Business Insider’s IGNITION 2015 focused on the future of media, and who better to talk about that than the heads of Roku and Hulu. The two sat down with Dave Morgan, the founder and CEO of Simulmedia. This has been edited for length and clarity.
Dave Morgan: We have Anthony Wood, CEO of Roku. Mike Hopkins, CEO of Hulu. We were just watching some of these slides about TV disrupted, growth of broadband, decline of video. Anthony, what do you think? How do you react to that? What’s TV to you?
Anthony Wood, Roku: Well I think obviously there’s a lot going on. The exciting thing for me is there’s more innovation happening in TV now than there ever has before and it’s great for customers, it’s great for advertisers, it’s great for content producers. I think maybe it’s a little less great for the incumbent video distribution companies but I think they’re going to do ok as well. So you know what’s happening of course is that the whole world is switching to streaming. The Internet is coming to TV the same way it came to other industries like books, travel, and music, and causing things to change. We think all TV is going to be streamed. That means that all advertising is going to be streamed. All video content is going to be streamed. So those industries are going to change a lot.
DM: Mike, what’s your perspective? I guess you’re a big supporter of streaming clearly?
Mike Hopkins, Hulu: Little bit. What’s interesting for us is that we’ve seen, I think at some point next year about 70% of streams that happen at Hulu will be on some form of a living room device like Andrew’s Roku, various other connected TVs and those devices. And I think that’s really interesting because I think a lot of people when they think of streaming, they’re thinking mobile, they’re thinking desktop. And what we’re seeing and what I assume our colleagues at Amazon and Netflix are also seeing is there’s a flight back to the living room. And as Anthony said, I think that’s really important for advertising as well because now all of a sudden in a living room we have the ability to target, we have the ability to give people choice, we have the ability to have people select the ads they want to watch, and I think there’s a real transformation in the consumer experience that’s taking place as a result.
AW (Roku): One of the things that I think is exciting is that consumers now have the opportunity to select the platform they want to watch TV on. Traditionally, that’s always come from the cable or satellite operator, but now when there’s services available on the Internet you have platforms like Roku emerging that we’re competing head-to-head with other large companies like Google and Amazon and Apple. And that competition is resulting in a very rapid evolution of the platforms. They’re getting better and better so for customers it’s great. It’s something that, at first, I think CableCARD tried to make happen but never took hold and now that’s happening.
DM: So Anthony, can you give us a little bit of a 5-year vision? I mean it seems to me one thing that is inevitable in the future of TV is the TV — the device. There may be questions about how many other boxes. Give a sense of vision and maybe give a sense of Roku’s strategy with the future TV ecosystem.
: Right. So we believe that all TV is going to be streamed so that means that there’s going to be platforms that emerge on mobile phones and PCs. There’ll be operating systems driving your TV. And that’s our business is being the operating system that drives your TV.
And the way you get that operating system, I think, will probably be three different ways, we believe. One is built into the TV, and we also believe that TVs will continue — although TV viewing is fragmenting and customers and consumers are watching in lots of different locations, the big screen is still where the majority happens and we think will continue to happen…. And also, boxes that you buy at retail, like an Apple TV or a Roku player. And then boxes distributed by your broadband or cable operator or satellite operator. We think that will be a big channel as well. So that’s where customers will receive their platform. But there’ll be just a handful of operating systems when we’re all said and done. There’ll be Roku, Android, and Apple is my guess on where we’ll end up.
DM: OK, so Mike, I guess in some ways you could make a lot of parallels to where you and Hulu are today to where HBO was probably after having been incubated at Cablevision and found the home and the platform at Time Inc. I don’t know if it’s appropriate like part of, media ownership at a lot of independence and obviously was, you know, where’s the next 5 to 10 years? How do you work in this emerging ecosystem and maybe beyond that ecosystem?
MH (Hulu): What we’re really aggressively doing now is investing in content and marketing. Those are our two biggest line items at the moment in terms of growth. We really set out to change the conversation about Hulu with consumers. We hadn’t really done a tremendous amount of marketing before we hired Jenny Wall, who runs marketing for us, last summer. I think over the last year and a half we’ve spent more in marketing than we had in the entirety of Hulu before then.
I think over the last year and a half we’ve spent more in marketing than we had in the entirety of Hulu before then.
And we’re really trying to change the conversation and grow dramatically. We’re going to be integrating into cable and satellite set-top boxes over the next year which will give us another channel for distribution. As Anthony said, there’s those three ways you can get TV on your TV. One of those three ways we’re not with today, and we want to change that.
DM: So what does integrating into a set-top box mean? You know, when I turn on my Time-Warner cable, which actually right now sort of pops up with my Samsung smart TV, what’s on the set-top box, or what’s on that interface?
MH (Hulu): Well, I think they’re all different today clearly. Some set-top boxes are old and they’re not compatible with what we’re trying to do, honestly. If you look at the newer set-top boxes that…are rolling out in there, there are a variety of ways that you can access an over-the-top channel. You can do it through the guide itself. There’s a section where those types of apps are and so we’re working with everybody to figure out what’s the optimal place is because I do think it’s multiple places that you need to be on these devices to get access into Hulu. Essentially, we’d be selling an a la carte service through them just as we sell it over the top today.
AW (Roku): I think one of the big things to understand is that because of the level of innovation that’s happening, both in the cable plant shifting to IP [Internet protocol] and then the user devices like Roku and the customer experience is getting so much better, and the price structure. Another thing that people probably don’t realise is a device like a Roku is designed for a very low cost….let’s call it $25, whereas a typical cable box is over $100. So all those factors are going to result in the steady decline of the proprietary cable box other than a few companies like Comcast who have the resources to invest in their X1 platform. Beyond that, I think almost all cable and satellite operators over time will get out of the business of making boxes, and they will move to a standard IPOS.
DM: I didn’t realise until I did a little research for this, but the annual revenue generated by set-top boxes in the U.S. is about $20 billion a year, which I just found extraordinary. So I don’t know exactly what that represents in the subscriber bill, but that probably pays for the service. Mike, how do you see your differentiation relative to other providers of video entertainment and how you establish it both in having the chance to have a direct brand but also, in some cases, working along with a device company or working along with an existing distributor?
: Sure, that’s a good question. Historically our differentiator has been we’ve had last night’s TV from Fox, NBC, ABC, and CW. That had been the legacy and the real differentiator between us and the other companies. We’ve increasingly, though, invested in prior seasons….theatrical, and now originals. And so I think over time our differentiation will come in the form of the kinds of shows we make and buy and the kinds of talent we put behind those shows. If you think what really differentiates an FX from an AMC or a Showtime from an HBO, it really boils down to the content choices you make. And so we’ll see over the course of time how those play out for us, but essentially it will be the content that we make and the brand feeling we put in as we market and we just rolled out a new brand campaign in the last couple of months and we’re seeing the results of that now.
AW (Roku): One of our goals as we build on our platform is to provide tools for companies like Hulu to really do a much better job of merchandising their content, promoting their content. A better job targeting, putting the right content in front of the right customer, and then ad technology is moving the world of Internet ad tech to the TV.
DM: Talk a little bit more about that, Anthony. How do you, from a practical standpoint, what do you think you can do? And then, Mike, I’d love for you to follow it since advertising is also part of your business.
AW (Roku): So the way Roku makes money is we licence our operating system, we sell our devices, we run a very large ad network actually, and there’s an economic deal to come onto a platform like Roku and if it’s ad-supported channel we get part of that ad inventory just like an MSO does. But also we buy a lot of ad inventory at wholesale rates. We take all the data we have. We have a lot of data about our customers, both because we know what they watch, but also because we have their billing address and we tie that to external data sources and we use that to build targeted ad campaigns like you get on the Internet, with much higher CPMs [ad rates measured in cost-per-thousand views]. So moving the world from, “I’m going to buy a TV show that’s Nielsen rated” to, “I’m going to buy auto intenders that make over $100,000 a year that live in California.” It’s going to be a dramatic change the way advertising is delivered.
Moving the world from, ‘I’m going to buy a TV show that’s Nielsen rated’ to, ‘I’m going to buy auto intenders that make over $100,000 a year that live in California.’ It’s going to be a dramatic change the way advertising is delivered.
DM: And in the comparison you were making you started with comparing to a Nielsen rating but you’re ending with a person targeted or an audience-based campaign.
AW (Roku): We just did a deal with Nielsen integrating them into our ad platform, the Roku ad framework, and that’s primarily for our partners. So we have partners like Fox that sell ads that are delivered on unconventional distribution platforms, but they’re also delivered on Roku with their TV-everywhere apps, and they want to be able to get paid for those ads using the same measurement tools they have on their traditional platforms so that’s why we do Nielsen. And there will always be a market for those types of ads. But increasingly there will be…we do interactive ads, our ads are all measured, and they’re all targeted so that they can be a much more ROI-based campaign if that’s what the advertiser wants.
DM: So Mike, how do you see these kinds of capabilities complementing what you do from a practical standpoint?
MH (Hulu): We think it’s great. We mentioned about differentiation a minute ago and I think from a business standpoint, that we have a dual revenue stream is a differentiator and really gives us a lot of economic firepower because we compete in the marketplace. What we’re able to start to do now on those living room devices is exactly what we’ve been able to do online through the PC and increasingly mobile for the last few years, and as I said before, with 70% of our streams happening in the living room next year, we’ve got a little bit of work to do on the measurement side to be able to fully monetise that inventory. But it hasn’t stopped us because we still kind of have the same information. We’ve got credit card information, we’ve got addresses, we’ve got email addresses, we’ve got the viewership patterns that people have, and so we’ve got all of our primary, first-party data that we can mix in with the BlueKai and third-party DMP [data management platform] information and really target that to the living room that nobody else other than us and a couple of other people can do today. What I think the ad markets looking for is third-party verification of that so we too are working with Nielsen and Comscore and them to really try to bring that to the next level.
AW (Roku):But I would say the thing that’s exciting to me about ads as a consumer of television, and I love television is that their ad loads are smaller. They’re more targeted so they’re more relevant, higher CPMs. I mean I think all the ad changes are all good for the consumers and the industry.
DM: So Mike, Hulu has a really interesting provenance and ownership structure. Tell us a little bit about it and tell us where you think that has benefits and challenges as you build your business.
Well, as you may know, we’re owned by Fox, NBC, and ABC equally. Comcast when they purchased NBC lost their say in the business for a period of time until ’19, so today I think of this as controlled essentially by Fox and Disney and having those three companies behind us gives us a lot of resources to be able to compete. When you look at the behemoths we compete with everyday, they’re pretty big. And so having their resources, having their smarts and brains behind us as well has been very beneficial.
DM: So Anthony, actually your business has an interesting provenance too. And I don’t know if everybody knows as much. Can you tell us a little about how Roku came to be and its independence and where you see whats a pretty interesting ecosystem of media companies, new streamers, distributors, hardware companies, operating system companies. When you say sort of you, Apple, and Google…they’re pretty big.
AW (Roku):Yeah, they are pretty big. Roku started building streaming players in 2008. We shipped the first Netflix player. The original Roku product was called the Netflix player and all it did was Netflix.
The original Roku product was called the Netflix player and all it did was Netflix.
But the whole goal from the beginning, I really believed that operating systems would emerge and a few platforms would end up dominating. And that was really our mission — to be that next generation operating system for TV. And that’s things like an app platform so you know, we have over 3,000 apps on Roku, ad technology integration. A big amount of our effort these days goes into UI work and evolving UI. I mean if you’re a customer you’ve got 3,000 channels on a Roku player so how do you find content you’re interested in in that environment? Recommendations, search, discovery are all big parts of our platform.
But the competition question, you know, we do sell devices and in retail, we do compete with Google, Amazon, and Apple. You know, according to NPD, we were number one last quarter in retail sales, in dollars, and units. But it’s a super competitive environment. But more important to us than devices is actually TVs. Building into TVs and smart TVs are going through a transformational from sort of homegrown solutions to licensed solutions and that’s a huge effort for us. TCL, which is one of our licensed partners, announced that they will sell 1 million Roku TVs this year.
DM: So I’d like to hit a little more on that and then I’d like to hear your point, Mike, as someone with content through these interfaces. There’s been a lot of fanfare over the last four or five years around efforts by the large television manufacturers to build robust operating systems and their smart TVs and, I think, most people would say it sounds exciting but usage has been pretty underwhelming. Where do you think they have missed that you’ve been able to be successful? And then Mike, I’d love for you to jump in and then back and forth here, on what are the things that you think are critical as a content brand in connecting to consumers through interfaces…from Anthony and/or a Samsung, Sony, LG?
I mean there’s a handful of reasons TV companies are not successful at building their own operating systems. One is scale. If you’re a content company like Hulu, you don’t want to go and do deals with 15 different manufacturers so a million units here, a million units there. You want to do a deal with one company and get every TV. So most TV companies don’t have the scale to do the content deals that they need. They don’t have the expertise to do content deals. They don’t have the expertise for software. Roku at our core is a software company. And they’re not known for doing great user interfaces. And also finally, cost. There’s a few aspects to the software that we have. One is ease of use, which is extremely key, but the other is cost. We put a lot of effort into software that runs on very low cost hardware and that results in a lot of benefits. But one of the big ones is it’s a lot cheaper to build a Roku TV than any other TV. So those are the things we focus on and that’s why we’re winning.
DM: So what does interface mean to Hulu and how do you see what Anthony and Roku do relative to everything from Comcast X1 to the Samsung and LG…?
MH (Hulu):Our whole objective is to get them into our interface, right? So to get somebody to launch our application and start interacting with us. So until you get to that point, it’s really important for us to have great partnerships. We have a great partnership with Roku. We deal with the other guys as well and trying to figure out ways to get our content surfaced through global navigation or global search. We’re really embracing that and trying to make sure we’re working in coordination with them. We spent a lot of time and effort marketing through their channels, trying to make sure if you have a Roku, we want to make sure that you can get Hulu through Roku.
But Anthony touched on this a little bit too, one of the biggest costs that we have to face from a technical and people standpoint is having to rebuild applications all over the place. So if we want to be updating what we do, it’s tough to be able to say, “I want to be able to make this change across the entire network,” and then you’ve got a different app on Roku, and a different app on the Apple TV, and then you’ve got a different app on the Samsung player. You have to employ a lot of people to do that and so these sort of global solutions that Anthony and his team are working on, we find really beneficial because we can hit a button and make a change, as opposed to having to rework everything.
AW (Roku):TV companies also don’t really have the expertise to do software updates. So let’s call it five or six major software updates a year to our entire installed base, plus apps you know, several a day. A TV executive in Asia, hearing that we’re gong to ship a TV and then we’re going to do five software updates a year for the life of that customer, is not something they want to do or can do.
DM: Mike, you’re comepting for consumer attention and wallets with really big companies, many of which are also your owners and some of whic are, competitors or cooperators, depending on how you wold look at them. How do you gain competitive advantage when you’re going, “Let’s think about the content side — the content acquisition side.” That’s becoming a highly contested place. We’ve heard companies like Yahoo very directly talk a big game and say you know they want to buy hits cheap like I guess everyone does, without much success.
MH (Hulu): I’ll just take it. I don’t care how much they cost.
DM: How do you see it? I mean you’ve got companies with warchests of they’re spending $3 to 5 billion a year. You know, HBO spends $1 million a year. How do you also think original versus product that’s already been created and made hits and you get extended rights on?
MH (Hulu):Sure, look I think one of the advantages a company like ours has is the data that we have. So we spend an awful lot of time looking at what our customers are using, how they’re interacting with content, what are the shows that we think other people like them may like? So the data does really inform what kinds of shows we go after in the marketplace. Now imagine our competitors are also doing the same thing. I just hope their data is a little different than ours so they’re not going after the same stuff all the time. But oftentimes we’re butting up against a lot of people, and we’re trying to buy an exisitng show or somebody’s in with a great pitch and a great piece of content.
DM: So when you’re thinking about this data. Are you positioning yourselves differently than some of your competition? To the extent that you might see some tiering between where HBO expects to come in or Showtime or where Starz fits in?
MH (Hulu):We do. I think when it’s an acquisition — when it’s a show that’s airing on another network — we’ve taken a very network-friendly approach. We really promote the network that has the primary airing of that show. We promote back to that for the end-season availability. I think the fact that we have advertising for the vast majority of our customers is a friendlier place for the ecosystem at large. I don’t think it’s fantastic for the industry that we train lots and lots customers to watch advertising-free-content, premium ad-free content across a lot of different platforms. I think it’s probably not a healthy place for the overall business. So we’ve launched this new commercial-free plan, but it’s sort of saying to customers, “Look if you want it without ads, you have to pay more,” as opposed to an all you can eat buffet at a lower price. So I think all of those kinds of things position us as a better place, I think, for people to sell content. And the fact that we’re today in the U.S. allows the studios, if they’re licensing it, to then go out and make money in other territories.
AW (Roku):I was just going to say customers don’t want just one app so you know, they typically want Netflix, Hulu, and Amazon so it’s not like it’s a ‘Hulu or Netflix’ type of situation.
DM: So this is an ecosystem that has had a lot of bundling and packaging and may have more, whether the distributors, the content owners…. Certainly most people probably are subscribing to Amazon Prime not necessarily because they want the content and the video but because they want the free shipping and it’s a premium nice add-on. It’s the toaster at the bank account. This is both a threat and an opportunity. Can you tell us a little bit about how you see bundling and packaging or premium strategies for both of your businesses?
AW (Roku): Mike’s the expert on this, but it’s a big change for the customers and the content community obviously. Hulu’s a bundle, right? Hulu has multiple networks. It has movies. I mean it has a lot of content in one bundle so customers like bundles, they just, from my point of view, they want more options and smaller bundles.
MH (Hulu):I think that’s right. Or a collection of content, or a big bundle of shows and movies. We now offer Showtime as an add-on so customers can add Showtime to their Hulu subscription. And so we’ll look to do probably more of that over time so we’re not only a bundle when you buy the Hulu product, but you then can add other brands to it as well. That’s how people are traditionally conuming and purchasing content. I think a la carte shows or networks is probably not the optimal way consumers want to acquire content. Certainly once the costs are added up in that environment I think bundling things together gives customers a lot more choice and lower prices.
DM: So non-U.S. strategy, just to jump over there a little bit. How do your businesses operate if they do operate outside of the United States and, you know, where do you think that is going for your businesses?
AW (Roku):Our belief is that TV operating systems is a global business. We start in the U.S. and that’s where we’ve got our dominant position, but we’re rapidly growing internationally. The TV companies that we have deals with, we have deals with five different TV brands at this point and growing. They’re all global companies. They want global solutions. Our licensing business to operators actually is doing a much better outside the U.S. than inside the U.S. So deals with Sky in the UK, Italy, and Germany, and then Telstra in Australia. It’s important that we expand internationally but it’s going to take a few years.
MH (Hulu):Today, we’re just in the U.S. We had a business in Japan that we sold a couple of years ago. We’re going to look. We don’t have anything announced or anything that we’re operationalizing at the moment, but I do think that over time, there’s opportunities there. I think there are a lot of markets that are just in there native stage for subscription-on-demand and we obviously also have a free business so I think we can plan a variety of ways internationally, and we’re just in the early stages of evaluating that.
AW (Roku):One of the advantages that Internet-based service or technology brings is the ability to have global scale and, you know, reap the benefits of that scale. And I think Netflix actually has that advantage that they now have a global business and they can bring that scale to content acquisition.
DM: So the topic is “Disrupting Television”. We saw some lines that go down like this that have to do with revenue and profits, and incremental profits which may be all of the profits. For a lot of big TV companies, obviously these are companies that are partners of yours, so you’re very careful in what you say about them. How can we think about the core companies in TV today — the networks, content producers, and distributors? Let’s assume that no one thinks they’re all going away, but let’s assume that how they operate is probably going to make a big difference to whether they are successful or not. What are the kinds of things you think are going to be essential for the companies in the existing TV ecosystem to be successful in the next five years and after, and what will be the things that will be absolute death knells for them?
MH (Hulu):First of all I think…
AW (Roku):Go with death knells first.
MH (Hulu):Death knells first? Well I think people love TV.
AW (Roku):No one loves TV, right?
MH (Hulu):People are watching a lot more TV today than they ever have. They just may be watching on different platforms and different devices and through different channels. But if you’re looking at TV shows, I mean there’s as many people watching those shows today as there were five or eight years ago. I don’t think people are watching less television so that’s good news.
AW (Roku):They’re watching better television too.
MH (Hulu):And the quality is there. There’s just so much good going on there. It’s the business model that’s the disruptive element here. The companies that are going to succeed are the ones that don’t put their head in the sand and deal with it.
The companies that are going to succeed are the ones that don’t put their head in the sand and deal with it.
Those that just put their head in the sand and are afraid to disrupt themselves or to do things that may be contrary to the current business models, I think those are the ones that you’re going to read about ten years from now that are in trouble. But I do think that it’s a transition. Consumers are transitioning. How do you, as a media company, transition into this new distribution, the new packaging, the new bundling? I don’t have the answer, but I think that those are the kind of questions that you’re going to have to answer.
AW (Roku):Things are changing. There’s going to be winners and losers. Obvius winners — Hulu is a winner, Netflix is a winner, Roku is a winner, you know the platform is changing. People moving away from EPGs [electronic program guides, usually provided by TV providers] to platforms like Roku. Consumers are huge winners. They have more choice. There’s still bundles, but they get to be more fine-tuned than the bundles they select. Advertisers are winners. Advertising platforms are going to get better and more effective. But I think there is money leaving the ecosystem; there’s no doubt. I think that’s mostly around distribution. There were a set of companies that really controlled distribution, in the U.S. anyway, that control is lessening. Now they also have huge new broadband businesses and so I don’t know the maths. Maybe they’re making more money than they used to be making. I’m not sure.
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