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Chat with Roku on hurdles to online video market

Roku makes a box for your television that allows you to watch shows and surf the Web from your living room couch. The Saratoga, Calif.-based company just announced deals with Facebook, Pandora, Flickr, Mobiletribe and to bring 10 new channels to its streaming media player. The 7-year-old company has a deal with Netflix to stream its videos to televisions.

But getting videos and other content on Roku's box has been slow in the making. Jim Funk, vice president of development, says much of that has to do with the aging business models of the cable and programming industries, which are loath to put everything online right away.

Indeed, with new online strategies called TV Everywhere about to launch next month, analysts say Comcast, Time Warner and satellite operators will keep television shows and movies closely held by tying that content to cable subscription models. In other words, to get Comcast On Demand Online shows over the Web, a user will have to first be a cable subscriber.

Ben Scott, of the public interest group Free Press, criticizes the practice, which he said will hurt smaller competitors such as Roku, Hulu and Vuze. Citing its inability to sustain its business without attractive content, online video distributor Joost just sold its assets to an investor. Scott says the TV Everywhere model is akin to a newspaper giving passwords for online news only to readers who subscribe to a physical newspaper.

The Federal Communications Commission criticized a lack of competition and innovation on set top boxes for television as a hurdle to broadband adoption. The FCC sees the 99 percent penetration of televisions in U.S. homes as a way to get people to use the Web, if the boxes that feed content through televisions also integrated Internet applications.

Funk says the industry is just emerging, so it will take time for online video and Internet over televisions to take off. Here is an edited version of our recent interview:

What’s holding back the online video market and Internet over the television?

Funk: We’re still early in a lot of ways. When you see something is possible, then you wonder why we aren’t there yet. We’ve seen a lot of PC-delivered video that can deliver high quality video over the Internet to people’s homes. So it’s entirely technically possible to put video over Internet to the PC. If we were sitting here three to four years ago, we would be saying same thing – why aren’t we there yet? Sometimes it just takes time to get there. Don’t be impatient.

But why? And what are the market forces in play that are determining how the online video market will shape up?

Funk: First, it’s because of technology, how to make a simple and good user experience and how to make it reliable. A lot of people are inventing in networks and servers to make it smooth. Every generation of products are made to make it better.

The second issue is the business model. If you look at networks and cable networks, they have a lot of infrastructure and shows that are expensive to use. Revenue to do that comes from today’s model from the cable and satellite bill. They charge an amount per month to a content owner, and the content owner inserts advertising. The model on the Internet doesn’t have the same subscriber base and revenue. For them to take all existing shows and move to the Internet would potentially result in at least near term a significant drop in revenue. That is changing, but that comes with growth of audience. And it comes with better technology and getting advertising and maybe a better business model. But those things are being worked through, and it's up to the content owners to make business decisions.

The third reason is consumer behavior. Even though online video is popular, people watch TV or DVR (digital video recorder). All those things are changing really fast, though.

What do you not have today that you want to be able to offer?

Funk: Some sports, for example. If we offer a football game at 1 p.m. Sunday afternoon, that is not something today for Roku and consumers that they can pick and choose. Over time, we’d like to offer more but it hasn’t been a business offer for content owners.

How will you compete?

Funk: At the end of the day, we are competing with other entertainment choices. Whoever owns a content company, they have to ask: Do I want to maximize success of content or go for the consumer? And they would say maximize content.

The co-owners of Hulu in some ways are in competition with broadcasters, but they say this is a consumer choice. We don’t want to be like the music industry. So the trend is certainly unstoppable. We will be open to anyone. There are hundreds of thousands of (our) boxes installed and users using them. Consumer choice is an amazing thing.

What is role of regulators in this market?

Funk: We don’t look to the government to take any action for us to be successful. We think the opportunity is there and the Internet is today very open. So we are optimistic.

We just need to make sure the Internet is carrying a variety of options. So the whole net neutrality thing is at a level just being able to say, gee, I want to be able to use Netflix streaming video even though I’m a subscriber to cable service.

So will you continue to get content one deal at a time? Will you be able to sustain a business doing that at this pace?

Funk: Even ABC, Fox and NBC, they don’t make all their programs. So there is oftentimes a role for an aggregator. So on Roku, consumers can find variety at a single place.

By Cecilia Kang  |  November 30, 2009; 8:00 AM ET
Categories:  Comcast , FCC , Online Video  
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