Roku in 2012: Is it time to sell?

A few days ago, I got a tip that Intel 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 Amazon.com to a product that’s available at Best Buy, Target, Walmart 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 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 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 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 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 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 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.

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