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Roku in 2012: Is it time to sell?

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A few days ago, I got a tip that Intel (s INTC) is supposedly in talks to buy Roku. I haven’t been able to confirm this; both Intel and Roku are simply saying they’re not commenting. So at this point, we gotta treat it as just another Valley rumor, which coincides with another rumor I’ve heard about Roku working on getting yet another round of funding. As I spent the holiday weekend trying to get in touch with sources that all clearly had better things to do, I thought about both about those scenarios — and realized that this may actually a good time for Roku to sell.

The case for an acquisition

No question: Roku has had a very good year. The company revamped its hardware line, added casual gaming as well as paid apps, and was able to transform Roku boxes from something you’d only find on (s AMZN) to a product that’s available at Best Buy, (s BBY) Target, (s TGT) Walmart (s WMT) and elsewhere. Roku predicted early on that it would end the year with a total of 3 million devices sold, and I’m fairly confident that we are soon gonna hear that it surpassed that number.

But all of this came at a price. Roku CEO Anthony Wood told me a few months ago that the company is making money with every box it sells, but when big box retailers sell your devices for as little as $50 a pop, you’re operating with razor-thin margins. This became very obvious when Roku raised a Series D of $8 million in August — only to turn around an invest a good chunk of it in advertising for the holiday season.

Roku resorted to billboards, banner ads and radio clips to advertise its boxes in recent weeks, giving the devices more paid publicity than Apple TV or Google TV ever had. All the advertising undoubtedly helped to spur holiday sales. But using VCs as a piggy bank to bankroll your ad blitz? That’s not a long-term strategy. It’s something you do to impress prospective buyers. Show them how much you could do if you only had the resources.

The case for more funding

If there’s any lesson to be learned from 2011 for a CE startup, it’s that acquisitions are risky. Cisco (s CSCO) shut down Flip last April after failing to take the brand to the next level. The same thing could happen to a Roku, especially since the smart TV market is still so immature. That may be enough of a reason for Roku’s founder Wood to resist a sale, but there’s also an argument to be made that could convince his investors: The company still has some work to do on both the technical and business fronts.

Roku announced in the fall of 2011 that it was going to expand to the U.K. and Canada, following Netflix (s NFLX) in its footsteps. Establishing itself as a global brand could help to maximize Roku’s value in the long run while not costing as much as any U.S. ad blitz, and piggybacking on Netflix’s impending U.K. launch this spring could help to make the expansion even cheaper.

Roku’s second challenge has to do with the product itself. The company slightly tweaked its UI when it revamped its hardware last year, but it’s still in desperate need for a much more aggressive relaunch. There are now hundreds of Roku apps available, and Roku’s simple home screen launcher that makes you scroll left and right to get to your content simply doesn’t cut it anymore. The company also is in dire need of an iPad(s AAPL) app and at least a plan to tackle things like universal search, cloud services and social integration — all of which isn’t really possible in Roku’s current incarnation.

However, time is running out on these projects. Google is getting ready to double down on its Google TV platform, Apple  may launch a more comprehensive TV product this year, and smaller competitors like Western Digital (s WDC) and Boxee aren’t waiting around either. Which brings me back to the thought that Roku may be best advised to sell now while its still enjoying its time in the spotlight, and then attack those problems with the resources of a strong corporate parent.

So why Intel?

It’s easy to see why Roku would benefit from an acquisition — but why would Intel buy a company whose products are based on a competitor’s chipsets? And didn’t Intel just two months ago throw in the towel in the Smart TV arena by shuttering its Digital Home group whose CE4100 Atom processor has been powering both the Boxee Box and Google TV devices from Sony and Logitech?

It’s true, the company officially said goodbye to the Smart TV sector, folding its Digital Home group into its tablet business; but Intel is still very much invested in the digital set-top box business, where it builds chipsets optimized for IP-delivered TV experiences like Comcast’s (s CMCSK) next-generation set-top boxes.

However, it’s becoming increasingly clear that the set-top box of the future may not look like a set-top box at all. Microsoft (s MSFT) is partnering with pay TV providers to stream live TV to the Xbox, and TV Everywhere apps have become a big hit on the iPad.  All of this could make Roku Intel’s best bet for a radically different set-top box business. One that’s not dominated by legacy hardware, but by bring-your-own-device offerings as well as lean boxes with simple UIs for customers that want to stream Netflix and HBO Go, but don’t want to bother with expensive full-blown smart TV platforms.

Intel could maintain Roku as a separate business unit that keeps selling its current-generation hardware, but eventually transition to an Intel SoC solution and maybe even land deals with pay TV operators to distribute Roku boxes in lieu of traditinal set-top boxes. Admittedly, it’s a long-shot, and I have my doubts that it will actually happen — but it may just be what both Intel and Roku need.

9 Responses to “Roku in 2012: Is it time to sell?”

  1. I got a roku box as a gift. i agree that the interface of scrolling and scrolling is a pain. They need to categorize it and/or add a search function. Perhaps a few icon-folders that you could use to categorize things for yourself.
    THe selection is very nice. i hope they can stay in business for a couple of more years.
    if you are interested in more than hulu and netflix, they certainly have a large selection – i’ve heard its much larger than appletv.

  2. I just got a Roku for Christmas. So far I have been very impressed with it.
    The UI is simple easy to use, the reomote is simple easy to use responsive. added to the ITouch ap and it makes a nice combination.
    As to if Roku should sell if it get the chance, Thats a iffy question, such as who to, and what they want to do with it, MS buying it would send it to its death.
    However, the right company supporting it and helping it to upgrade it boxs and software could be just the nudge it needs to help it complete with Apple and Boxee on a more even foot.
    The content has increased considerably, with Netflix, amazon, which are standreds, to A huge number of private ad-on channels covering a wide variety niche programming from really old classic tv/movie to channels decided to teaching one how to use Photoshop. The SDK allows anyone to potentially create their own content and add their own channel to the Roku lineup.
    I personally see great potential Roku even other other boxes of this type as long as they manage to keep prices down and continue to add content and even do some deals with paid content providers such as Showtime.
    I don’t look forward to Roku disappearing anytime soon as long as they continue to do what they’re doing.

    Ken Lawson

  3. There is no future for a standalone company selling sub $100 CE devices at tiny margins. They’ve done great to date. Bravo Roku. Take the money. And run.

    If they try to stay independent, they’d have to go public. With low double-digit gross margins and infinitesimal profitability as an absolute best case. This is not good.

    Take the money. And run.

  4. 3screenplanet

    Sorry Jangko, the simple UI that you say is in bad need of a major reboot easily passes that babysitter test and is a big hit among the customers that helped Roku triple sales this year. And do you seriously think that Western Digital is keeping Roku up at night? WD is as threatening as the crap Roku knockoff from Sharp.

    And nine out of ten Roku fans would agree with KenG that Intel would completely tank Roku.

    • Roku’s IU works well for what it has to offer now, but it’s not scalable. Adding more apps, live TV or other features ill break the paradigm of the UI. So the company is either forever stuck with what it has to offer now – or it has to revamp the IU. I’m certain that it is already working on the latter.

      And I don’t know whether WD keeps the folks at Roku up at night, but it’s certainly a serious competitor. Not only does the WD TV have some prime apps that Roku doesn’t (YouTube, Spotify), the company has also enough spare change to invest in TV advertising…

      • I think fans of Roku are as fanatical as Apple fans sometimes :)

        The simple truth is that Roku is popular because it was one of the pioneers in the Netflix / media streaming market, and it spent quite a bit of money on marketing to gain visibility.

        To be frank, at the low end, the NTV 200 from Netgear gives it a run for the money (1080p output capability at $49 (on a deal) with full Vudu capability and similar Netflix capabilities), and the WDTV Live SMP wins hands down at the higher end ($99) with better OTT support as well as extensive local media support (which Roku fails at in a spectacular manner).

        This is not to say that Roku’s devices are bad. Just that they are not technically top-notch or cost effective when compared to other solutions in the market.

      • Rurik Bradbury

        WD is not a threat: those folks couldn’t spot beauty if they occupied the Louvre.

        I just switched from Apple TV back to Roku (more channels, like Hulu Plus). The UI is quite similar, just as simple as Apple’s, and the Roku iOS app puts the two exactly on par — swipe gestures vs clunky button taps.

        Roku’s killer problem is no leverage — they forced me to add a credit card when I signed up, but I have no intention or reason to buy anything from them, rather than the content providers directly.

  5. If that rumor is true, it’s good bye Roku. Intel has ruined virtually every company they have bought, and they have no idea about how to run a company that makes CE boxes. I hope it’s just another investment, although it’s hard to understand why they would invest in Roku, unless it is tied to Roku developing an Intel-based product, which would sell for more than their current boxes, and leave customers less satisfied.

    I used to wonder how Roku could make money on their products, given their incredibly low prices, but I’m guessing they get a few bucks from each of the channels they support, for installing the software for companies like Netflix and Amazon. They might actually be getting all of their profit from payments like that, which is a great idea (too bad those channels weren’t around in 2003).