Should Apple Be Concerned About Roku's TV Deal?

Set-top box maker and Apple (AAPL 0.52%) competitor Roku announced on Monday that it had struck a deal with two Chinese companies to include its smart TV technology in their televisions.

Should Apple shareholders be concerned? The smart TV market is heating up, with Apple's competitors, notably Google (GOOGL -1.97%), focusing their efforts on the living room even as longtime TV stalwarts -- Sony (SONY -0.33%) and Panasonic (PCRFY -3.03%) -- struggle.

A built-in Roku box
Going forward, Roku's media streaming technology will power TVs made by TCL and Hisense -- buyers of these television sets won't need to purchase Roku's set-top box; they'll get the Roku experience by default.

In theory, that could result in fewer sales of Apple's competing set-top box, the Apple TV. Ultimately, that could lead to fewer movies and TV shows purchased through iTunes, in turn weakening the lock-in effects of Apple's ecosystem. Nevertheless, I don't think Roku's deal with TCL and Hisense is much of a problem for Apple.

Although both companies are leading TV manufacturers, the sets they produce are known for affordability -- not their quality. PC Mag, reviewing Hisense's 55-inch LED TV, concluded that the set "gets you a capable LED-backlit HDTV ... for a low price, but don't expect stellar performance." Similarly, CNet characterized TCL's 40-inch set as "a cheap television that provides a usable picture, but that's about it."

The iOS/Android war enters the living room
Consumers who buy these budget sets likely aren't among Apple's core customers. Moreover, Roku's basic set-top box technology, while a nice feature, should be surpassed in 2014.

Apple has been widely rumored to be working on a full-featured smart TV set for quite some time. Whenever the device makes its debut, it should include many high-level features such as motion controls and voice commands. Late last year, Apple confirmed that it had purchased PrimeSense, the company behind the Xbox 360's Kinect motion controller.

Apple has steadily updated its Apple TV set-top box, adding many new channels in 2013, but the device still lacks iOS support -- third-party apps and the ecosystem that has endeared consumers to the iPhone and iPad simply aren't there.

Google, too, is looking to bolster its living room strategy, even though its Chromecast dongle was one of the great tech gadget success stories of 2013. Like the Roku and Apple TV, Chromecast allows users to access media-streaming apps such as Hulu Plus and HBO Go on their TV, but can't run any Android apps from Google Play.

Like Apple, Google is reportedly preparing a more advanced smart TV device. According to The Wall Street Journal and The Information, Google will release the "Nexus TV" sometime this year. Like Chromecast, it will serve as a gateway to Internet-based content, but will offer more in the form of third-party Android apps and games.

Making money selling TVs isn't easy
Although Roku's deal shouldn't impact Apple's smart TV ambitions, the company' ability to succeed in that industry is far from guaranteed. A year ago, Morgan Stanley analysts estimated that a full-featured Apple TV could add around $4.50 per share to Apple's earnings.

While that's certainly possible, lately most high-end TV manufacturers have struggled tremendously. Panasonic's plasma TV sets are widely believed to offer the best picture in the business -- CNet, reviewing Panasonic's top-of-the-line ZT60, characterized its picture quality as the best ever.

Despite that level of quality, it seems most consumers just weren't willing to pay what Panasonic was asking -- at nearly $3,000, the ZT60 is several times more expensive than sets from rival manufacturers. To the dismay of many videophiles, Panasonic announced late last year that it would no longer make plasma TVs.

Sony doesn't make plasmas, but its TV business has also been terrible. In fact, Sony's TV division has lost the Japanese electronics giant money for much of the last decade. It briefly returned to profitability earlier this year, but fell back into the red last quarter.

Just noise
But for investors excited about Apple's television prospects, Roku's announcement amounts to nothing more than noise. It's possible that Apple could lose a few would-be Apple TV buyers, but those purchasing cheap, Chinese-made sets likely aren't among Apple's core demographic. More importantly, Apple TV remains just a stepping stone -- the more fully featured, smart TV investors have been anticipating should offer a far better experience than the Roku.