Roku 2 Internet TV box adds gaming, more channels, subtitles

LOS ANGELES  Can an even smaller box and ability to play games turn the Roku into a household device?

That's the big hope for the Saratoga, Calif.-based company, whose little black box lets Netflix subscribers and others watch Internet video on their TVs for an upfront cost of just $100.

The Roku 2, a redesigned box in a much smaller package, arrives in stores this week at a time when longtime partner Netflix is set to raise its rates 60% — a nod to the decline of DVDs in favor of watching online content in the living room.

"Netflix clearly thinks the DVD era is over," says Dan Rayburn, an analyst at Frost & Sullivan.

Netflix no longer will offer DVD rentals and instant online and device viewing at one flat rate. It used to cost $10 a month for both; now it's $8 for DVDs and $8 for streaming video. The pricing move helps Roku, says Chuck Seiber, Roku vice president. "Netflix has been really successful at transitioning its customer base to use its streaming service more, and this just really hits it home," he says. "It creates a decision point for customers."

Additions to Roku include:

•Gaming. A redesigned remote control is included that goes beyond fast-forward and rewind to also play games. The smash hit Angry Birds, which has sold more than 100 million copies on the iPhone, iPad and Android devices, comes free (in a full version) with the new Roku player.

•New channels. Roku now has more than 250 channels, including a FoxNews.com offering, with about six hours of daily programming from the 24-hours-a-day channel; a collection of online video from AOL; and movies from the Epix pay-TV movie channel, which offers films from Paramount, Lionsgate and MGM studios.

•Subtitles. Aimed at the hearing-impaired community, the feature allows users to read the dialogue for many movies and TV shows available on Netflix.

The business of providing options for consumers to watch Internet entertainment in the living room is growing as more folks look to cut the cord from pricey cable and satellite-TV services. Roku and Apple's similar $99 Apple TV are seen as cheaper alternatives. Both Roku and Apple have sold more than 1 million boxes. Roku says it will reach 3 million users by the end of the year.

By comparison, Microsoft's Xbox 360, Sony's PlayStation and Nintendo's Wii — which offer both gaming and streaming movies — are in tens of millions of homes.

Richard Doherty, an analyst at the Envisioneering Group, says that 25% of U.S. homes will have Internet connectivity through TVs or set-top boxes, or both, by the end of the year, growing to 50% by the end of 2012. "Roku was the first, and still the easiest to use," he says.

The best-selling TVs right now from companies such as LG, Samsung, Sony and Vizio are Internet-enabled — offering a few specific Internet channels, such as Netflix and Amazon Video on Demand. Doherty says Roku has an opening with the portion of the population that bought new non-Internet-enabled sets over the past few years.

"You will have 50% of homes next year who don't have Internet-enabled sets," he says. "That's a huge market."

James McQuivey, a Forrester Research analyst, says the expansion into gaming is a good way for Roku to compete and differentiate itself from Apple.

"About 10% of iPad owners seem to fall for the idea that they need an Apple TV … so as the iPad market grows, so do sales of the Apple TV," he says. For Roku to remain relevant, it needs to do things the Apple box can't — games, for example.

"The powerful thing about gaming is that it consumes hours," he adds. "A device that can earn an hour or more a day of use is a real competitor and will matter in the long run."

Console gaming systems such as Microsoft's Xbox and Sony's PlayStation 3 primarily sell games that average around $60, while Apple's online games for the iPhone and iPad start at a few dollars.

Doherty says gaming through a Roku box will hurt established players like Microsoft and Sony. "It's a huge selling point for Roku," he says. "It would be for Apple, too, if they offered games with Apple TV." Seiber says Roku expects to offer many more games over the next few months.

Meanwhile, Apple, which historically unveils new products in September, could have a new HD TV in its future, many analysts say.

"The company could completely reset the role of the modern TV," McQuivey says.

What's on the Roku 2

The Roku 2 box ($99) has more than 250 channels available for viewing. Here's a sampling of what's available:

•Netflix. Watch movies and TV shows with your Netflix subscription.

•Amazon Instant Video. Pay-per-view recent movies, starting at $2.99. Prime, a $79.99 yearly subscription service, offers older titles.

•Hulu Plus. Full seasons of TV shows from ABC, NBC and Fox, for $7.99 monthly.

•Pandora. Online radio, free.

•Crackle. Free made-for-Web comedies; Sony movies, including Jerry Maguire; and TV shows, including Seinfeld.

•Roku Newscaster. Network news broadcasts from CBS, NBC, ABC, Fox and cable.