Friday Mailing #52: U.S. Streamers Face Real & Growing Competition from AVODs, *Especially* in 2022
When one spends enough time with Pluto TV - which I do daily now - a few things become clear:
Both SVOD and MVPDs face real and growing competition from AVODs like Pluto, The Roku Channel, and Tubi
Entertainment content - meaning series and movies for both theatrical and streaming - doesn't need to be paywalled
Kids and news content on AVODs seem to be the same or as good as kids and news content on SVODs and linear.
Sports content seems to be the only obvious paywalled content use case
These lessons didn't really "pop" for me until listening to and reading Q3 2021 earnings reports and calls. Both the FT (New US subscribers are drying up in TV streaming competition) and CNBC (Disney makes the trend clear: Growth is slowing for streaming services) picked up on the big trend: subscribers growth has plateaued.
CNBC's Alex Sherman did a good job summing up the market dynamic:
The slowing growth among most streaming services may suggest pandemic gains are waning as more people return to outside activities and out-of-home work.Still, the general trend of linear TV cancellations and streaming signups appears to be continuing. Disney, WarnerMedia and AMC Networks all reaffirmed previous full-year and future year forecasts. And while pandemic gains may have slowed, production slowdowns and shutdowns have also ended, which will lead to a surge of new content for all of the streaming services.
Real & Growing Competition from AVOD
Lachlan Murdoch, Executive Chairman and CEO of Fox Corp, made the compelling business case for the growing advantages of the AVOD model over SVOD, and why entertainment content doesn't need to be paywalled:
Looking Ahead to FY 2022
Tubi is a prime example of our unique approach to streaming compared to others in the media landscape. We program and monetize Tubi in distinct contrast to the SVOD approach of many other media companies and we're more than pleased with the results.While others compete aggressively in the SVOD space, investing heavily in content and promotion, we identified the opportunity to be a leader in AVOD, a strategy which aligns with our advertiser and audience focused approach companywide. As SVOD platforms faced the challenges of subscriber acquisition and retention and ever-increasing programming costs, FOX has carved out a differentiated and unique path. Tubi's measured investment in its content library and original programming is delivering solid returns. In addition to serving viewers with a content library of more than 35,000 titles, which is more than five times the size of Netflix's library, Tubi's unique original content strategy is already seeing early signs of success.
Out of the first four original films that Tubi released this year, two of which have performed so well in the quarter that they have already generated advertising revenue well above the local production costs, meaning they are already generating a positive return on investment. Tubi's deep understanding of its audience is a key asset as Tubi original movies outperformed blockbuster movies available on the platform. The growth at Tubi continues to exceed even our best expectations for the business when we acquired it. Tubi will generate significantly more revenue this fiscal year than our cost to purchase the platform in early 2020. In the first quarter of the fiscal year, Tubi more than doubled its revenues year-over-year. And total view time on the platform, TVT, Tubi's key metric continues to climb with 30% growth compared to last year.
Murdoch's not-so-subtle implication is that the ROI from producing content for SVOD is trending downwards, and the ROI from producing content is trending upwards.
That was also was the market trend looming in FT reporters' Anna Nicolaou's piece on Q3 streaming results:
Netflix last month told the FT it is on track to deliver a “steady pace” of programming up to the end of 2022, after production delays due to the pandemic left the company lighter than expected on shows earlier this year.“We’re in uncharted territory,” Reed Hastings, co-chief executive, told investors last month. “We have so much content coming [in the fourth quarter], like we’ve never had.” But in the US, it is unclear how far that will move the needle. So far this year, Netflix has added only 88,000 subscribers in the US and Canada, compared with 6m in 2020 and 3m in 2019. With 74m subscribers in the US and Canada, Netflix may be content with simply maintaining that base. But newer competitors need to add subscribers to make their heavy investments worth it.
Netflix, Disney, WarnerMedia (AT&T), ViacomCBS and Comcast all had weak stories for U.S. subscriber growth. That points to two logical questions:
How much growth is left in the U.S., which has the highest ARPU for all services?
Given that 120MM Americans consume YouTube via Connected TV, is the Total Addressable Market in the U.S. for AVODs larger than SVOD?
I think it is reasonable to begin imagining the media marketplace in 2022 playing out with the answers to these questions being:
Very little, and
Yes
Meaning, business models which have bet on SVOD too heavily face a rocky 2022 because lower ROI is likely, and AVOD business models face a promising 2022 as advertisers increasingly shift dollars away from linear.
Looking Ahead to FY 2022
I will revisit observations #3 and #4 in later essays. That said, one initial conclusion from Lachlan Murdoch's comments, above, is that:
The streaming marketplace is fragmenting because the ROI from content spend in SVOD is plateauing market-wide, and
Demand for sports remains stronger on linear than on streaming (a point Bob Chapek also made in Disney's FY Q4 earnings call)
Given that this essay began with Pluto TV, the other thing worth noting, is how much ViacomCBS undersells Pluto TV. There are 46 mentions of Tubi in the Fox earnings transcript, but only 16 mentions of Pluto TV in the ViacomCBS earnings transcript, and 70 mentions of Paramount+.
In terms of quality of content, product, and UX it is the furthest possible thing from "a free top-of-the-funnel service" for Paramount+, as CEO Bob Bakish described it. The total mentions should be flipped.
Pluto TV is ViacomCBS's future simply because the product is exponentially better and the TAM in the U.S. is exponentially larger. My hope for ViacomCBS is that they figure this out sooner than later.
Because given what other media companies revealed in Q3, 2022 is shaping up to be brutal on its expected ROI for Paramount+.