smart TV

Why Roku TV will save the company

January 8, 2014: 5:01 AM ET

Internet-connected televisions can be clunky, expensive, and redundant with what's already in your living room. But that isn't stopping Roku from betting its future on them.

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FORTUNE -- In the battle for the living room, Apple, Google, Microsoft, and Roku rise above all other contenders. These technology companies all have one thing in common: They manufacture external devices that connect to conventional televisions to allow people to view streaming music, TV shows, and movies from the comfort of their couch.

For nearly six years, Roku enjoyed the spoils of this approach. On Monday, the company signaled that those good times could eventually come to an end -- even as sales for its boxes approach a cumulative eight million in the U.S., more than a third coming in the last 10 months.

In an announcement at this year's Consumer Electronics Show in Las Vegas, Roku introduced Roku TV, its first attempt to offer actual televisions loaded with its software. The company will work with Chinese electronics makers Hisense and TCL to produce several models, ranging in price from several hundred dollars to upwards of $1,000, depending on screen size. In doing so, the company implicitly acknowledged that while it is flourishing today, it cannot survive solely as an accessory, and that it must embed itself in the television to thrive in the long term.

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Smart televisions gained attention in 2011 as the next frontier for Internet connectivity, and adoption has increased since they arrived on store shelves shortly thereafter. But their interfaces were often difficult to use, streaming quality was sometimes spotty, and some models could lack popular content that others offered. Oh, and they were expensive.

Today, most major television manufacturers offer smart TVs, including Samsung, Panasonic, Sony (SNE), LG, Sharp and Vizio. They offer popular services such as Netflix (NFLX), Hulu, Pandora (P), and Vudu. Their price is more in line with conventional television sets. According to recent research from NPD Group, sales of connected TVs doubled from 11% of televisions sold to 22% between November 2012 and November 2013. In a survey, 38% of smart TV buyers said connectivity was important.

But they can still be troublesome to use, and adoption rates lag behind those for cheaper external devices such as the $500 Xbox and $400 Sony Playstation gaming consoles, Google's $35 Chromecast, the $99 Apple TV, and the $99 Roku 3.

Roku chief executive Anthony Wood smells opportunity. He believes that Roku TV -- which will roll out in stores in fall 2014 -- gets Internet-connected TV right without an external device, keeping his company in the game as set-top boxes face extinction. The product differentiates itself by simplifying the experience (fewer remote controls, a unified interface) while offering more channels, to the tune of 1,200 or so. As time passes and more people decide to upgrade to a smart TV, Wood hopes that they will pick a Roku-branded set over any competing one.

"People are going to buy TVs, and our goal is to get Roku into as many as we can," Wood said. If the company can trade on its brand loyalty, all the better.

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That's important because none of the technology companies vying for people's attention in the living room -- Apple (APPL), Google (GOOG), Microsoft (MSFT), et al -- manufacture televisions. At least for now: Apple is believed to be working on such a product, but it traditionally acts as a stalking horse to others in the race to new industry segments, waiting until others firmly establish it before pulling ahead for the win. And Microsoft's latest Xbox model, the One, is designed from the ground up to be connected. "If you're playing a game, you don't have to stop to watch TV, surf the web, enjoy an app, check your fantasy team, or take a Skype call," Xbox spokeswoman Lisa Gurry said in an e-mail.

The lengthy television buying cycle -- people now buy TVs every four to five years, down from seven or eight -- does have an end, though. People will eventually want to buy a new TV. When that happens, they'll expect that their new smart TV can do everything that their external device has been able to do for years.

Wood wants Roku to get in on the ground floor. In the short term, Roku TV is an opportunity to expand the company's platform. In the long term, it may be the company's flagship product.

"We don't like the term 'Smart TV,' " Wood said. "We just want to simplify the TV experience."

This article was updated on January 8, 2014 with additional information on Roku sales.

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