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How Roku Morphed From a Quirky Hardware Startup to a TV Streaming Powerhouse

Roku founder and CEO Anthony Wood doesn’t fit the image of your typical tech mogul. In person, he comes across as quiet and introverted. He keeps a low profile in public and eschews the Silicon Valley hipster look for country-boy outfits that include overalls and dad jeans with suspenders. But judging by the company’s first earnings report in November, he’s a bona fide billionaire, controlling just over a quarter of outstanding common stock for a company whose share price more than tripled since its September IPO.

Spend some time with the 52-year-old and you’re not surprised at all to learn that he singlehandedly wrote Brightscript, the in-house programming language that powers the 5,000-plus apps currently available on Roku. “It was kind of a side project. Just for fun,” Wood tells Variety. “Like a hobby; something I worked on for a few years.”

Wood’s understated demeanor shouldn’t distract from the fact that he has been single-mindedly driving the ascent of Roku for the past 15 years, transforming it from a small hardware start-up to a publicly listed company with an estimated 2017 revenue of $500 million and a $5 billion market cap. Roku makes the most popular streaming players in the U.S., regularly outselling much bigger rivals like Google, Apple and Amazon, and has earned the financial backing of media giants like News Corp., Sky and Viacom. Now, the company is getting ready to upend the $70 billion business of TV advertising in the U.S. while also taking on Amazon’s Echo and other smart speakers.

Roku isn’t Wood’s first stab at playing in the big leagues. “I’ve been starting companies since I was 19,” he says. In 1996, Wood struck early gold when Macromedia scooped up one of his first start-ups for $36 million. But he also had some misses. In the late ’90s, he built one of the first digital video recorders, only to see TiVo emerge as a victorious competitor. “That hurt,” says a former employee, speaking with Variety on condition of anonymity.

The experience instilled in Wood a desire to get it right the next time around. His game plan: Found a company, grow it well, take it public. Over the years, Roku has been approached multiple times by big corporations looking to snap up the upstart, with suitors including Amazon, Intel and Cisco. Wood rebuffed them all and stayed the course.

Much of Roku’s battle plan to take on internet giants like Amazon and Google as well as TV manufacturers like Samsung and Sony was set from day one, according to Wood. “We decided the best way to compete with those folks is to focus on value, content and ease of use,” he says. “Those are our tenets, and they have worked really well for us.”

After first dabbling in devices for digital photos and internet radio — and a brief stint at Netflix — Wood and his team began shipping Roku’s first streaming player in 2008. That device looked a bit square, and Roku’s original user interface was anything but flashy. Wood instead aimed for simplicity, banning all but the most essential buttons from Roku’s remote control, and calling apps “channels” to help TV viewers in their transition to the new medium. “Companies commonly overdesign something and make it kind of pretty, but not easy,” he says. “Customers, what they really want is easy.”

Roku has kept its eye on simplicity ever since that first player while also making products that often are far more affordable than those of its competition. “People underappreciate how important price is,” Wood says. “At the end of the day, $10 at retail makes a huge difference.” Parks Associates senior research director Brett Sappington agrees that low prices were key to the company’s success. “That really helped Roku,” he says.

But while Roku was outselling Apple and long-gone start-ups like Boxee in the streaming-device space, a new threat was emerging: TVs with built-in apps. “A streaming media player is essentially a way to make a dumb TV into a smart TV,” Sappington explains. “If you have a smart TV, you don’t necessarily need a streaming media player.”

For about two years, Roku considered building its own TV set in-house. “Then we decided: No, that’s a way to lose a lot of money,” remembers Wood. Instead, the company teamed up with Chinese firms looking to enter the U.S. market and willing to undercut the competition with budget-priced TV models — a strategy Sappington calls “a very smart decision.” And with millions of active users and growing brand awareness, Roku was able to talk to TV makers eye-to-eye and demand that they not change a thing about its software. “We had a big enough brand that they were willing to do those kinds of deals,” Wood says.

The result has been a successful partnership with TCL, which has become the fourth-biggest TV maker in the U.S. after entering the market with Roku TVs just three years ago. Altogether, Roku is licensing its software to eight consumer electronics brands, and one in five TVs sold in the U.S. now runs the company’s software. Roku’s advantage in this space has long been that it’s seen as a kind of Switzerland — able to make deals that don’t push its own hardware or ecosystems — which is not true for some of the industry’s biggest players. “No one wants to partner with Amazon or Google” for that reason, says Needham & Co. senior analyst Laura Martin.

But to really understand Roku, you have to look beyond the streaming boxes, sticks and even TVs. “People think of Roku as a hardware company,” says Martin. “It is not.”  Rather, the firm is leveraging hardware to acquire users, which can then be monetized via advertising and licensing fees. “The goal was always to generate revenue by monetizing the platform,” says Wood. “As our scale started to approach 5 million active accounts, that’s when we said, ‘Now we can start focusing on monetization.’”

Roku began approaching publishers on its platform starting in 2014, asking them for the opportunity to either sell a share of their ads or get a cut of their revenue. Some publishers were taken aback by the company’s demands, and a few of the biggest ones have successfully rebuffed Roku over the years. For instance, Roku told representatives of music video service Vevo in 2016 that it had to fork over a share of its ad revenue or leave the platform, according to a source with knowledge of these conversations. Vevo, which generates the vast majority of its views on YouTube, retorted that it would rather leave than share a single penny. In the end, Vevo prevailed, staying on Roku without a commercial deal in place.

Roku also isn’t making any money with YouTube, the second-most-popular channel on its platform. This lack of income from some of the most-viewed channels on Roku prompted Morgan Stanley analyst Benjamin Swinburne to call Roku’s valuation “hard to justify” last week, resulting in its share price dropping 15% in two days.

But for a growing number of publishers, Roku is becoming an important partner, capable of getting comparably high CPMs for their content. “Increasingly, for the middle and long tail, we are their ad sales team,” Wood says.

In just the past few months, Roku has undergone another transformation: In addition to selling ads for third-party channels, the company now runs the Roku Channel — its own ad-supported free video service — on its devices. These efforts are overseen by Rob Holmes, who joined the company in early 2017 from Comcast, where he was the senior VP in charge of advanced advertising.

In addition to working with existing partners, Holmes has been striking deals with Hollywood studios to directly license their catalogs for the Roku Channel. Getting those deals took some education, Holmes recalls. “We didn’t have the mindshare that we should have had, given the size of the platform.”The Roku Channel was introduced in early September. Three weeks later, the company went public — and with that, almost overnight, the world woke up to Roku’s size and aspirations. “The IPO has really helped,” says Holmes. “It’s much easier [now] to come in and have conversations with folks about who we are and what we are doing.” Wood has said that he eventually wants to have every movie catalog title available for free on the Roku Channel.

Holmes’ own goals are a bit more modest as he aims to figure out how to program to Roku’s audience and strike deals that are workable for both sides. This may include more TV shows in the future but not necessarily exclusives. And no, Roku isn’t looking to produce its own Netflix-like originals. “That is not something we have in our plans right now,” says Holmes.

Still, his message to Hollywood is clear: Roku is already in the content business, and it wants to be top of mind as studios think about windowing their content. “We are a very viable outlet,” says Holmes. “We should be one of their first calls.”

Roku is also getting ready to significantly expand its hardware business. Just last week the company announced an expansion into the home audio space. For this, Roku is once again teaming up with consumer electronics brands, which will license the company’s technology to build smart sound bars and speakers with integrated voice control. Roku-powered speakers will work together throughout a consumer’s home, capable of playing the same song synchronized in every room.

Smart, internet-connected speakers are not a new idea. Forrester Research recently estimated that 15 million U.S. households already owned a smart speaker by the end of 2017, and Amazon was expected to once again sell millions of its Echo devices over the holidays. Google has aggressively been pushing its own speakers; Sonos has been transitioning to voice-controlled devices; Apple is about to unveil its HomePod. Samsung, Microsoft and others are pushing into the market as well. “There are already too many smart speakers,” says Internet of Things expert Stacey Higginbotham.

Roku is betting it will have a chance to succeed in the market by making its own products TV-centric. “We see TVs as the central part of a growing home entertainment network,” explains the company’s VP of product, Mark Ely.

Roku has been investing heavily in research and development in this new growth area, acquiring Danish multi-room audio start-up Dynastrom in November for $3.5 million, as Variety was first to report. Roku even built its own smart assistant, meant to compete head-to-head with Amazon’s Alexa, Apple’s Siri and Google’s Assistant, thanks to an emphasis on media consumption. “We are an entertainment company,” says Ely. “An assistant has to be really great at entertainment.”

Higginbotham has her doubts about Roku’s chances in this space but agrees the company needs a voice strategy.  “Voice has become an essential interface in the home,” she says. “It democratizes access to devices.”  In other words: Voice makes things easy — and Roku can’t afford to be perceived as hard to use.

Other risks for Roku going forward include its international business. The company has been the market leader in the U.S. but has had a much more limited footprint abroad, largely relying on pay-tv operators that use white-label versions of its streaming boxes. “Roku has been slow to expand globally,” Sappington says. That has given an opportunity for Amazon and Apple to take the lead in Europe and elsewhere.

Still, some believe that Amazon, Apple and Google will have a hard time catching Roku. “That [goal] was reasonable three years ago,” says Needham & Co.’s Martin. She believes that Roku will continue to see solid growth in its user and revenue numbers, in part because of the underlying trends in the industry. Everything is moving to streaming — and Roku is ready for that. Case in point: Disney is planning to launch its own Netflix competitor in 2018, likely driving even more consumers to give internet TV a chance. “Disney will give Roku a big boost,” Martin says.

Wood, meanwhile, is getting ready for the next phase of his plan: growing Roku from a NASDAQ newcomer to a big, and eventually profitable, public company. He still won’t be a flashy CEO in fancy suits — but he did recently coin a new catchphrase: “It is a great time to be in the streaming business.”

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