Monday July 07, 2008 – Antonette Goroch

News that Netflix had sold out of their recently unveiled Roku set-top boxes(STBs), which allow users to stream movie content directly from Netflix to the TV via its “watch now” feature, in just three weeks has left many puzzled about what this means for the future of the STB and on-demand movie delivery. Rather than portending a future of more “Internet TV” devices that will compete with current set-top devices for consumer dollars and eyeballs, though, this is more likely evidence of the incremental evolutionary path of STBs which will come to include these technologies, and more, as content distribution becomes more fluid and multiplatform based.

The Netflix STB by Roku is not the first Internet STB to hit the market in recent years. AppleTV and Akimbo, among others, have failed to gain much traction though, due to high cost of the units, and a lack of overall content availability. Netflix/Roku have found success where others have failed because their model is cheap (only $99), easy to use (connects right to a users existing Internet connection—no PC necessary) and plugs into an existing ecosystem of content/users (Netflix’s user base of 8 million+ customers and more than 10,000 movie titles).

While these early returns are no doubt promising, they are more likely to offer a proof of delivery concept, and evidence of what consumers want in a service, rather than a new standalone product category. The argument that consumers don’t want a myriad of STBs each doing one thing littering their living rooms is a sound one. But already rumors abound that Microsoft is negotiating with Netflix to integrate the technology into the Xbox 360, which could be a boon for both companies, boosting Netflix’s user base and and enhancing the utility of the Xbox 360. Meanwhile, Netflix has also said it is in discussions with other consumer electronics manufacturers to integrate with DVD players and DVRs, and is seeking a broad-based ubiquity.

Netflix’s motivations in these moves are clear. The DVD by mail market is expected to peak over the next five years, and Netflix will need to leverage its subscriber base into new modes of content delivery if it is to survive. If it can use the Roku technology to adapt itself into a variety of existing STBs through partnerships, rather than just the current standalone model, it will be well positioned to both survive and thrive.