For several years, Roku has been making delightful little boxes that allow people to watch video streamed from the Internet to their televisions. Now the company is cutting out the middleman, working with Chinese manufacturers Hisense (600060:CH) and TCL (2618:HK) to sell Internet TVs powered by its software. Roku first announced that it was building televisions at the Consumer Electronics Show in January, and it is showing them publicly for the first time this week. They will go on sale this fall.
The general look and feel will be familiar to anyone who has used one of Roku’s boxes. Almost all 1,700 channels available through a standard Roku are available on the TVs, with the exception of WatchESPN and Watch Disney. (Roku couldn’t reach a distribution deal with Disney (DIS) for the new devices.) Smartphone apps allow people to pull up Netflix (NFLX) or YouTube (GOOG) videos on their phones and play them through the new TVs, so long as the devices are on the same wireless network.
Smart TVs have been a hard sell, which is odd when you consider that most people in the entertainment industry tell you they represent the future. It’s not that smart TVs haven’t made it into the wild. More than 63 percent of households with broadband connections had at least one TV that connected to the Internet early in 2014, up 10 percent from the year before, according to the Diffusion Group. Michael Gerson, Diffusion’s president, says he’s not sure how much the devices have been changing people’s behavior. In other words, manufacturers are adding Internet connectivity to televisions, but not in a way that inspire people to make much use of it.
Roku would seem well-positioned to change that. Its boxes are the biggest dedicated media-streaming devices in the U.S., accounting for 44 percent of the industry’s sales, according to Parks Associates. Apple TVs (AAPL) made up 26 percent of sales. Roku owners are also more likely than Apple TV owners to use their devices for over-the-top services such as Netflix. Televisions potentially hold greater appeal because they integrate the cable and Internet viewing experiences. On the other hand, it’s a bigger hassle to replace a TV once the software goes out of date, or the processor becomes obsolete within 18 months of the initial purchase. Roku says it will update the software regularly, but the company acknowledges that it can’t do much about the inevitable physical obsolescence of its machines.
Unlike Apple, which has been rumored for years to be preparing to manufacture televisions, Roku is satisfied to be the software provider for smart TVs. It makes more sense for companies such as Hisense and TCL to team up with it than to design their own operating systems; neither has Roku’s software expertise or relationships with content companies. In exchange, Roku is sacrificing its distinctive design and name recognition in the U.S. To most Americans, a Hisense TV will look and sound like the generic brand.
They’re priced that way, too. While neither Roku partners is a household name in the U.S., TCL is the world’s third-largest TV manufacturer, and Hisense is sixth. They can turn this scale into cheap, cheap televisions. Hisense says it isn’t setting a price on the televisions—it will let the retailers decide—but expects its smart TVs to fetch less than the combined price of a standard TV and a separate Roku box. TCL’s version ranges from $230 for a 32-inch model to $650 for a 55-inch version. When asked how they’ll distinguish themselves in the U.S. market, the two companies give almost identical answers, citing such things as vertical integration and factories conveniently located in northern Mexico.
Both companies already make smart TVs, but their executives haven’t been impressed by the efforts. Chris Larson of TCL says that until now, the industry has handled Internet connectivity in the same way it treated 3D: as features added to drive up device prices, even if consumers didn’t want them. “If you look at any smart TV on the market, including ours, it’s a dysfunctional experience,” he says.