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March 6, 2012, 12:00 a.m. EST
Roku is in a sweet spot in shifting TV land
Commentary: 'Friendlier partner' a force for pay TV to reckon with

By Therese Poletti, MarketWatch
SAN FRANCISCO (MarketWatch) — The little Roku box that 2.5 million consumers use in their living rooms to stream movies or TV shows from the Internet has become a thorn in the side of pay television.

With a small minority of consumers "cutting the cord," or ditching their cable service, the Roku box has become one of the popular ways for consumers to stream Internet video onto their TVs. What started out as a box designed to stream content for Netflix Inc. (NASDAQ:NFLX) has become one of the easier ways to get rid of cable service.

But Anthony Wood, the founder of the 150-employee start-up in Saratoga, Calif., doesn't really see it that way. The company, which is about to launch in Canada, just on the heels of last month's entry into the United Kingdom, tries to be a friend to all: cable and satellite companies, content providers, broadcast TV, even television manufacturers.

"We try very hard to be the happy, friendlier partner," said Wood, who is also Roku's chief executive. He noted that only about 35% of Roku's customers have canceled cable or scaled back on their subscriptions. But unlike rival Boxee, "We don't promote our box specifically for cord cutting."

Still, for all its partnerships — and Roku now has over 400 channels of content to choose from in its Channel Store — it has become a force for cable and satellite TV companies to reckon with. It is also one of the best placed companies as the Internet starts to have some serious impact on the shifting landscape of broadcast TV.

"If a consumer changes input [from a cable box] to a Roku box, they are now not anywhere near their pay TV service," said Colin Dixon, an analyst with the Diffusion Group. "They are using Roku's guide and Roku content and that is taking people away from the pay TV guide and pay TV content. They are in fact in competition."

Comcast Corp. (NASDAQ:CMCSA) , for example, won't let its customers who pay extra for HBO watch the HBO Go service over a Roku box. "They believe the television experience is theirs," Dixon said. Roku said HBO is having talks with the non-participating companies.

The numbers of cord cutters in the U.S. is still small, but when some providers lost subscribers last year, cord cutting was believed to be a cause.

"The whole cord cutting thing its sort of like the weather in Texas," said Kurt Scherf, an analyst with Parks Associates. "Wait a day and it will change...It's not 'chicken little, the sky is falling' yet." Scherf believes currently there is more "cord shaving" going on, as consumers cut down on extras to lower their cable bill, such as getting rid of a second cable box and replace it with a Roku box.

The recent fourth-quarter earnings reports contained some positive news for some, such as Dish Network (NASDAQISH) , which gained 22,000 net subscribers in the quarter, and said it has "begun to turn the tide in subscriber losses." Comcast is still losing cable subscribers, but its fourth-quarter loss of 17,000 cable subscribers was its lowest drop in five years.

For some consumers, there is enough content coming in through the Roku box that they don't miss cable, if they have gotten rid of it.

"I cancelled Comcast and my kids didn't even notice," said Jan Narkiewicz, a software developer in San Jose. His three children watch "Glee," "Gossip Girl," "Pretty Little Liars," and many shows via Roku. And he can now watch baseball games across the U.S. on MLB.com on his big-screen TV for an extra $125 a year, or about 83 cents to watch each game played by his favorite team, the Boston Red Sox.

The Roku box works either with a direct Ethernet hard-wired connection or a WiFi signal and offers an easy-to-navigate user interface. The content includes unlimited streaming of Netflix for $7.99 a month, Hulu Plus for $7.99, video on Amazon.com (NASDAQ:AMZN) , and many free channels. The fully-loaded $100 Roku 2 XS comes with a free full edition version of Rovio's Angry Birds.

"I get asked a lot, 'what smart TV should I buy?' And my response is get a great TV and buy a Roku box for $50," said Dixon. "These smart TVs cost $1,500 and they keep changing the platform. If there is this new web standard and the TV doesn't support it, are you going to go and buy another one? It's a no-brainer."

Roku, which means six in Japanese, is Wood's sixth company. The best known of those ventures is ReplayTV, which he started in 1997, where he invented the digital video recorder. In 1999, ReplayTV beat rival Tivo for Best in Show at the Consumer Electronics Show. It was gearing up to start its IPO roadshow in March of 2000 when the NASDAQ crashed, and the IPO was cancelled. The assets of ReplayTV were bought by DirectTV.

Roku fashions itself as an agnostic device, open to all content and cable services and touts how easy it is for developers to program for it and offer new channels. It's similar to how Google Inc. (NASDAQ:GOOG) sees Android against Apple's iPhone. Indeed, Roku's biggest competition is Apple Inc.'s (NASDAQ:AAPL) Apple TV. Wood said Apple TV isn't as open. "Roku is about being an open platform."

In January, Roku launched the Roku Streaming Stick, a small device only slightly bigger than a thumb drive, which can be attached to a slot in a TV.

The company saw strong sales in 2011, hitting $100 million in revenue, up from $46 million in 2010. Analysts, however, believe its profit margins must be pretty thin, based on its consumer-friendly prices. Still, Wall Street investment bankers have come calling regarding an initial public offering, Wood said. "We are very interested in an IPO but not this year," he said.

As broadcasters, cable companies and others deal with the consumer shift to on-demand viewing, Roku is well placed for the trend.

"We don't watch live TV in my house," Wood said, describing a recent moment when he put his 7-year-old in front of a TV to watch the Disney Channel. "She said 'it's not what I want to watch.'"