Next TV Summit: Roku CEO Sees Virtual MSO Coming


San Francisco -- Internet set-top startup Roku has been in talks with major U.S. companies that are interested in offering a stripped-down bundle of TV content, delivered over broadband, to reach consumers who don’t want to pay for traditional cable or satellite service, Roku founder and CEO Anthony Wood said.

“In the next 12 months in the U.S. you’ll start to see a virtual MSO, a pay-TV package distributed over the Internet through devices like Roku,” said Wood, speaking at Multichannel News/B&C Next TV Summit here. “Companies are trying to figure out how to reach a different class of customer, maybe who don’t have cable TV.”

Roku, which sells low-cost set-tops for streaming Internet video, has been in discussions with several companies that “have aspirations” of being a virtual MSOs, Wood said. He expects incumbent players that already have billion-dollar content deals to step up to the plate first.

“A lot of this is about getting access to the content, and that requires a lot of money and experience to structure it well,” he said. The emergence of a virtual MSO will likely drive “some reduction in the size of the bundles” for traditional pay-TV providers, Wood added.

Roku currently offers more than 600 different channels, ranging from Netflix to HBO Go, and has sold more than 3 million set-tops to date. Its primary competitor is Apple’s $99 box, which provides access to services including Netflix, YouTube and iTunes, and has sold a similar number of units.

Apple TV is aimed at “people who are very Apple-centric,” Wood said. “They have  hard time envisioning a non-Apple product.” While Apple provides a large content selection, much of that comes from Apple’s own iTunes store. “For them, Apple TV is more of an iPad player, whereas we’re trying to build a platform for television,” Wood said.

In July, Roku announced $45 million in funding led by News Corp., with participation from BSkyB and prior venture-capital investors Menlo Ventures and Globespan Capital Partners. The company said an “unnamed strategic investor” also joined the round, which The Wall Street Journal reported was Dish Network.

News Corp. has a history adopting new distribution platforms, like direct-broadcast satellite, and “they see the Internet as the next big platform they need to be part of,” Wood said. By investing in Roku, News Corp. -- in addition to having a stake in the over-the-top ecosystem -- gains access to promotion on the home screen of the Roku guide.

BSkyB, meanwhile, has 10 million satellite customers in the U.K. The operator is planning to use Roku devices to deliver Now TV, set to launch in 2013, an Internet-video subscription service to reach the other 10 million households in the country. “It’s going to have a different price equation, pay as you go, with a subset of content, targeted at a financial model that works for those remaining households,” Wood said.

Roku also has a deal with Dish, which is delivering international programming via the startup’s set-top. “The reason Dish is really interested in this is they can add a bunch of more international channels,” Wood said.

Wood said 10% of customers who buy a Roku never had cable, while about 20% of customers cut back on cable. Another 10% to 15% of customers canceled their cable service after buying the box.

“Some customers are just looking to save money,” he said. “But for the majority of our customers, it’s additive -- they love TV and want a new way to get it. For a lot of people they’re using DVD players less.”

On Thursday, Roku announced that next month it will begin selling the $100, USB-size wireless Roku Streaming Stick, which plugs into the back of an HDTV to deliver Internet content. The company also announced a deal with Walmart Stores’ Vudu online-streaming service and said it has enhanced its mobile app to let users display their photos and play music on Roku devices.

“We want to expand our platform to TVs and other devices in the home,” Wood said. The Roku Streaming Stick addresses a key problem for TV manufacturers: People keep their TV for typically seven to eight years, but streaming-player technologies are on a curve to become obsolete in two to three years.

Saratoga, Calif.-based Roku has 200 employees. The company’s comes from the Japanese word for “six,” because it’s Wood’s sixth startup. He was previously vice president of Internet at Netflix -- which spun out its streaming player development into Roku -- and he formerly founded ReplayTV, one of the first DVR makers.

“We really want to change the way people watch TV, and make TV better,” Wood said. Roku is “changing the way people watch TV.”

Wood said he recently pointed out to his daughter, who watches all her TV via Roku and her laptop, that the Disney Channel offers live shows 24 hours a day. “After three minutes watching Disney Channel, she said, ‘This isn’t the show I want to watch,’ and switched to Netflix to watch Wizards of Waverly Place.”

Game consoles represent the most over-the-top video viewing today, but Wood said that in terms of viewing hours streamed to TV, game consoles are flat to declining while time spent on streaming players and connected TVs is growing.

Wood predicted there would be consolidation in the Internet TV platform space: “Content owners don’t want to keep writing apps for all these platforms,” he said.