well for Christmas is always a big effort. Right now we are in the middle of a lot of change. We are in the early days still.