Roku Working on SoC Solution for ‘Effective,’ ‘Low-Cost’ Smart TV

Ultimately, Roku expects an SoC (system on a chip) solution for its streaming platform where it handles the software and support for TV makers, Shannon said, but the company hasn’t announced a timetable for the chip. Roku will initiate a “big effort” toward chip integration next year, but whether a solution will appear in 2013 or 2014 “hasn’t been pinned down,” he said. He called the SoC approach a more “effective, high-quality, low-cost way” for a TV company to get to market with smart TV.

Second- and third-tier TV and component makers are Roku’s target as well. Roku’s model offers brands a way to offer smart TV via the Streaming Stick that launched earlier this year without having to make the investment required for their own platforms, Shannon said. “It’s not realistic for content providers to support low-volume platforms with apps, he said, saying Roku has leverage with 650 channels. Brands Roku is working with that can’t support their own app platforms include Haier, Mitsubishi, Oppo, GlobalVue, Onkyo, Integra, Hitachi, Element and Tmax, he said. To be “Roku-ready,” video hardware needs an MHL (Mobile High-Definition Link) port and requires companies to offer either “hard” or “soft” bundles, he said. A hard approach has been taken by 3M, for one, bundling a Streaming Stick with its MHL-enabled projector, he noted.

Most of the Streaming Stick volume won’t be retail-based, Shannon said, and will come instead from TV bundling deals. Regarding the future path for MHL, Shannon told us MHL had a “false start” with the idea of “plugging your cell phone into it,” he said, but Roku is hopeful that the plug-in smart TV concept will drive further penetration of MHL-equipped TVs going forward. He compared MHL’s path to digital cinema where the industry originally thought digital masters would be the impetus for digital cinema but instead “3D ended up driving it.” MHL-based smart TV is a “pretty simple proposition,” he said, “and it seems to be working.” The embedded base of MHL-enabled TVs includes some Toshiba, Samsung and Insignia sets, but he expects the market to gain traction in 2013. “I think it'll be really popular at the low end,” Shannon said, “and that should drive it upstream."

Citing the news of the Disney-Netflix deal, Shannon said, “The whole notion of watching video over the Internet has shifted, and it’s no longer the early adopter experience.” Despite Roku’s reputation as an early-adopter product, Shannon called the Roku audience “the Walmart crowd; we're very mainstream and Middle America.” Roku products are sold at Target, Best Buy, and Amazon through 12,000 retail locations, he said.

As part of Roku’s mainstreaming, boxes have reached promotional pricing of $39.99 this holiday season, making it a “stocking stuffer,” Shannon said. During Black Friday the company sold on average one player every two seconds, he said, saying, “we're moving units by the millions.” The company has an embedded base of 5 million units, he said.

Roku is riding the wave of Internet TV, and subscriptions to online streaming services have grown by five times in 2012 over last year, Shannon said. Most TVs will connect to the Internet “eventually,” he said, and Roku believes “virtually all TV will be watched over the Internet over the long run.” By the end of 2016, he said, 68 million devices will be hooked up to the Internet in U.S. homes, which will have multiple connected devices.

Roku expects to be a major part of that picture, with expansion plans that include deals with cable operators. Shannon “wouldn’t be surprised” to see Roku working with cable operators as part of their “overall platform for the future,” he said. A misconception is that most streaming video is viewed via smartphone, but “that’s not the case,” Shannon said, citing NPD figures showing 45 percent of online video viewed on TV, 14 percent via desktop PC, 17 percent via laptop and one percent each via tablet and netbook, he said. Roku customers’ streaming usage has grown from nine to 12 hours per week from 2010-2012, Shannon said.

Roku has segmented its business into retail, connected TV and services, Shannon said. The future of streaming lies in the set-top box and connected TV segment, and Roku plans to “cover a lot of market share,” he said. The company has recently put added focus on driving revenue per box once boxes are in the market, he said. With an installed base of 5 million boxes, the company has leverage now with content providers, he said. For many of Roku’s content partners, “we are the most important over-the-top distribution vehicle they have,” he said. That enables Roku to drive advertising revenue models and win share of subscription revenue and transactional revenue, including the sale of games, he said. Roku nets as much as 30 percent of transaction revenue through its apps, he said.

Roku is on track with where it planned to be, Shannon said. The company’s hardware business remains profitable, and services revenue augments hardware business, he said. Shannon called the Roku Channel Store the company’s “revenue source of the future,” saying Roku has the biggest content selection of any OTT platform. “We tend to be first with most channels,” he said, making the company a target for its competitors.

On the future of streaming hardware, Shannon noted that game consoles currently lead in hours of video streamed, but that’s changing, he said. “Our footprint is growing much faster,” he said. Game consoles, PCs and Blu-ray players’ share of the streaming market will continue to decline as share of streaming boxes and connected TVs grow, he maintained.