Member Mailing: Why Apple's & Amazon's Advantages In Sports Streaming Are Over-Hyped
My newest monthly opinion piece is up for The Information. In “Can Netflix Win the Contest for Connected TV Ad Dollars?” I wrote about one little discussed risk for Netflix’s ambitious vision for its ad-supported business: its relationships with Smart TV manufacturers.
As Netflix told investors in its Q1 shareholder letter, “Netflix’s growth depends on the uptake of connected TVs.” Its ad model will inevitably evolve that relationship, turning it into a head-to-head competition with the entire connected TV universe for ad dollars.
The emergence of Connected TV device manufacturers (or, original equipment manufacturers (OEMs)) as power players in streaming has been playing out in the background for a while now.
Part of the power is pure scale - Nielsen estimates the total number of TV households in 2022 is 122.4MM, and device makers like Roku and Amazon may have as many as 50MM connected TV devices, each, in U.S. households. [1]
But no one streaming application will ever have a holistic view of what consumers want unless it is owned by a Smart TV operating system. Each streaming service is “actually a walled content garden, blocking out or strictly limiting access to competitors’ content”, as IAB Executive Chairman Randall Rothenberg recently argued in a Twitter thread. That means publishers with limited libraries will never understand the consumer preferences of audiences beyond the walls of their service. The data publishers intend to sell to advertisers will also suffer from the same limitations.
The other problem is that Smart TV user interfaces (UI) and user experiences (UX) create “a lot of friction that still exists between the streaming consumer and the streaming sports broadcast” (I wrote more about this problem in The Tiger Woods Comeback Story vs. Streaming Bundles).
Friction in the UI/UX and serve as a back-drop to the recent New York Times article, “Why Big Tech Is Making a Big Play for Live Sports”, which highlighted the emergence of Apple and Amazon as competitors for sports rights. The article forewarns of tech’s potential “dominance” of live sports distribution, and highlights the financial advantages of tech’s model over legacy media streaming services.
But, it fails to mention either friction or “walled gardens”, and I think these are both crucial to understanding where big tech’s power lies, and does not lie, in streaming.
Total CTVs in the U.S.
In the U.S., a recent report from Leichtman Research Group estimates there are 500 million CTV devices, reaching an estimated 87% of TV households.
So 106.5MM households have at least one Internet-connected TV device. Across all households, including those with no connected TV devices, there was a mean of 3.9 devices per TV household – compared to 3.2 in 2020, and 2.4 in 2017.
Across all households, the mean number of stand-alone streaming devices is 1.5 and the mean of connected Smart TVs is 1.3. As for leading devices, TiVo’s recent Video Trends Report found that of people surveyed in the U.S. and Canada that purchased a TV in the previous six months, 40% bought a Samsung. LG was the next most popular with 18%, and Sony was next with 8%.
However, Roku streaming sticks and boxes lead the CTV device space. 33% of respondents said they had a Roku SMP, 30% an Amazon Fire TV, and 17% an Apple TV. 21% of current CTV device owners plan to buy another one in the next six months. Of those, 23% plan to buy a Fire TV device next, while 20% plan to get a Roku.
The Mess
Comparing the Leichtman and TiVo research, one implication is that the smart TV ecosystem is a much more complex world than the cable box ecosystem.
In my earlier essay The Question Plaguing Connected TV: Who’s Watching?, I wrote about how people are now watching streaming content not just on TVs, but also on smartphones, gaming consoles and tablets. Those devices don’t communicate with each other:
For example, Hulu will record someone who logs in to watch a show on their Vizio TV at 9 p.m., and then goes to bed and continues to watch that show on their Apple iPad at 10:30 p.m., as the same subscriber. Hulu will also record that ads were served to that subscriber on both devices. But Apple and Vizio will each report back to the media buyer that different people watched those ads on different devices.
It’s an absurd outcome: A person logging into the same account in the same app to watch the same content in the same house across two devices is not counted as the same person. Moreover, neither Hulu, nor the ad buyers, nor the measurement services can report who in the household was using the Hulu account at the time; that’s important because advertisers pay a premium on connected TVs to target ads to individuals within a household.
The household may have only one broadband provider - likely from Comcast, Charter, Cox or Verizon - but with 3.9 Smart TV devices alongside smartphones and tablets devices in a household, streamers and advertisers both face the unusually complex exercise of figuring out who is consuming what in the household.
The Challenge for Advertisers
Leichtman’s study highlights why this is a particularly difficult pain point for advertisers: 46% of adults in US TV households watch video on a TV via a connected device daily (compared with 40% in 2020, 25% in 2017, and 4% in 2012).
Leichtman found that among the valuable advertiser demographic of 18-34, 62% watch video on a TV via a connected device daily – compared to 54% of ages 35-54 and 24% of ages over 55.
This data point will be completely worthless, and to advertisers in particular, if they cannot determine who is watching what on which device. This is especially problematic in sports streaming, where rights deals are expensive and advertisers will pay a premium for sports viewership.
“Why Big Tech Is Making a Big Play for Live Sports”
I start this research data because, first, it is important to understanding what friction looks like in numbers; and, second, it highlights a key weakness in the New York Times article about Apple and Amazon having “thrust themselves into negotiations for media rights held by the National Football League, Major League Baseball, Formula One racing and college conferences.”
The emphasis of the article is, correctly, on the advantages of Apple’s and Amazon’s business models versus legacy media’s in bidding for sports rights, which are becoming increasingly expensive (the NFL doubled its media revenue in last year's $113B deal). As former Disney CEO Robert Iger told the NYT, “It’s hard when you’re competing with entities that aren’t playing by the same financial rules.” Iger was referring to the “bankroll” of Amazon and Apple, both of which have market capitalizations in the trillions of dollars (Amazon at $1.17T, and Apple at 2.45T).
But Iger was also referring to the economics of their spend: Apple sells devices and services ($68B in 2021), and Amazon has two fantastically profitable multi-billion dollar businesses in Amazon Web Services ($62.2B in gross revenues 2021) and Amazon Advertising ($31B in gross revenues in 2021). By comparison NBCUniversal grossed $9.3B in 2021, and Paramount grossed $21.8B from advertising and affiliate revenues, alone, in 2021.
The acquisition of sports rights for $1B per year is an afterthought for individual line items of Amazon and Apple, much less their entire businesses. Whereas for legacy media companies facing cord-cutting and facing a highly competitive streaming marketplace (with high churn), those sports rights risk being a greater percentage of annual operating expenses as audiences decrease.
To date that decline has been compensated for by rising affiliate revenues (per pay-TV subscriber fees paid to TV networks from linear distributors or Multichannel Video Programming Distributors (MVPDs)), and from linear advertising revenues projected to remain at ~$65 to $67B per year through 2025 (eMarketer), questions will remain in the background.
But the looming question is, for how much longer can these CTV advertising market dynamics and cord-cutting trends sustain these revenues? And given this, Apple and Amazon seem like the inevitable winners.
The “Real” Challenge for Apple & Amazon
The New York Times described the challenge for Apple and Amazon as "persuading somewhat skeptical sports leagues that they can produce high-quality broadcasts, flawlessly stream games for millions of concurrent viewers, and maintain[ing] sports fans accustomed to flipping between games with a remote”.
But, I think the “real” challenge for Apple and Amazon is that they often will be one device among multiple brands in an average U.S. household. That means that their distribution of sporting events will be fragmented across devices, and therefore vulnerable to the problem of friction that I wrote about in The Tiger Woods Comeback Story vs. Streaming Bundles:
Smart TVs control the last mile to the consumer, and they can extract rent for better distribution. But there is a lot of friction that still exists between the streaming consumer and the streaming sports broadcast that even the Disney bundle UX fails to solve within Hulu.
So, for example, watching MLB on Apple TV+ on an Apple device may be the optimal viewing experience for both Apple and the consumer, but watching MLB on Apple TV+ on a Vizio Smart TV will be sub-optimal for both Apple and the consumer Apple TV+ is not native to Vizio's software and Vizio has few, if any, incentives to prioritize Apple TV+ content natively. [2]
Apple’s and Amazon’s perceived advantages in sports streaming are that they have both (1) proprietary devices across U.S. households *and* (2) applications that are distributed across competitive devices. But, their respective multi-pronged strategies of breaking into the living room will be a disadvantage as long as competitors like Samsung, LG, Sony, and Roku gain more market penetration than Apple or Amazon.
That market penetration means their devices *also* will be in the same households. Competitors controlling the “last mile” to the consumer, either entirely or in part within a household, means they can create friction by either:
Introducing more friction between consumer and the game in the UX/UI (e.g, making it harder to find the app from the home page), and/or
Refusing to co-operate and share first-party data with Apple and Amazon to help all parties tell a “cross-device” story to advertisers. [3]
There are structural misalignments in the CTV marketplace that make the future of sports streaming unlikely to be something both consumer- and advertiser-friendly anytime soon. In other words, it does not matter how large the treasure chests of Apple and Amazon for sports streaming rights are. The purchasing habits of CTV households in the U.S. leave them vulnerable to their competition both in the short-term and the long-term.
The Exception: Comcast
It may be worth keeping a closer eye on Comcast than Apple or Amazon for two reasons. First, as Sports Business Journal’s John Ourand reported this week, Major League Baseball seems to be giving “higher grades” to Peacock - which is owned by Comcast's NBCUniversal - than to AppleTV+: “That isn’t based on viewership figures, which have not been made public, but rather on production. Peacock, which started streaming games this season in a new Sunday morning time slot, has benefited from NBC’s history of producing live sports, MLB Chief Revenue Officer Noah Garden said.”
So, Apple is not very good at producing for sports streaming yet. Amazon is also on a learning curve, launching its own production for the NFL’s Thursday Night Football in Fall 2022 (I wrote about this last March in Amazon, NBCU, The NFL, & Addressable Advertising (on the PARQOR Substack archive)).
Peacock has been vulnerable to the type of UX/UI friction from CTVs that I described, above . With expensive sports rights deals for the Olympics, the English Premier League and the NFL, third-party platforms can create both real pain-points and imagine expensive pain-killers to force Peacock into paying for less friction (Comcast has been guilty of this, too, with Peacock's competitors in their Xfinity UX/UI).
But, because Peacock is owned by Comcast, which has access to over 68MM customer relationships, in part because of a recent 50/50 joint venture to license its Flex streaming platform to Charter (see Footnote [1], below, and Why The Comcast & Charter Joint Venture Is About Search & Discovery & Not Bundling).
Second, Protocol’s Janko Roettgers reported yesterday that Comcast has been “weighing the acquisition of a TV-maker to bolster its nascent smart TV platform efforts”, and has approached both Vizio and TP Vision.” Roettgers argues that this strategy would “help Comcast remain relevant in a world where an increasing number of consumers cut the cord”.
I think it is more notable as Comcast solving for reducing friction for Peacock and its sports broadcasts across more devices and within households. Meaning, Comcast pursuing sports rights *and* buying up Smart TV companies seems like a smarter strategy than tech companies pursuing sports rights, alone. Friction is real, and it leaves bets on sports streaming like Amazon’s and Apple’s vulnerable to all sorts of economic and software architecture “taxes.”
Given the complexity of the CTV device ecosystem, Comcast does not seem to be laying the foundation of a new MVPD model. But it has key pieces that advertisers need (scale, advertising software in Freewheel and NBCU One, and household IP addresses), and it can create less friction for millions of households in the U.S.
It is too early to declare Comcast a winner. But, it is clear that Peacock and Comcast's Xfinity are positioned to deliver the best sports streaming experience for consumers and advertisers in the long-run, regardless of the resources of Amazon and Apple.
Footnotes
[1] As I laid out in Is Apple A Better Partner for Major League Soccer (MLS) Than Legacy Media?: Apple TV devices have low penetration (13.1% according to eMarketer, but 5% of premium video streaming minutes according to video quality provider Conviva). Also, Apple TV+ has a 5.6% market share globally, and a 5% market share in the U.S., according to JustWatch.
Also Roku, Amazon and Comcast’s Xfinity platform are established competitors at a greater scale in the U.S.:
Roku has 63.1MM active accounts, with the majority in the U.S. Assuming around 90% are in the U.S. and Canada (56.8MM), and 90% of that subset of users are in the U.S. that totals just over 50MM active Roku accounts in the U.S.
Assuming Amazon Fire TVs have 85% of the reach of Roku in the U.S., there are ~42.5MM active Amazon Fire TV accounts in the U.S.
Comcast has 32MM residential customer relationships (excluding 2.5MM business services customers), and another 6MM customer relationships via its Xfinity software with Cox. Charter has 30MM residential customer relationships (excluding 2.2MM business services customers), totalling 68MM residential customer relationships.
[2] You can read more about Apple's strategy in sports streaming in my recent essay, Is Apple A Better Partner for Major League Soccer (MLS) Than Legacy Media?
[3] I wrote about how this latter strategy has been playing in the Automatic Content Recognition (ACR) marketplace in The Question Plaguing Connected TV: Who’s Watching?:
...device makers and ACR providers, such as Shazam or Samba TV, each collect their own data on what’s watched and who’s watching it, which they offer independently to advertisers and the media buying agencies that manage campaigns. This piecemeal information can go some way toward filling in the attribution gap—but not far enough, because the data providers “have failed to recognize that they’re not competitors,” Gerber said.
To make matters worse, various ACR providers define an ad impression differently: Some record an impression one second into an ad, others at six seconds, and still others at the end of the ad. Gerber said this makes ACR data “not comparable.”