http://www.businessweek.com/articles/2013-09-25/rokus-survival-takes-more-than-beating-apple-tv

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Roku's Survival Will Take More Than Beating Apple TV


Roku's Survival Will Take More Than Beating Apple TV

Photo illustration by Businessweek.com

(An earlier version of this story ran online.)

Heavy users of streaming video love Roku, which makes puck-size boxes used to view Internet-streamed video on television sets. Since it began piping Netflix (NFLX) from broadband connections into viewers’ living rooms in 2008, Roku has become the favorite device among 37 percent of U.S. households with streaming players, compared with 24 percent for Apple TV, according to researcher Park Associates. On Sept. 25, Roku released new versions of its devices, making minor improvements to its cheaper models and adding content from M-Go, a video rental and purchase service owned by MediaNaviCo.

With hundreds of channel-like apps, the company already has much more content than Apple TV, although the absence of iTunes and YouTube are big gaps. Despite its early-mover advantage and coterie of hard-core users, Roku is struggling to expand beyond its niche and has been forced to find other sources of revenue besides hardware sales.

The company can’t keep up with Apple (AAPL), which sold 13 million Apple TVs worldwide by the end of May, with 6.5 million of those sales coming in the previous 12 months. Roku announced earlier in 2013 that it had sold 5 million of its devices in the U.S. over the past five years; the company says comparing its sales to Apple’s doesn’t make sense because of Apple’s global reach, but wouldn’t provide its own global numbers.

Roku has much more riding on this competition than Apple does. As a small, standalone hardware company, it makes most of its money from sales of its streaming players. Apple TV can afford to rack up losses as long as it’s providing its parent company with another source of iTunes Store revenue. The enormous user base of iPhones, iPads, and MacBooks is a tremendous advantage for Apple TV. Whether Apple makes an inferior product is largely unimportant, says Dan Rayburn, an analyst for market researcher Frost & Sullivan. “The question is whether it took a sale away from Roku,” he says.

Apple isn’t the only large company that could eat into Roku’s market share. Google’s (GOOG) Chromecast, a small hardware key that streams broadband video to a TV through the Chrome browser or apps, isn’t quite a direct rival, but it can hurt Roku’s sales given its $35 price tag. (Roku’s prices range from $50 to $100.) Other threats include video game consoles, which also offer Netflix’s app plus an array of video rental and purchase services. ABI Research projects that Microsoft (MSFT) and Sony (SNE) will sell 133 million console systems in the next five years; many gamers who shell out for those devices could decide they have no need for a Roku player.

The small company’s early traction in a relatively new market gives it a fighting chance. One thing it can do is attract other content providers, who pay a fee to get on its menus. Chief Executive Officer Anthony Wood says content companies are increasingly willing to pay for placement on the menu of channels that users see when they turn on the device. “Almost everyone pays,” Wood says, although he declined to provide details of any specific arrangements. While Rayburn says the fees that content owners pay tend to be small, the M-Go annoucement points to a wider opportunity, with Roku helping to sell video content and taking a cut of the other company’s transactions with consumers.

Those kinds of opportunities depend on scale. Wood wants to expand his company’s reach by licensing its platform to television manufacturers building smart TVs. Streaming-device maker Boxee, which raised $26 million for a product admired by early adopters, tried a similar tack but struggled before selling itself to Samsung Electronics (005930:KS) earlier this year for around $30 million. Rayburn says Boxee’s problem, and now Roku’s, has been that television makers want to keep the development of their smart-TV platforms in-house.

Wood says he’s not concerned, arguing that TV companies are more desperate than ever to get moving on Internet-connected TVs. He doesn’t think they are going to be able to do it themselves. Ironically, every mention of Apple’s long-rumored plan to make its own TV helps him make his case. “Even the rumor of an Apple TV helps us with our licensing business,” Wood says.

The bottom line: Roku’s popularity among streaming-video users could be short-lived given the competition.

Brustein is a writer for Businessweek.com in New York.

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