Device maker could help Rupe sidestep multichannel middlemen

Because Rupert Murdoch is known for making bold moves, subtler ones like a modest investment in Roku announced Thursday are easy to ignore — yet prove just as significant.

A small gizmo maker getting a $45 million round in financing led by News Corp. and BSkyB may pale to thunderclaps like the launch of iPad-only newspaper the Daily or an acquisition of once-leading social network MySpace. But this could be the humble beginning of a pivotal shift in the post-split era of his conglom.

The toehold Murdoch has bought into Roku could represent his re-entry into the distribution side of the media business he vacated in 2008 when he sold his stake in DirecTV to Liberty Media. A pivot this ain’t: News Corp. still has distribution DNA at the very top given that chief operating officer Chase Carey came over from the top job at DirecTV.

But this time around, Murdoch could be setting himself up to deliver content in distinctly different fashion, which could have implications for both the pay-TV biz where News Corp. makes most of its money, and the digital powerhouses like Apple, Amazon and Google challenging incumbents like Comcast.

Sources within the conglom say it is simply a minority investment — News Corp. is getting only a 7% stake in Roku, according to an insider estimate — in a device manufacturer that has all the makings of a great growth story. By selling cheap hardware with hundreds of app-based TV channels, the four-year-old Saratoga, Calif.-based venture has outsold rival product Apple TV in the U.S. with 2.5 million boxes, though Steve Jobs’ “hobby” has a global total of 4 million, according to Apple’s third-quarter earnings call earlier this week.

With the cash infusion, Roku is going to try to catch up overseas and diversify its product base beyond the box to wireless hardware like a Streaming Stick, a dongle that can deliver Internet video to TVs via their HDMI port. First glimpsed at CES, Streaming Stick is being released in the fall.

“Roku’s significant technology advantage, coupled with a strong market position, places them in a unique position to be an integral part of the television landscape for years to come,” News Corp. chief digital officer Jon Miller said in a statement.

In addition to the funding, News Corp. will put Miller on Roku’s board. That appointment is noteworthy because Miller, whose unofficial job is being Murdoch’s resident media futurist, is all about reinventing News Corp.’s content kingdom for a digital age where its brands establish a direct-to-consumer relationship with users rather than get filtered through middlemen like cable operators or search engines.

To get a glimpse of how Miller sees News Corp.’s future, consider its apps for assets IGN and Wall Street Journal, which are available on Xbox Live Marketplace. While a gaming tastemaker and a national newspaper might not seem cutting-edge examples, they produce tons of video content that don’t have to be locked into the multichannel world of authentication the way brands like FX or Fox News Channel are. They’re essentially TV channels that happen to not be on TV.

“We’ve got real religion atop News Corp. about relating to consumers directly,” Miller said on a panel at New York’s Paley Center earlier this year. “The biggest thing we’re working on is how do we go to the B-to-C model, how do we directly relate to consumers. If media companies don’t do that going forward, they are extremely disadvantaged.”

In Roku, News Corp. can potentially re-assert itself as a middleman mediating the content experience on its own terms in a way it can’t in the multichannel world where it’s most lucrative properties have little flexibility. Even if the multichannel world maintains its market share for decades to come, there is still a significant secondary business to be had where Roku resides, and News Corp. has just put a chip on that table.

Instead of putting all its eggs in the pay-TV basket, News Corp. is moving one that can hatch in the long-term as a distribution vehicle. Which isn’t to say Roku is even an either-or proposition when it comes to pay TV. Like Netflix — which counts Roku as the very first device on which that brand streamed content — the venture has always been careful to portray itself as a complement to cable TV. Its data shows less than half of its buyers cut or shave the cord. Earlier this year, Comcast even cited Roku as a place where its subscriptions could be available in a manner similar to what it’s doing on Xbox.

If there’s a fight News Corp. could be picking here, it’s not with Big Cable — it’s Big Tech. There’s dissatisfaction on News Corp.’s part with Apple, Amazon and Google, which have always treated content as garnish for the main course: the hardware sales that are more material to their business. They’ll never value content on the levels the News Corps. of the world want them to. With Google in particular there’s no love lost given Murdoch’s zero-tolerance stance on piracy.

If its investment is any indication, News Corp. may have picked the hardware horse it intends to ride into the digital future, which could come to the exception of Roku’s much bigger competitors. Maybe News Corp. is getting on board an iTV killer before Apple actually ever launches its ballyhooed TV.

Apple has rammed its head again and again against the closed door of Hollywood, which so far hasn’t had to knuckle under to digital distributors dictating unfavorable terms to license content the way the music industry was undone. As News Corp., NBCUniversal and Disney have already demonstrated with Hulu, they want in on the action instead of simply handing off their product from the outside.

Now Roku may get a leg up on its bigger competitors by letting at least one content company get a piece of its pie. The loss of autonomy may be worth it in the long run.

Of course, at this point, Roku is just a small investment for News Corp. and BSkyB, not an acquisition. But Roku may now be bearing the seed from which a profound strategic shift can sprout for Murdoch.

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