Roku pins TV's future on Internet streaming TECHNOLOGY DVR creator pins hopes on Internet streaming

Anthony Wood - the inventor of DVR and his newest streaming device Roku poses for a funny picture in his home in Palo Alto, Calif. on April 13, 2012. Anthony Wood - the inventor of DVR and his newest streaming device Roku poses for a funny picture in his home in Palo Alto, Calif. on April 13, 2012. Photo: Siana Hristova, The Chronicle Photo: Siana Hristova, The Chronicle Image 1 of / 4 Caption Close Roku pins TV's future on Internet streaming 1 / 4 Back to Gallery

Anthony Wood's invention of the digital video recorder in the 1990s helped reshape the way couch potatoes watch TV, but he says the DVR is already headed down the road to obsolescence.

So for the past decade, Wood, 46, has helmed Roku Inc., a company that's been steadily playing a big hand in driving the DVR out to pasture.

Wood said the future of TV is in Internet streaming, and the Saratoga company makes simple, inexpensive devices that connect TV screens to a growing world of video - from Netflix movies to commentator Glenn Beck's show - that is stored out in the cloud.

"Would you rather try to remember to record a show, or would you rather just have everything ever made instantly available on demand?" Wood said in a recent interview. "It's a much better experience."

Roku sold about 1.5 million devices last year in the United States, and in January sales began in the United Kingdom.

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The second part of that international expansion comes Monday when Roku begins selling its Roku 2 XD and Roku 2 XS models online in Canada. The company also plans to have products on the shelves of Canadian Walmart and London Drugs outlets by the end of the month.

Increase in streaming

The expansion comes at a time when viewership of Internet streaming video is increasing. Last week, a report from the Leichtman Research Group said 38 percent of U.S. homes have a TV connected to the Internet, up from 30 percent last year.

"We've hit that inflection point, and it's really cascading," Wood said. "It's great for us. We sell hardware, but we are also a distribution platform for television over the Internet."

Most people stream video through a game console, which figures because broadband connectivity has long been a standard feature for console makers. But only 1 percent of U.S. homes use a device like a Roku or Apple TV, the Leichtman report said.

Roku is hardly the only Internet streaming device maker, with Apple Inc. long rumored to be working on a device that may change the market. Even DVR maker TiVo Inc. of Alviso markets its latest model as a one-source device for recorded and streaming video.

But Wood said Roku's prime market isn't the 18-to-25, tech-savvy type who would use a game console or line up to buy the latest new gadget. More often, he said, it's their parents. Roku hopes to open up that wider mainstream TV watching market.

"Our customers are not early adopters," Wood said. "They're people who watch TV. We put a lot of effort into making it really simple."

Wood sought a simpler way to record episodes of "Star Trek: The Next Generation" when he was inspired to invent a digital video recorder in the mid-1990s. He saw newspaper ads for computer hard drives and realized those could help replace analog VHS tapes.

Unable to go public

His company, ReplayTV of Mountain View, and TiVo became the talk of the Consumer Electronics Show in 1999 when they both introduced first generations of what was then called a "personal video recorder."

But while TiVo, which takes credit for "development of the world's first digital video recorder," was able to take advantage of the dot-com bubble and go public, ReplayTV missed the boat and ran through its investment funding.

"Literally the day of the road show, the market crashed," Wood said. "So it was unable to go public, but it was still spending ... and it needed that money to stay in business."

Inventor's 6th company

Later, cable and satellite operators added a DVR as features to their set-top boxes, "so it was hard for companies to make money building DVRs," he said.

Still, he said, "they were a stepping-stone product. They're still popular and they're going to be around for a while, but they're declining. The big thing for cable operators is to have a DVR in the cloud."

ReplayTV ownership has switched hands several times and is now part of DirecTV.

Wood, meanwhile, founded Roku in 2002. It's his sixth company and the name is the Japanese word for six.

Roku's first product focused on what an HDTV monitor displayed when it wasn't showing a TV program. The $500 HD1000 displayed high-def reproductions of classic paintings like Vincent van Gogh's "Starry Night," turning a wall-mounted flat screen into an art gallery.

"That product category itself was really an utter failure," said Kurt Scherf, vice president and principal analyst with Parks Associates of Dallas. But he said the company's work on home digital media adapters such as the SoundBridge networked music player led to the first set-top box to stream Netflix movies directly to a TV.

That $100 box, introduced in 2008, freed Netflix streamers from their computers and was a catalyst for today's streaming video surge. Netflix itself is moving away from its legacy DVD-by-mail business to the growing streaming portion of its business.

Roku now has 400 entertainment channels available. Those include Hulu Plus, Amazon Instant Video, Crackle, HBO Go, Epix, NHL GameCenter Live, Pandora Internet radio and the "Angry Birds" game. There is even GBTV, a video network from political commentator Beck.

In all, Roku has sold 2.5 million streaming media players, with unit sales tripling last year as the company entered retail stores, including Walmart, for the first time.

Strategic positioning

The 170-employee company, which had about $100 million worth of sales last year, also did some limited holiday advertising.

Roku has found success working with content producers on distribution deals while still positioning itself as a company that can help rather than disrupt the existing TV ecosystem, Scherf said. Roku devices, he said, can be promoted as a way to extend cable TV viewing to other rooms without cable operators having to deploy their own expensive set-top boxes.

But down the road, Roku could itself become an independent source of specialized video-on-demand programming.

"The position they are in right now is one where they can have their cake and eat it to," Scherf said. "The question is will they be able to take advantage of attaching itself to the next big trend of media consumption over the Internet, streaming that offers live TV."

Future of smart TVs

In January, Roku introduced the Streaming Stick, a version of the media player built in to a USB-size drive that can plug in to newer models of TVs that have a Mobile High-Definition Link-enabled HDMI port. The stick is supposed to turn the TV into an Internet-connected smart TV.

"And in two years, when you want to upgrade to the latest technology, you just replace it," Wood said.

Moreover, the stick signals Roku's new push into the smart TV market.

"It's a go-forward strategy for us," he said. "Over time, we'll probably end up licensing directly into smart TVs. Four years from now, I think almost all TV content will be Internet delivered. It'll be through a variety of platforms, but I think the streaming players and smart TVs will be the majority."