In Q2 2023, PARQOR will be focusing on three trends. This essay focuses on "The definition of scarcity is continuously evolving away from linear and towards walled gardens."
To remind you, PARQOR identifies a few key trends each fiscal quarter that reveal the most important tensions and seismic shifts in the media marketplace. Must-read stories or market developments are not always obvious from press reports or research analysis, and often require a deeper dive. PARQOR’s analysis questions established ideas and common wisdom, reassesses the moving pieces, and reveals the potential in the media marketplace in 2023.
Free ad-supported TV services (FASTs) are a hot topic lately, and deservedly so: both Paramount Global’s Pluto TV and Fox Corporation’s Tubi are now showing up in Nielsen’s monthly The Gauge index of the most-watched services across broadcast, streaming, cable and other sources on TVs in the U.S. Both are consumed less than 0.5% of both HBO Max and Peacock and less than 1.0% of Disney+.
So, two free services are performing as well as the best performing legacy media subscription services, and better than subscription services not showing up on The Gauge like Discovery+, Starz and Apple TV+. There is an obvious hole in that story: The Gauge does not track consumption on mobile devices, and somewhere between 15% and 50% of Netflix consumption is on mobile devices, and around 90% of YouTube consumption may be on mobile devices. As for everyone else, they tend to be black boxes outside of Nielsen — we are lucky to get the limited insights from Nielsen that we do get.
This means the story for FASTs is positive — both Fox and Paramount have reported growth in users and revenues from Tubi and Pluto, respectively — and also emerging competition subscription streaming services in the U.S. facing flattening growth. But, to play devil’s advocate here, what if there is not one story for FASTs but multiple stories, and they aren't all positive?
Key Takeaway
The FAST story is a good one but it isn't a consistent one, and its future lies outside the hands of Nielsen's current market leaders.
Total words: 1,500
Total time reading: 6 minutes
1. The Economics
I have already written about one aspect of the FAST model in February. Disney CEO Robert Iger’s concerns about the business model for “general entertainment” is ultimately a challenge to Disney management: “Why are we spending billions to compete with and lose share to free services with a similar value proposition?”
It’s an important point: Disney invested billions and took on billions more in debt with the assumptions that (1) there was a viable business model in the recurring monthly revenues from streaming and (2) Hulu’s business model had proven that premium legacy content could attract CPMs as high as $35. But, the economics of Iger’s game plan no longer seems viable for two reasons.
First, the revenues from streaming alone have not been proven to be profitable outside of Netflix. Hulu’s model *is* profitable on its own, but the losses from Disney’s other streaming ventures (Disney+, Star, ESPN+) have drowned those profits out to the tune of over $4 billion in losses in 2022.
Second, as I pointed out in February’s essay, the licensing model for FASTs is so much more cost-effective than the licensing model for subscription streamers. Licensing pays for the residuals contractually owed to cast and crew (and residuals are a key issue in the looming Writer’s Guild strike, scheduled to start this week). FASTs pay a revenue share on all ads served against any licensed content viewed on one of their channels, but Disney+ pays a fixed fee per play based on rate cards and a long list of other variables for its licensed content.
In short, ad rates are variable and fixed fees are not. The growing popularity of FASTs has resulted in a complex dance between:
whether a movie or TV series is better off being distributed on a FAST, where the content may be more likely to be viewed but there may be a smaller, less reliable pot of revenue to share; or,
whether it should be on a subscription service where the content may be less likely to be viewed but the returns are more predictable.
2. The Advertising
Advertising is a crucial part of why Pluto TV was acquired by Viacom for $340 million, and Fox Corporation paid $440 million for Tubi. The question that I think most commentators and analysts miss is *why* advertising is important.
The obvious answer is that millions of FAST viewers watching hours of content per month creates multiples in additional video impressions. Those impressions are valuable in multiple ways.
They are marginal impressions that can be monetized via programmatic advertising — which is how Tubi and Pluto originally monetized their inventory pre-acquisition — or direct-sold by ad sales teams, which is how Paramount and Fox have grown advertising revenues since acquiring Pluto and Tubi, respectively. Pluto is perhaps most notable because at $1 billion in revenues in 2022, it was grossing nearly 3x its purchase price only three years post-acquisition. It also helps to solve for "make-goods", as I wrote in November 2021, when the impressions for an ad have not reached a volume that met the pre-arranged acquired impressions - the mille of the Cost Per Mille (CPM) - and/or their intended demographic because of underperformance and/or error.
FASTs bring the value proposition of linear to digital, literally, with the electronic programming guide (EPG) and curated individual channels that look and feel like cable channels. The only difference, which I pointed out in The New Economics of "General Entertainment", is that more niche, “general entertainment” channels like Pluto TV’s Slow TV channel are also content against which advertisers can buy and reach target audiences.
The more demand shifts to connected TV (projected to be 7% of total media ad spend in 2023 and 9% in 2026), and the more cord-cutting accelerates, the more connected TV offers advertisers new inventory similar to linear, which they can price similar to linear and which they can continue to sell at upfronts (for as long as they continue to exist). As The Verge’s David Pierce wrote on FASTs last week:
“The future of TV is free, it has ads, and it involves a lot of channel surfing. It’s a lot like the TV business of old, really. That’s actually kind of the point.”
Last, advertisers are more comfortable with the brand safe “premium” and “general entertainment” content that FASTS distribute — typically older movies and TV series — than they are with digital content from creators and legacy media websites. Buyers' comfort in large part has to do with existing “co-dependent” relationships with TV ad sellers, who historically have discounted digital inventory in tonnage deals because buyers have trusted linear inventory more.
3. The Technology
Economics and advertising highlight why FASTs work for legacy media companies: They offer better economics on the distribution side and they offer a familiar value proposition to both consumers and advertisers. It’s a great model. But, research firm Omdia projects that FASTs will be a $12 billion annual business in 2027, but according to eMarketer that would be 12% of a $98 billion market in 2027, 29% of a $40.9 billion CTV advertising, and 19% of a $64 billion dollar U.S. TV ad spend in 2023.
So, FASTs are an insufficient solution for a legacy media company facing declining revenues from cord-cutting and flatlining streaming businesses. But what about a technology company?
Amazon has FreeVee and Roku has The Roku Channel. FreeVee is incremental to Amazon’s business model and helps drive Amazon Fire TV engagement. Advertising is one source of revenue for Roku’s Platform Revenue business (which is basically 100% of Roku’s operating income), and another is the distribution of FAST channels (its share of revenues from third-party distributors. On top of that, Roku has 71.6 million active accounts, most of which are devices.
But FreeVee revenues are not broken out in Amazon’s earnings, and there’s not much evidence it has broken through with consumers yet — Pierce describes recent content investments putting FreeVee “on the map”. In other words, these FAST businesses don’t solve a problem for these tech companies. They’re also owned by tech companies with trial-and-error operational cultures. They are neither solving for the pain points of older businesses or compensating for lost revenues.
FAST is the child of SVOD
There was a great quote from Beth Anderson, General Manager, FAST Channels, BBC Studios in a recent podcast interview with nScreenMedia:“If you think about FAST as not the child of pay TV linear, but the grandchild. They are the child of SVOD.”
Another way to phrase that is, FAST solves a problem SVOD has had, and in an indirect way, it solves for linear’s pain points, too. That model has hit a wall in large part because legacy media companies have not solved for the technology. I wrote about this problem two weeks ago:
“There are no easy answers for Iger or any other CEO who have built upon a non-personalized UI/UX. I would argue that a key reason for that is that none are CEOs with a software or computer science background (I argued this last week). Meaning, the choice of Hulu versus BAMTech is not necessarily a binary choice (in practice it was not an easy one). Ultimately all their streaming futures hinge on their software or platforms.”
FAST is partially a solution to this problem. But a FAST also is a software business, and that plays into the weaknesses of legacy media companies. The Verge’s Pierce wrote about how FASTs drive better engagement than SVODs and Vulture’s Joe Adalian recently wrote about how FASTs like Tubi solve for discoverability better than SVODs. Those are more software-related problems and less content-related problems. The business models for Amazon’s FreeVee, Comcast’s Xumo, The Roku Channel, Samsung and LG are both hardware and software businesses. Software is a necessary condition of their hardware business success, and their FASTs are baked into the operating system of every connected TV device sale.
Legacy media companies do not own that luxury and instead rely more heavily on libraries for their value propositions. At a time when Smart TV sales are projected to "surge" and therefore competition set to grow, that may be a weakness. So, the FAST story is a good one, but isn't a consistent one, and its future seems to lie outside the hands of Nielsen's current market leaders.
Must-Read Monday AM Articles
* Pluto TV’s Olivier Jollet discussed FAST competition & exclusive vs original content
* Walmart+ customers now will receive ad-free access to select content from Paramount’s traditionally ad-supported streaming service Pluto TV.
* Tubi Founder, CEO Farhad Massoudi exits, Fox reorgs Tubi into a digital growth business
* Nearly seven in 10 (69%) of U.S. TV viewers use free streaming services at least monthly — sharply up from 42% in 2019, according to the 2023 edition of Horowitz Research’s State of Media, Entertainment & Tech: Subscriptions study.
* Stitching FAST channels into pay-TV apps is becoming more commonplace.
* Most CTV Ads miss the frequency "sweet spot"
* It looks like US consumers are about to enter a massive refresh cycle on the TVs in their homes. If it happens, the market share of TV OSs is liable to shift dramatically too.
* For the last decade, advertisers have predicted the proverbial death of linear television — and thus linear television advertising — at the hands of everything from the digital video recorder, digital advertising and now, the rise of streaming and ad-supported video. But even as the digital video market is on fire, it won’t leave linear TV in ashes.
* A recent panel of experts includng Fabrice Mollier, president of Chez Canal+, could not agree on the definition of “impressions” – or surely more relevant, “contacts” – that are the basis of the TV currency in France,.
* Digital ad revenue in the U.S. rose 10.8% to $209.7 billion last year as marketers continued to spend in online channels despite slower economic growth, market uncertainty and mass layoffs at big tech companies, according to a new report from the Interactive Advertising Bureau and PricewaterhouseCoopers LLP.
* The challenge of multiple TV currencies at upfronts: “I can’t imagine that the advertisers -- the ones ultimately funding the market -- are going to eagerly step up and pay a bunch more money for a spot based on one rating if they have a legitimate basis to choose a competing rating with a lower number and a lower price for the media.”
* Simulmedia CEO Dave Morgan argues "we are now in an era of Superior TV, where TV is only going to get better and better. This is probably going to happen faster than we imagine -- and often in ways that we can’t imagine now.”
* A former Snap executive wrote for The Verge: “Today, the product evolution of social media apps has led to a point where I’m not sure you can even call them social anymore — at least not in the way we always knew it... Call it the carcinization of social media, an inevitable outcome for feeds built only around engagement and popularity.”
* WWE reverses a streaming policy, allowing its stars to return to Twitch
* The NCAA women’s basketball tournament, Women’s World Cup and others seek to turn rising ratings into much bigger broadcast fees. ($ - paywalled)
* An FT love letter to YouTube: “You can have the internet if I can keep YouTube. It has a greater trove of content than Netflix, HBO and Amazon Prime combined and squared. It enfolds high and low culture with the promiscuity of a Clive James essay." ($ - paywalled)
* A new kind of local rights deal is emerging in Arizona, where the NBA’s Suns and WNBA’s Mercury announced plans to have a local broadcast channel on Gray Television and the streaming service carry their games.
* Billionaire Mukesh Ambani’s streaming service JioCinema will add more than 100 films and TV series to its platform, including Warner Bros. Discovery content to build on the popularity of its cricket broadcasts in its push to take on global giants like Walt Disney Co. and Netflix Inc. in the fast-growing Indian market.