How Roku is kicking the cable industry’s butt & where it’s going next [exclusive]

Anthony Wood (pictured) is Roku’s CEO, and at his house (he’s married with three kids), each person gets seven hours of TV each week — all sans cable, natch.

The family gets its fix primarily from Amazon’s pay-per-view video selection, he said, and hours are logged on a per-person basis using the BOB screen time manager.

But there is some cheating in the system; when his wife sits down for Modern Family, for example, a few others will join the viewing party without having to log in themselves, meaning most family members get more than seven hours of TV per week.

It’s a small infraction, and Wood seems generally nonplussed. The important part is the way his family gets their TV fix — via the web and a small set of services and hardware that are severing ties between consumers and cable companies.

In an exclusive interview with VentureBeat yesterday, Wood talked at length about his company, their competitors, the changing entertainment industry, and where we’re all headed over the next couple years — including Roku.

“Forcing change”

“The Internet is clearly going to revolutionize the way we get video,” Wood begins by stating the obvious. Both he and I (a happy Roku user) know that the online TV revolution is well underway. Wood sees the evolution nearing its completion relatively quickly. “I think over the next four years, most Americans are going to get their video over the Internet,” he said.

Even old-guard cable networks like HBO are rolling out online subscriptions; Wood points out that web incumbent Netflix has called out HBO Go, an online companion to the channel’s traditional subscription, its biggest competitior.

“There’s a lot of change coming; a lot of stress for the industry as it figures out how to move to this new world,” Wood continues. In a way, he sees the pressure the music industry faced ten years ago being echoed in today’s video wars; the only reason this battle is being staged ten years later is that we consumers now have the bandwidth to get what we want from almost all forms of media, not just small MP3 files.

Still, most of those heading up content creation for film and television don’t see the Internet as a primary means for getting and consuming video content. “The content owners view TV as their traditional market,” said Wood. “They view watching on your laptop or phone as a second, incremental market.” Because of this worldview, he said content creators will give Internet-enabled viewing rights to PCs a lot easier (and cheaper) than rights for Internet-connected TVs. Cable operators still see the television set as their proprietary domain.

And if you’ve ever wondered why, for example, you can watch some Hulu Plus shows on your laptop but not on your TV, this is the crux of that issue. Every few years, content creators and cable operators renegotiate the rates that the operators pay to license the content. And if, for example, ABC let Hulu give its users the ability to watch Pretty Little Liars on Internet-connected TVs, the cable operators “will use that fact to pay less during the next negotiations,” said Wood. “Or they’ll take [the content creator] from channel two and put in on channel 638.”

Still, in spite of this seeming stranglehold, Wood said, “The Internet is forcing change. Why is HBO Go around? It’s because of companies like Netflix… and the incumbents realize they have to do a lot more to compete. It’s forcing them to give consumers more choice.”

After all, for every roadblock cable operators create, creative consumers find a way around it. Whether it’s torrenting content we can’t buy online or setting up our home media servers to stream web content to our TVs, sisters (and brothers) are doin’ it for themselves. And sometimes, when we realize we’re doin’ more for ourselves than the cable and satellite companies are doing for us, we simply cut the cord.

But most of us still maintain some relationship with a tradition TV provider — for now. “We survey our customers, and we ask them what they did with their cable package after they about a Roku,” said Wood. “Around 40 percent cut back or cancel cable, and that’s split half and half,” in other words, 20 percent cancelled and 20 percent reduced their service. “And that number is pretty consistent, so the majority of Roku customers have cable or satellite, and Roku is additive. It’s an extra source of content.”

But that supplement is rapidly trending toward becoming the norm. “It used to be people watched around four hours a week on Roku,” said Wood. “Now, they’re watching 12. I think in four years, it’ll reach 30 hours, and most people today watch 35 hours each week.”

The cable connection

But cable networks and providers don’t want to get cut out of the deal completely, so they’re attempting to keep pace with consumer-driven change and innovation.

“The big trend that’s happening now — a lot faster than I thought it would — is that the cable networks and operators are embracing the Internet and doing authenticated packages,” said Wood, citing HBO Go as an example. This service, while it still requires you to be a traditional HBO cable subscriber, allows you to have access to Internet content with on-demand features and the like.

“Over the next year, all the major cable networks and operators will be on Roku,” said Wood. “The next step after that, sometime this year, will be a company that offers an over-the-top cable package… And then, all hell’s gonna break loose.”

But Wood doesn’t see à la carte service for cable content coming any time soon; the traditional system of bundles has too much money and legacy tied up with content to ravel that quickly. “I think what you’ll see is fraying of the bundles, different packages with less content bundled, different kinds of packages, some à la carte products, and a much better experience,” he said. “There are also companies looking at doing these virtual cable packages… they’ll charge a monthly fee.”

He continued to explain, “In the next couple years, a lot of customers are still going to buy a cable package from a cable operator, but you probably won’t get your box from the cable operator anymore… and then you’ll be able to sign up for a whole bunch of video options on that box. And it won’t be controlled by your cable company.”

Don’t feel too bad for the cable operators, though. Wood said they’ll continue to make money on their highest profit margin item: high-speed Internet and related products and services.

As far as fraying the cable bundle, Wood sees premium content channels such as HBO and Showtime being unbundled first. “But look at ESPN,” he pointed out. “It’s owned by Disney, Which owns about seven different cable networks. And those guys, I don’t think they have any plans to let you buy ESPN without buying the whole package.”

Another interesting challenge is sports. TV content for sports programming is often signed over to networks like ESPN for hefty licensing fees. “They paid billions of dollars for those rights, and they want to make sure they get paid for that content,” said Wood. “The industry knows they need to start offering their content over the Internet, but they don’t want to cannibalize their exsiting business.”

And while most of the major sports networks (except NFL) are on Roku right now, Wood said they’re all out-of-market because of the aforementioned licensing deals. For sports fans, he concluded, “It’ll come down to getting your local station or ESPN over the Internet.”

Apple and Google: The competition

“Our target audience is people who watch TV,” said Wood, outlaying the major difference between the $50 Roku box and the hundreds-of-dollars competition.

“It needs to work for everyone. The most common mistake tech companies make with TV is they make it too complicated.”

In fact, Wood continues, bang for the buck and drop-dead simplicity are two of the company’s core principles, the third being providing great content.

Due to its affordability, Wood said of the Roku box, “We outsell Apple TVs in the U.S…. We compete with them, they’re a streaming box, but the similarities end there. [Apple TV] is an accessory for the iPad and iTunes. Roku has over 400 channels, and none of that is on Apple TV.” Referencing AirPlay and the walled garden Apple has created for streaming media and hardware, Wood said, “Our focus is to be the non-Apple alternative.”

As for Google TV, Wood said the reason not many have been sold is one of simplicity. “It’s hard to use, and there isn’t a lot of content. …I think [Google] fundamentally believes TV should be about search and activity, and I don’t think that’s true.”

He adds, “Also, the content companies don’t really like Google; there’s a lot of conflict there.” Conflict might be an understatement. Google and content creators stood on opposite sides of SOPA/PIPA, the legislation that emphasized the deep rift between Hollywood and Silicon Valley. And over and over again, content creators have asked Google to take a stronger stance against film and television piracy, never with satisfying conclusions.

With piracy as the main point of contention — and one that’s keeping consumers from enjoying a fruitful collaboration between the entertainment and tech communities — than no party is closer to the center of that debate than Google. All this makes imagining happy partnerships between content companies and the search giant a near impossibility, at least for now.

Where Roku is going next

Currently, Roku has sold more than 2.5 million of its boxes. In 2011, sales tripled, and half those sales occured during the holiday season, when the company made a huge marketing push. Overall, said Wood, “Sales are huge, we’re getting 132 percent year-over-year growth on average.”

Wood said the company expects to sell 19 million boxes over the next three to four years. But for 2012, Wood said smart TVs are going to be the next focus for Roku. At CES, the company unveiled its streaming sticks, thumb-sided drives for MHL ports, which Wood said should be part of all new TV sets within four years.

“If you look at the way people view streamed video content, the majority of it is on game consoles,” said Wood. “But the percentage of hours on consoles is declining, and the percentage on Roku and smart TVs is growing.”

Smart TVs, he admitted, are currently a very small part of the overall market, but, he continued, “It’s a market that we want to make sure we’re participating in.” And the streaming stick, while it is a stand-alone product, is “more of a strategy for us,” he said. “We did a deal with Insignia, and we’ll be doing bundles with them. We have deals with other major TV OEMs we haven’t announced yet.”

In addition to the streaming stick and adding more authenticated channels like HBO Go, Roku will be concentrating in 2012 on bringing more games to its newly launched gaming platform.

And yes, Roku-interface haters, Wood said drastic improvements to the user interface are coming this year. “Now that we’ve got 400 channels, and more channels coming, we want to make finding and searching for channels easier, too,” he said.

Now, all Roku has to do is break into profitable territory — an as-yet-unreached goal for the company, which has been pouring money into product development and marketing.

“If you think of the range of new connected devices, at one end you have Apple. They make almost all their money on hardware,” Wood said. “And on the other end, you have companies like Amazon that sell their hardware at cost but make most of their money from content. We’re more toward the Amazon end. We make some of our money from the hardware… but we get revenue share. We did about $100 million in sales last year, but we’re still not profitable. We’ll prbably turn a profit sometime in 2013.”

Of course, with sales and revenue share from current products alone, Wood said the company could be profitable right now if it wanted to. “But theres still so much to invest in, so many opportunities.”