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Roku's Survival Will Take More Than Beating Apple TV.

The Roku LT streaming player and remote control for television features buttons for M-GO, Netflix, Amazon, and Vudu

The heaviest users of streaming video love Roku. The company makes little devices that offer hundreds of channel-like apps with access to far more content than rival Apple TV, despite the conspicuous absence of YouTube and iTunes from the Roku lineup. Back when Chromecast was just a gleam in Google’s eye, the Roku team had already released a plug-in dongle to stream video from the Web and mobile devices on a TV. But can a small core of passionate users and a knack for nifty products keep the company alive?

Roku released new versions of its streaming devices Wednesday, making minor improvements to its cheaper models and announcing a new deal with M-GO, a service that allows people to buy or rent video content. Customers will now be able to buy M-GO offerings through their Roku accounts by pressing a special M-GO button on their Roku remotes. But life is hard for a small standalone hardware company, and Roku will be facing some pretty stiff challenges ahead. Building an appealing product isn’t a guarantee of a successful future.

There’s a paradox facing Roku: More people use its streaming-video equipment than any other product, even as the company far lags behind Apple in overall sales. Research group Park Associates recently found that 37 percent of households that have a streaming video device use a Roku as their primary device, more than the 21 percent using Apple TV or any other rival device. But Apple TV accounts for 56 percent of all streaming-video device sales, according a recent estimate by Frost & Sullivan, while Roku remains in distant second with 21 percent of the market.

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Roku announced earlier this year that it had sold 5 million devices over the last five years. The trick, then, will be to bring in revenue from its modest but highly active user base through deals with content purveyors like M-GO.

Roku notes—correctly—that Apple’s sales numbers come largely because consumers already have a connection with the giant company through iPhones, iPads, and MacBooks. Apple, of course, makes its money on those products and sees Apple TV mainly as another way to drive sales of digital content on its iTunes store. Roku’s business, on the other hand, is largely based on selling just its streaming-video device. Whether Apple makes an inferior product is oddly unimportant, said Dan Rayburn, an analyst with Frost & Sullivan. “The question is whether it took a sale away from Roku,” he said.

Google’s Chromecast could be another not-quite-direct competitor that could impact Roku’s sales, especially given its $39 price tag. Also circling as Roku rivals are video-game consoles, which aren’t included in sales numbers for streaming devices but do include similar apps, such as Netflix and a wide array of video rental and purchase services. Sure, these consoles won’t be used primarily for streaming video. But ABI Research projected that Microsoft and Sony would sell 133 million units over the next five years. Many gamers who shell out for those devices could decide they have no need for a Roku.

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Still, this is a relatively new world and Roku’s early traction gives the small company a fighting chance. In a recent interview the company’s chief executive, Anthony Wood, said that content companies are increasingly willing to pay for placement on the menu of channels users see when they turn on the device. “Almost everyone pays,” he said while declining to discuss details of any specific arrangements. The deal with M-GO also points to a wider opportunity at commerce, with Roku helping sell video content and taking a cut of the transaction.

But those kinds of opportunities rely on scale, and the market for the kind of devices Roku sells remains minuscule. Wood wants to expand his company’s reach by licensing its platform to television manufacturers building smart TVs. Roku is already in talks with Chinese manufacturers, he said, although no deals have been struck yet. Boxee, another company that raised $26 million for a streaming platform admired by early adopters, tried a similar tact—and it struggled beforeselling itself to Samsung earlier this year for around $30 million.

If that’s a pessimistic sign, Wood doesn’t let on. He said that television companies are more desperate than ever to get moving on Internet-connected televisions, and that they’re not going to be able to do it themselves. He cheers a every mention of Apple’s plan to make a real television. “Even the rumor of an Apple TV helps us with our licensing business,” he said. “Being an Apple alternative is a great place to be.”


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