For years, the TV streaming platform and hardware maker Roku has had to answer the same question a lot: With Apple, Google, Amazon and other tech giants vying for control of the living room, are you doomed?
Sure, that is some tough competition. But on the latest episode of Recode Media with Peter Kafka, Roku CEO Anthony Wood explained that, actually, those companies are not as scary as they might seem.
“Those companies used to be small and they had competitors and they, like normally happens in the tech business, when Google for example started search, well, Yahoo was huge and who would have thought you could start a new search company?” Wood recalled. “In the tech business, superior technology often wins and tech companies basically compete on how smart their employees are and the quality of their products.”
And in his view, Roku’s technology is superior. Plus, Apple et al are trying to meet larger strategic goals with TV streaming devices, using them as a trojan horse to get consumers hooked on iOS (or Android, or the Alexa platform).
“We’re much more focused,” Wood said. “All we do is we come to work every day and we think about how to make TV better. Those companies, yes they’re great companies, but they come to work thinking about how can I sell a bunch of shoes, how can I be better at search, how can I sell more phones? TV is on their list but it’s at the bottom of their list.”
Below, we’ve shared a full transcript of Peter’s conversation with Anthony.
Peter Kafka: We’re here with Anthony Wood, CEO and founder of Roku. Welcome, Anthony.
Anthony Wood: Hi Peter, thanks for having me.
Yeah. I’m trying to remember the last time we sat and talked for a while. I think it was years ago. I think it was on a stage in LA.
That’s right. I remember that.
I asked you all the standard questions, which is, “You’re going to get crushed by Apple, crushed by Google, crushed by Amazon. What’s going to happen?” That was years ago. Since then, you went public?
I checked the market cap this morning, the company’s worth about $7 billion. So things are going well.
Yeah, we went public a year ago and business is great. It’s an awesome time to be in the streaming business.
Yeah, I’m writing about another company that wants to raise a bunch of money and you are now part of their pitch, which is, “if Roku can go public, then we ought to be able to raise this much money at a billion dollar valuation because there’s room for lots of companies now to participate in the streaming boom.”
One of the challenges with Roku going public was this perception that we’re a hardware company, which I think that’s largely gone away.
Because you used to sell hardware and you still do.
We still sell hardware. Our goal for selling hardware is to build active accounts, we’re not trying to make money on hardware. My point was just that that was a challenge for us. And so, we spent a lot of time with investors explaining our business model, which is about services and advertising, content distribution.
I was reading this report recently of a company that was going public and I was reading their roadshow deck and they said, “yeah, we have a service business, you should think of us like Roku.” I thought, wow, we must have been successful in convincing people we have a service business.
That’s great. You need some equivalent of the “Netflix and chill” if you really want to break through. I think that’s probably added a couple of billion dollars to Reed Hastings’s market cap.
Yeah. That’s probably the reason they’re successful.
You have a longstanding relationship with Netflix?
Yes. I’ve known Netflix for a long time. I used to work there for a while.
You used to work there. And initially, when you guys started the company, you were kind of a Netflix-adjacent company, right? The initial story was … You tell the story.
Roku was started in 2002. We built streaming media products. We had internet radios, we had high-definition media players, we had digital signage, which we actually spun out into a separate company called BrightSign that’s now very successful. In the early years, I also would go talk to Netflix.
What had you done at a Netflix when you worked at Netflix?
So I hadn’t worked at Netflix yet, I was just saying I started Roku and then we have some original products that were fairly successful. I would go to Netflix and I would say, you know, hey — this was before they had streaming players — and I was like, “We should work together on a streaming player.” And they said, “Yeah, we should do that. No, we shouldn’t do that.” So they went back and forth and we never really got to an agreement.
And then they started doing a search for a VP of Internet TV. I thought, well, if they’re not going to do a deal with Roku, maybe I should just see if I could do that for them and run Roku. And so actually I cut a deal or made a deal with Reed Hastings, the CEO, where I would go work at Netflix and run Roku.
You’re running your own company and had a full time job at Netflix.
Yeah. It was great that he would let me do that. I built out their streaming player group. I also started their licensing group that did the original deals with Xbox.
So this is a decade ago, roughly.
This is 10 years ago, yeah.
Because they’ve only been streaming for 10 years.
This was the time they had just launched their beta streaming service on PCs. My job was to build a box, but I also said, “Hey, we should license this technology.”
They knew they wanted to stream stuff. And their assumption was most people don’t have the hardware to actually get this stuff onto a TV. So it’s not just enough for us to put this onto the internet and push it out. People can watch on the laptops. If we want to get this on a TV, we’ve got to create a device that can do that, so we’re going to build that ourselves. You were going to build that.
That’s right. The original Netflix beta version, when they launched it back then, was on the web. You could watch it on your laptop. So anyway, I started building this box for them and I built the team and we got to the point … And I also, like I said, I also started this very tiny group to license it to TV companies and to game manufacturers. That actually went really well. And so, the long story short is that they decided, “Well, we don’t need to build our own box because this licensing strategy is working well.” And so we struck a new deal where that team I had incubated inside Netflix spun out and became part of Roku, which was ongoing on the side, and that’s how we got …
So you started a company, went to work for Netflix, kept running the same company, left Netflix, brought the team that you’d built up at Netflix back to your original company.
That is a unique round trip.
Yeah. Worked out really well. And then, we finished up that box and three months later shipped it, it was the first Netflix player. That’s how we got into the streaming …
Was it called the Netflix box? Was it sort of branded as a Netflix box?
It was the Netflix Player by Roku. That was the first product. And then after that, we quickly added an app store and started bringing on other services besides Netflix. And then we changed the name from Netflix Player to the Roku Streaming Player.
Right. And up until recently, I was looking through your S1 a while ago, Netflix was almost entirely, it was the bulk of what was happening on Roku players, even up until a couple of years ago.
No. Streaming on Roku has been diversifying for years. I mean, of course it used to be 100 percent Netflix. Our absolute base is Netflix streaming is the same, or goes up. But on a percentage of hours, it ticks down every quarter, I think the last number we gave Netflix was less than a third.
Should we back up? We’re seven minutes into this and explain what Roku is for anyone who’s still listening who doesn’t know what Roku is?
You guys sell boxes that allow you to get streaming video content onto your TV. You license software that goes onto TVs, like the TCL I just bought from Costco, it’s great. Now you are selling advertising and other services for people who are distributing that stuff.
That’s right. So our business is … The way I think about it is we’re a platform for television distribution. We build scale of our platform by selling these players which we’re well-known for and we’re the market leader in, and also licensing to TV companies. In fact, the last number we put out, which is the most recent data we have, is 25 percent of all smart TVs sold in the United States are running the Roku operating system. So that’s how we build our scale of our platform and we don’t really make money doing that. The way we generate our gross profit as a company is we get paid for distributing content. When we send you an email and get you to sign up for HBO, then we get a percentage of that subscription revenue.
But our biggest business is advertising. So if you think about the fact that all TV viewing is moving to streaming, and that means all TV advertising is moving to streaming. Under the Roku platform includes a very advanced, sophisticated TV ad platform. We’re in New York today because Roku’s New York office is all about ad sales. Most of the Ad Age top 200 advertisers now advertise on Roku.
Was this the model you had in mind when you came back from Netflix with a team you’d built up there, you said, “We are going to start putting out hardware and then over time we’re going to transition into a services company”? Or did you have to grow yourself into that idea?
No, our strategy has never changed. Our strategy has always been to be a platform for television, a next-generation Internet TV platform, and then to make money on services. Now the exact services, we tried a bunch of different things. We knew advertising was a big possibility. We tried games, actually, selling games. Signing up subscribers to services has always been something we’ve done. So we’ve tried a few things, and the things that really worked the best were advertising and subscription services.
But it was always, “We’re going to be a digital company, not a box company. The box is a method of getting our platform into someone’s house.”
Was there ever any pushback from investors or anybody else saying, “Services are great, but right now we’re struggling to get the internet into someone’s house and to get them to stream something. So why don’t you concentrate on turning a profit on these devices you’re selling?”
The funding cycle for Roku was originally … I funded it myself, and then we ended up doing a first round of venture capital. When we did that pitch, the pitch was definitely, “Look, we’re going to build a platform and we’re going to make money on services.” That was the whole …
From the get-go.
From the beginning. That was in the original investor pitches. When we raised money from News Corp after the venture round, we did a strategic round with News Corp, led that. And again, it was all about the services and content distribution and the way TV is changing. That’s always been our pitch. It was hard. A lot of investors were skeptical early on when we didn’t have any service revenue, when all our revenue was just hardware.
Right, because it was a long period where you’re saying, “Look, one day we’re going to be this, today we’re a device company.”
I never said we were a device company, we sell devices …
But that’s what your P&L would say?
Yeah, that’s correct. It was hard in the early days to get investors to believe, but we got enough to believe and we funded the company.
To go back to current day, you’re what, 22 million users?
Yeah, 22 million active accounts.
Active users. That’s someone who’s streaming something through one of your devices.
We think of it as a household. It’s not just one person. It means they’ve streamed in the last 30 days.
How many of them are people like me who are buying a TV set and it happens to have Roku installed and so once I turn it on, I become an active user?
So the majority of our active users are still people who own our streaming player. The fastest-growing segment are TVs. We’re on the bubble right now of TVs about to pass players in terms of generating new accounts.
People often ask me, “Are streaming players going to go away?” People will just get it built into TV. We sell millions of streaming players. Our market share is actually growing. It’s a great way for us to get active accounts. I don’t think it’s going away anytime soon. But TVs are definitely the most strategic avenue for us because when you buy a Roku TV, you turn on the TV and you see the Roku home screen. So it puts us in a great position to recommend content and to help you decide what to watch.
I remember when you guys said, “We’re moving into TVs, here’s our TV strategy,” you announced a bunch of licensing deals. They were all with mostly Chinese companies that I hadn’t heard of. Not the Samsungs of the world, not the Sonys of the world. I thought, well, that’s, I mean, I understand why you were doing it, but that’s going to be difficult for you to break through. Did you have confidence that the TCLs of the world were going to be sort of a big brand even though no one knew about them at the time? No one in the U.S. knew about them.
Right. We had a strategy, we sat down and thought, “Okay, what kinds of companies should we license to?” If you look at … This was early on, we said, okay, well, if you look at the trends in TVs, originally TV companies were American. RCA and Zenith. And Japanese companies took over, Sony and Panasonic. These days there’s almost no Japanese companies that actually make TVs anymore except for Sony. Like Toshiba, Sharp, those are all licensed brands now. Then the Korean companies became dominant, Samsung and LG.
But now, the Chinese companies are the only ones gaining in market share and everyone else is losing market share. So the next wave we felt was going to be Chinese companies. If you just look at the economics of TV, the Chinese companies are vertically integrated. They control most of the manufacturing and it was clear they were going to become the dominant players. And so we decided, we’ll bet on Chinese companies, and also they’re more willing to work with us. If you’re Samsung, you’re very proud of your TV software and …
And you spent a lot of time building up your OS and you’re very proud of it and you’ve got big grand up plans for that, and so you don’t need Roku to come and show you how to create an operating system for the internet.
That’s right. And so, that strategy has been super successful for us. TCL, for example, unknown in the U.S. when they started working with us, they were a No. 24 in market share. They’re the third-biggest TV company in the U.S. now.
Did you have a sense that they would grow that quickly? I literally think I had not heard of them until I knew I needed to buy a new TV. Went to the New York Times Wirecutter site, researched what’s the best TV and they said, “You should go buy this one. It’s from TCL.” Frankly, I wouldn’t have bought it if I hadn’t had an endorsement from a place like that that I’d heard of. “This is some weird brand, I’m not going to buy.”
Well, I think we helped. They’re a great partner. They’re a very low-cost manufacturer, vertically integrated. They make great quality TVs. But I think certainly our software and our brand has helped them be successful in the U.S., has been a great partnership. I mean, yes, we felt like this strategy will work. Now, it worked really well and we were maybe a little surprised how well it works so quickly, but that was the plan from the beginning. It’s not just TCL. TCL is a great partner but we also have a lot of other Chinese manufacturers that are partners. There’s I think 10 or 11 different brands now that license the Roku TV.
And also in the TV business, the other big strategy for us was work with retailers. The retailers actually are the most powerful players in the TV distribution business. Other than maybe Samsung, the way TV distribution works is the Walmart and Best Buy TV buyer says, “Hey, I think I’ll buy, you know, I think I’ll outsource six different” — I’m just making up these numbers — “six different 42-inch TVs. I want these kind of features and this is how much I’m going to pay. TV company No. 1, would you like to sell us those TVs? Nope. Okay, TV company No. 2, we’ll take yours.” So, working closely with the retailers, creating reasons for them to want to sell Roku TVs was also an important part of our strategy.
It’s not a coincidence when I walked into Costco — I knew I was going to buy anyway, but that’s the first TV you see right when you walk in the entrance, in this case was a big ol’ TCL TV with Roku.
Us, TCL, we put a lot of work into making that happen.
Did you realize that, again, when you were building this company years ago, that you were one day going to have to go wrangle with Costco and Walmart and I assume you’re going to Bentonville and making trips like that, explaining why they ought to put your stuff in prime slots like that?
Oh yeah. Roku has been selling retail products from the beginning. And so getting distribution, you know, flying out to retailers and talking to buyers is standard operating procedure in our business.
I think a lot of folks I talk to probably are not used to, “How do I deal with the retail channel and why do I have to deal with a retail channel? Why can’t I just sell this stuff on my own through my website? It’s the internet.”
Well, you know, when we started selling Roku, actually, we sold them online only, originally. I’m sorry, the Roku Netflix players. Other Roku products were in retail, but we decided, well, we’ll start with Netflix online only. And then when we turned on retail a couple of years later, that had a dramatic … sales really picked up. Retail is … We sell a lot of products in Walmart, retail’s an important place.
And you’re comfortable going out and making the case. There’s some people who really relish that sort of …
Yeah. You personally.
Well, I don’t do that personally.
You get someone else to go make the case for you.
We have sales teams. In the early days, of course, I used to do it and it wasn’t the favorite part of my job, but I know how to do it. It was an important thing to do. But these days, there’s a thousand employees at Roku and we have experts to call on those companies. Of course, big strategic relationships like with Walmart, I do spend time on that. I go meet with them in Bentonville.
I want to hear more about the business today but I wanted to start, I wanted to talk a bit about how you got here personally. You were mentioning that you don’t love sales yourself. I’m assuming you’re an engineer by trade, by training.
Yeah, my background is, I’m a nerd. I taught myself to program computers when I was 13.
What kind of computer were you working on?
Well, in middle school … I grew up in Texas but in middle school I went to, we moved to Holland for two years and I went to the American School at the Hague and they had a PDP 11 in a room in the corner.
I don’t know the PDP 11.
It’s a mini computer. This was right before, right about the time Apple IIs came out.
I remember the Commodore Pet.
Yep. Well, when I was in Holland, I used to go to this computer museum which was in downtown Holland and they had a bunch of, they had a Commodore Pet, which I also used to program on.
We had tape machines.
I was trying to explain to my kids how you would load a program using a cassette tape but of course they don’t know what a cassette tape is, so they just looked at me blankly.
I still have my cassette tapes with my programs on them.
And what were you thinking early on? “Computer programming is a business for me, a life for me, it’s a thing I wanna do”? Or was it some other path?
Oh well, early on I wasn’t thinking about those kinds of things. The way I got into business was … I guess I’ve always been interested in business. I grew up not poor, but sort of lower-middle class.
What’d your folks do?
My dad was in, well, he was in mechanical engineering, drafting, and then he moved into sales and I was born in the U.K. and he got a job at Lockheed and that’s how we ended up in the U.S. I would do things when I was young, like there was a golf course behind our house and I used to go and find the golf balls in the creek and sell them back to the golfers. So I was always interested in ways to make money.
So you were a nerd who also valued commerce?
Correct, that’s right, I’m a commerce-valuing nerd. So little things like that. But as far as my career, I really didn’t give it much thought. But early on I started writing programs. I had a TRS-80, which was one of the first microcomputers, and I wrote some programs and some software and I would try and get them published and I got some published in some magazines but mostly they got rejected. I thought, “Well, if they’re not gonna publish them, then I’ll sell them.” So that’s how I started selling computer software.
What was your breakthrough piece of self-written software?
I would say my first hit was in college. I had a Commodore Amiga computer which was the …
A step up from the Commodore 64.
There was the Pet you mentioned, then the Commodore 64, then the Amiga, that’s right. And so I had the Amiga and I wrote software and designed some hardware. This was back in 1986, I guess, and computers were just starting to get multimedia capability. So, the Amiga was popular because it had an eight-bit sound playback, it could play back eight-bit digital sound and it became the first desktop video production computer.
But anyway, I built this product called Perfect Sound, which would record audio. So it could play back digital audio, it was the first computer that could play back digital audio, but it couldn’t record it. So this Perfect Sound would let you record the audio and let you edit it like you’re doing with your podcast. So I sold that for $99.
And again, you have to spell that out, there was no internet. If you wanted to distribute your software you did it through magazines.
Yeah, or stores.
Oftentimes, or stores.
Magazines or stores.
Trade shows too, I think.
Yep, we would go to Commodore trade shows.
You could literally sell your software at a trade show.
Yep, we used to do that, that was fun.
At what point did you go, “Oh, I wanna build a multimedia streaming box company that could eventually become a platform?”
Well, I did this Perfect Sound, which was a digital-audio recording and editing software for consumers. It was just for fun, it was almost like a game, and we sold a lot of them. It was a top hit for the Commodore Amiga. Then we did some other products, but then I graduated from college and I moved to California and I started a company doing professional digital-audio stuff. So non-linear editing systems, like today it would be Avid and Digidesign.
You were building these things?
Yeah, that was the first products where I built those and sold those and made a decent amount of money. So that’s where I sort of had some first commercial success. So I did digital-audio stuff all my career and then the internet became popular and I thought, “Well that’s gonna be big, why don’t I do some internet software?” So I started doing internet software and that company got bought by Macromedia and became a core technology …
And that gave you enough resources to start Roku?
Nope, then I started … After that I started Replay TV, the first DVR company.
Yeah, I did that for a few years.
Replay and TiVo were sort of neck and neck for a while.
Right, yep. We were the first TV DVR companies. Replay was actually first, which people probably don’t realize. TiVo won sort of the marketing war and then after Replay … Replay got bought, has now got sold a few times. It’s now owned by DirecTV — the technology — and then I started Roku.
Started Roku and then again had this idea, “I get the internet, I get media, I see how they’re gonna work together, I can see far enough out that I can make the leap from devices to advertising and services.”
Yeah, it was clear that the television world was gonna shift to streaming, that everything was gonna be available on-demand. The timing was a little less clear. So I started Roku and was sort of like, “Well, that will be a big thing but we’ll just build multimedia digital gadgets that are the convergence of media and the internet and consumer.” So we built a few different products, and the streaming player, of course, is the one that became super big.
And you said you started that in 2002?
Yep, late 2002.
We’re 2018, now you walk into a Costco, you buy a TV, it’s impossible not to buy an internet TV. Doesn’t mean you’re gonna connect it to the internet but it’s all now standard. Is that the timeline that you projected? You thought this was gonna be a 16-year project? Did you think it was gonna happen sooner, later?
I think the timing is roughly what we projected. I remember going back and looking at the business plan that we did in 2008 and it’s close, it wasn’t exact.
So I mentioned at the beginning when I talked to you last time on a stage, I had a bunch of standard questions. “What’s gonna happen when Google crushes you? What’s gonna happen when Amazon crushes you?” At the time, we spent a lot of time thinking about Apple’s streaming ambitions. “They’re all gonna crush you and/or buy you.” I know Amazon looked at buying you for a while. Why have you been able to survive and flourish competing against companies with enormous resources, much more than yours? You can argue that this isn’t their core but they all take the living room and TV and streaming seriously.
Yeah, I think … Well, first of all, this is a common question. I just would remind people that those companies used to be small and they had competitors and they, like normally happens in the tech business, when Google for example started search, well, Yahoo was huge and who would have thought you could start a new search company? In the tech business, superior technology often wins and tech companies basically compete on how smart their employees are and the quality of their products. So that’s one thing.
But I would say that in the case of Roku … I’ll give you the big-picture answer and then some examples. So the big picture is if you think about when new competing platforms have emerged, the software platform has always changed. So if you go back, we were talking about PCs back in the early days, well before PCs, there were mini computers like that PDP 11. Those had their own operating systems. Those operating systems didn’t make the transition to PCs. Instead of operating systems designed for PCs, Windows became the dominating operating system on PCs and then when phones became a computing platform, Windows didn’t make that transition. No one’s running Windows these days on their phone, they’re running Android or iOS.
So it’s the same thing, when new computing platforms emerge, an operating system or a platform built specifically and optimized for that platform wins. So that was phones and then right now where TVs are becoming a computing platform in their own right and what you’ve got is the incumbents trying to take their Android software and their IOS software, their phone software and port it to a TV. So the same thing that was tried in the past and failed they’re trying again. That’s their natural inclination. But what Roku has done is we’ve built a purpose-built platform designed from the ground up for TV and so it’s better for TVs. It’s just got intrinsic advantages versus porting a mobile operating system.
So you think it’s a technical advantage that you guys have over Apple and Google and Amazon?
Yep, that’s the core of it. And then of course there’s other things. We’re much more focused. All we do is we come to work every day and we think about how to make TV better. Those companies, yes they’re great companies, but they come to work thinking about how can I sell a bunch of shoes, how can I be better at search, how can I sell more phones? TV is on their list but it’s at the bottom of their list.
I got say, from both the outside and someone who’s been streaming a lot video for a bunch of years and has had an Apple TV for a bunch of years and still has one, you can make pros and cons for either — at least on the user side — for either of your software, but they all fundamentally do the same thing. They get Netflix onto my TV and that’s great. When I look at your success, I think you guys have had some combination of strategy and maybe something else that has allowed you to get your boxes into people’s homes and to get your software onto those boxes. Apple could certainly have licensed their software to a TCL or whoever else. They seem to have made some decision, they didn’t wanna do that for whatever reason.
Right. I’m not saying that they couldn’t do it technically. I’m saying that you had this innovator’s dilemma. They’ve got big, existing businesses and they wanna leverage that for their new business and this is what they always do. It’s not that Microsoft couldn’t build a phone operating system, they just decided they’ll port Windows to the phone. It’s not that the PDP 11 company couldn’t make PC operating systems.
But Microsoft wanted to extend Windows and looked at phones that way instead of looking at phones as a new platform.
Yeah, instead of saying, “Hey, let’s just throw all that work away. Let’s just start from the ground up and build something completely optimized for phones.” It’s just not their instinct and it’s also just … You gotta remember the evolution of these new computer platforms is they start out really small and then suddenly, one day, they’re big. So these companies when they’re small they’re like, “Why should we spend time on that?” So first of all they don’t spend a lot of time on it in the early days and then they wanna take their existing infrastructure and technology and they wanna just embrace the new platform.
So for example, so what’s better about Roku software? Well, a big one is that phones are expensive, like they cost a lot of money, they’re super computers. TVs are cheap, the main board on a TV is $25 and TVs are brutally cost competitive, no one makes money in the TV business. So our software runs on low-cost TVs, it costs less to build a TV with Roku software. When you’re trying to get 50 cents off your bill of materials so you can win a Black Friday special at Walmart, the amount of money you save by cutting your RAM in half and your CPU in half by running Roku software — which actually has great performance and more content — is huge. It’s the difference between getting distribution and not getting distribution in Walmart.
Do you think because you’re the challenger you’re willing to make concessions or business arrangements that an Apple or a Google wouldn’t make because they would say, particularly Apple, they seem very particular about distribution?
The details matter. So each of these companies have their own strategy and they have their own reasons for doing TV products. None of those companies have the reason of, “We wanna build the best cutting-the-cord box possible.” They have reasons that involve getting broader distribution for their proprietary platform, their ecosystem or their services. So Roku’s the only company that actually says, “Hey, we wanna build a product that has the most content, is the best cord-cutting box possible and is extremely inexpensive.” It costs $29 and is super simple to use.
The other thing is just, again, focusing on the specific market. The natural inclination for a lot of companies is, “We’ll use HTML,” but HTML has a lot of downsides. It’s designed for PCs and phones that have lots of computing power. It encourages the use of HTML frameworks that produce more complicated user interfaces. So again, it’s just like these details matter and so the result is a user interface that’s a little bit harder to use, costs a little bit more to build. Yeah it’ll run Netflix, but it costs more and it’s harder to use. So why would you buy that when there’s something that’s easier to use and costs less?
You call this a cutting-the-cord box, you’re explicit about that, but a lot of your distribution partnerships have been with people who professionally distribute TV, right? You mentioned Dish, maybe you didn’t mention them but Dish has been an investor, you’ve worked with them. Sky in the U.K. you work with. When I tried to cut the cord with what’s now Charter they said, “Do you have a Roku TV because if so you can stream our stuff through them, we’ve got an app.” It’s actually a lousy app but I don’t think that’s your fault. How have you managed to work with people who are still in the traditional TV distribution business?
Yes, that’s interesting. In our early days we used to avoid talking about cable, cutting the cord and stuff because we didn’t want to annoy our partners, but I think one of our goals is to be a good partner. A good partner for our TV partners, good partner for our retailers, good partner for our content partners, and we have MVPDs that are good partners as well. We have the Xfinity App on Roku. We distribute, like you said, we distribute streaming players through DirecTV, AT&T stores, through Sling, which is owned by Dish. So I would say that the answer is we try and be a good partner. For a long time they resisted the trend, but I think now most companies realize people are moving to internet for TV and they need to embrace that. So we wanna help them.
So the new thesis is streaming’s for real, it’s gonna happen and now you see people like John Stankey from AT&T/Time Warner saying, “There’s gonna be a handful of big players. There’s gonna be a Netflix maybe and an Apple and AT&T/Time Warner’s … There’s gonna be this consolidation. There’s gonna be five or six dominant sort of streaming platforms.” So all those should work with your devices and softwares.
That makes sense, but it seems like if that world happens it’s gonna be difficult for you to get money out of those folks. Already — and maybe this has changed, but in your S1, at least, you said, “We really don’t make any money from Netflix, even though that’s a dominant channel from us.” And you don’t make any money from YouTube. If there’s a handful of dominant streaming players, streaming providers, how are you going to be able to convince them to cut you into their business?
Well, just let me correct some misconception … We didn’t say we don’t make money from Netflix, we said we don’t have a material amount of money from Netflix, but we do make money. When a customer uses a Roku the first thing they see on the home screen is a Roku ad. They don’t often realize it’s an ad because we try and make it content oriented and useful for the customer, but we do get paid. So we get paid for every customer that we sell buttons on the remote.
Anyway, to answer your question, I think that … I agree that, well, I don’t think there’s gonna be five apps ultimately but I do think we are gonna start to see some content consolidation which is one of the reasons that we launched the Roku channel.
Explain what the Roku channel is.
So the Roku channel is a channel that Roku — owned-and-operated channel that Roku publishes, Roku streaming channel or an app. It started out as movies and TV shows. We’ve added news and we’re gonna keep adding other content categories. It’s free, ad-supported.
If you think about our strategy, our strategy with the Roku channel has sort of two big pieces. One piece is that the interface on a Roku is going to evolve from the way it works today which is an interface of apps or what we call streaming channels, to a more content-first user interface. So when you turn on your Roku on the home screen you’ll seen content recommendations. So for us the Roku channel is our sandbox for building that content-first experience and eventually it will become more prominent and might even end up as the home screen someday.
And I do believe there will be consolidation and that a lot of companies that are making their own apps today will realize and are starting to realize that our expertise is not being a direct-to-consumer service. We have great content but we don’t have the skills and we don’t sell ads, we don’t have the skills and machine learning and data to do recommendations. There’s a lot of things we don’t do, billing, there’s a lot of pieces that …
Yeah, but they’re all saying they wanna learn that now really quickly. For a long time they were content not to do it. Now they’re all spending billions of dollars trying to figure out how to do it.
The big guys. There’s a lot of companies I think that you might think of as big but are actually mid tier that will end up saying, “You know, it’s a lot easier for us to get distribution by doing deals with the scale distribution partners. We’ll go do a deal with Roku, and let them handle all that stuff,” for example.
You guys are essentially becoming the cable company, right? You were going to become a pipe and they were going to go through you, and there was going to be some value that you extract out of that.
We’re a content distribution company.
Yeah. I think that what will happen is content will get distributed on these large-scale content distribution companies, which Roku is the leader. Other big ones would be Amazon, Netflix is, but a little bit Netflix-specific, and maybe some of these virtual MVPDs will end up being the …
Disney, and AT&T/Time Warner.
Disney, yeah. For us, there’s this goal of building what we call a content-first UI, where people can publish their content on Roku, and as will get sold, they’ll get merchandise, or billed, and that will all be automatic. We will be one of those consolidation points as content starts to consolidate.
You’re both going to be a distributor of other people’s stuff, or you’re going to distribute the Netflixes and YouTubes and AT&T/Time Warners of the world, and you’re building up your own sort of channel that you think is going to become one of those dominant hubs, as well.
That’s right, and because on Roku, on the home screen, we just have an intrinsic advantage, and we believe on Roku’s platforms will be the easiest, best way to get that sort of content. There’s always going to be exclusive content in channels like Netflix, and you’re always going to want to run Netflix, so of course we’ll make those available, as well, but there’s going to be tons and tons of content that’s not necessarily exclusive that we will make available direct.
When I turned on my brand new TV, which I love talking about, and I put on Netflix, it said, “Hey, you’ve got a 4K TV, it looks like. Do you want to pay me an extra $4 a month” — I think it was — “to get 4K content?” Curious to see what happened, I said, “Okay.” I hit a button, and it’s like, “Great, now you have it.”
Do you participate in that exchange at all? Are you getting any money out of that deal? The additional $4?
Our general business model is that for subscription services like Netflix, when we sign up a customer, we get a share of the revenue.
In this case, I was already signed up. This was an upsell.
Yeah, so it depends on the specifics of the contract. We also generally get shares of the upsells. Netflix is unique. They’re Netflix, and we do have a deal with Netflix, but in general, it’s the non-Netflixes of the world where we make most of our money.
Right. The smaller players at a little … Netflix has a lot of leverage, and you have an awesome relationship that goes back with them.
Not just smaller. We get ones that … Netflix is unique in that most people have Netflix. No one else is like that. When we get paid, we get paid when we sign up a new subscriber. If you already have the subscription done, we don’t get paid.
Right, so you get a bounty for signing up at HBO?
It’s not a bounty, we get a rev share for the life of that subscriber.
You sign up an HBO customer, you participate in that?
Advertising, you talked about, is a big part of your business. There’s a trend, at least in part of the streaming world, away from ads. Netflix is ad free, HBO is ad free. You can get ad-free versions of CBS, Hulu, etc. Lots of folks still stick with the ad services, but do you worry at all that there’s going to be a push away from advertising among a big segment of your customer base?
No, not at all. This question is a pretty common question, but …
That’s what I do. I ask the obvious questions.
It’s a common question by smart people.
Here we go.
People think of Netflix as creating the streaming revolution, and there’s no ads on Netflix, but why do people cut the cord? They cut the cord for two reasons. One is they cut it because it’s a better experience streaming. There’s tons of content. You can pay for just what you want to pay for, it’s on-demand, so much better experience. They cut the cord to save money, as well.
We don’t think people want to replicate their large cable bundle costs in the streaming world, so we think what’ll happen is, and what we see, is that consumers will sign up for a small number of SVOD services, Netflix, maybe one or two others, but then they want to supplement that with a lot of free content. Probably the No. 1 question we get in search on roku.com for pre-sales is, “What can I get on Roku for free?”
People will tolerate advertising if they get free content, and they understand that value exchange and they’re comfortable with that?
Absolutely, and I think ad loads are going to come down. The Roku channel, which is a free ad-supported channel, we run half the ad load of traditional TV, so there will be less ads, but the CPMs of the ads are going up as they become targeted and scarcer.
Again, the idea of targeted TV advertising — we had Dave Morgan in to talk about this, because people have been talking about it for years. It’s still really nascent. I think anyone who’s watched Hulu or any sort of ad-supported streaming TV, as you said, you have seen the same commercial over and over, apparently, because they haven’t sold it. How far off are you from real targeting and actually understanding maybe who I am and what I might want to watch and not watch, or buy and not buy?
Every ad served on Roku is targeted, 100 percent targeted, one-to-one, personalized. Advertisers can buy lightly targeted ads. That’s often how they start, because they’re used to buying Nielsen demographics. One of our targeting segments is Nielsen demographics, so if you want to target 18- to 30- or 40-year-old males, you can do that. If you want to target people in the market for a car that make over $100,000 a year, you can do that as well. If you want to target people living in New York City, you can do that. If you want to target people with pets, you can do that. That is the future, and that is how we sell our ads. We don’t sell ads today by shows or by brands. We sell everything by audience.
But that said, the main reason TV advertisers are moving to Roku is because they’re following their audience. As people switch to streaming, if you want to advertise on TV to those viewers you have to run streaming ads. For example, Nielsen put out some data recently that said that 10 percent of Americans in the 18- to 34-year-old demographic are only reachable on Roku. If you want to reach those customers, you need to advertise on Roku.
What happens when there’s a new advertising platform is the viewers move first, and then the advertisers start to follow over a lag.
That’s for every platform?
For every platform.
There’s a lot of really smart business people, and smart tech guys and women, who have failed, because the ad market didn’t follow them as quickly as they thought. And they keep saying, “Look, now all the eyeballs are over here.” The ad guys is saying, “Great.”
Our ad business is growing over 100 percent year over year. It’s just a great business, and they are coming and we are leading the way on that. A couple years ago when we started selling ads, the advertisers were very skeptical. These days, you don’t have to convince them, you just have to get them to decide how much money they should move over.
You don’t have to spend time convincing them and explaining to them how this stuff works now? They get it.
No. There’s still a lot of work, but it’s a lot easier than it used to be.
When we talked a while ago, you weren’t public, you were still raising money, it looked for a couple years like you were ready to go public, you delayed that, you finally went, it looks like it’s worked out well. What has surprised you about that process? What did you not expect about running a public company?
I was surprised by how similar it is to running a private company.
Yeah. A lot of people say, “Don’t you hate being public? Isn’t it hard? Everything’s changed.” The reality is, Roku is … It’s not like the old days when people went public with $10 million in sales. Roku had substantial sales when we went public. We already put in place most of the infrastructure of a public company, just because we were a bigger company.
The only thing that’s really changed for us is a little more discipline on information. We can’t be quite as transparent as we used to be. But there’s a lot of great things. The stock is publicly traded. That makes it easier to hire employees, it allows anyone in the public to invest in Roku and be part of our experience.
You hear one school of thought, people say, “Oh, yeah. He had his quarterly reporting, you get to spend all this time putting out those reports and it shortens your focus.” There’s another school of thought that says, “This is a great discipline for running a company, because you can’t hide problems.” It seems like you’re, at least, on the second — you seem okay with it.
Yeah. We were already doing quarterly reports to our board. They’re more detailed and there’s a lot of audits, but there’s not a lot of change.
How close did you get to selling a company? I’ve written about the fact that Amazon was looking at you guys. Was that decision not to buy you, was it your decision not to sell?
I had the luck of making a fair amount of money early on in my career. I’ve had some successful — Roku means “six” in Japanese, it’s my sixth company. The prior companies, many of them were very successful. I don’t want to sell Roku. Of course, we would look at any offer seriously, but it’s not like I feel like we need to sell Roku for personal financial reasons. And also, I’m a big believer that …
By the way, I think you’re the first person I’ve ever talked to, at least on the record, who said, “The fact that I had made money in a prior life changes the way I look at selling or not selling this company.”
Thank you for your honesty.
Oh, that’s a big deal.
You’re the first.
No, that’s a big deal, I’m sure. Everyone thinks that.
They just don’t say it.
Oh, really? I don’t know why they don’t say it. It’s obvious. The more important thing is all about leaving upside on the table, so if you think a company will be successful, other than you’d like to get some cash to change your life, why would you sell it? It’s going to be worth more in the future.
I think we’re in the early days of streaming, I think Roku will power almost every TV in the world. That’s a hugely valuable company. If we sold the company now, we’d be leaving all of that upside, we’d be giving that upside to whoever buys the company.
The Amazon thing that I’m talking about was a couple years ago. More than a couple years ago.
I don’t know anything about Amazon. That was all rumors.
No, it wasn’t rumors. You can’t be honest with me in one sentence, and then be not honest … That’s all right. You don’t have to talk about it, but I get to ask.
We’ll move off into the future, you came up with a line of speakers recently. I understand why lots of companies — Apple, Google, Amazon — want to get into speakers, they’re all launching smart speakers. Yours is not a super-smart speaker. There’s not an AI, there’s no Alexa/Siri equivalent in there. What’s the point of building out speakers for you guys, and other hardware?
Yeah. Roku is all about making TV better. How can we make TV better? We believe there’s lots of room to continue to innovate. We’ve innovated a lot. We did the first Netflix player, we did the first app store for TVs, we were the first to ship almost every major service, we invented the stick form factor for streaming players, the streaming stick, we invented the private listing where you can plug your headphone into your remote control and not bother people while you’re watching TV.
Innovation is at the core of one of the reason’s we’re successful, and we still think there’s lots of room to make TV better, and one of the things about TVs is, as they get thinner, this audio quality gets worse. A lot of people want to add sound bars or home theater systems, and the desire for that is just getting bigger, but it’s hard for mortals to hook up audio to their TV. If they’re successful then they often end up with multiple remotes and all this stuff. Why can’t you connect a speaker to your TV by just plugging into power and just having it connect automatically and work?
If someone who’s struggling to connect my TCL Roku to my Vizio Soundbar that I also bought …
Yeah. Oh, you should totally get a Roku speaker, wireless speaker.
I wish I’d — and then it’s got this whole lag problem. I get why, as a consumer, I might want to buy from the same …
This lag problem is a good one that you get with all of these, because these things don’t really work well together, the audio gets out of sync. We control the software in the speakers and the TV, we can produce a product that has zero lag.
I get, as a consumer, why I might want to do this. I’m very frustrated. That solves the problem for me. On your end, though, your business, you’ve already explained, is selling services and advertising, so selling me a soundbar, I don’t see how that helps you, unless that you’re making margin, and if you’re not making on the TVs.
Right. Our business model is to sell a lot of TVs and then monetize those TVs. In the “get you to want to buy a Roku TV” category, we want to make Roku TVs better. One way we can make them better is making it so that it’s easy to add peripherals to your TV. That’s why we do it.
We don’t necessarily have to sell hardware. We also have a licensing program. We license our Roku. We call this the Roku Connect technology. It’s available for license. I don’t know if we’ll keep selling speakers or not, but in the early days, we felt like it was important to just show … to build a good product. This is how it should work, demonstrate what’s a great consumer experience, and then we’ll continue that. We’ll license that, as well. Our goal is to make Roku TV a better TV. That’s why we’re doing it.
Are there other peripherals that you can think of that’ll enhance my TV-watching experience? Tell me about them in advance so I can write about them, but also not purchase someone else’s products instead?
Remote controls are an obvious one. For example, you didn’t mention it, but the wireless speakers actually come with a new form factor remote control, which is a wireless remote control, in sort of a puck form factor. It looks like an Amazon Echo or something, or a Google Mini, but it’s battery powered. You can put it on your kitchen counter, you don’t have to plug it in, and you can talk to it and say, “Hey, Roku, play …” Actually, it uses the button. It’s not far-field, so you press the button and you say, “Play music on my TV.” Your Roku TV turns on and music starts playing.
It’s another to enhance … A lot of people listen to music on their TV, so it’s another way to make it easier to have a better TV experience. That’s a peripheral. That’s a wireless remote peripheral.
What else is coming?
Uh, we don’t talk about future products.
All right, so you’re not going to explain the roadmap to me? Not going to lay it out in this podcast?
Our secret roadmap, no. I’m not going to discuss that.
All right, we’ll come back again over the roadmap. Anthony, this has been great. Thank you.
Thank you. It was nice to see you again, and thanks for having me.