Monday AM Briefing: The Cola Wars, Retail Velocity & Why I Disagree With "The Streaming Wars"
About 10 years ago I sat across from Shelly Palmer at an Un-Conference in Jackson Hole, Wyoming, and discussed with him why I believed linear ad sales were effectively the obstacle to digital growth at Viacom.
He paused for a second, and then asked "Do you know why linear ad inventory is still more valuable than digital to advertisers?"
I vaguely remember I gave him some wordy answer related to conversion funnels and consumer awareness.
Shelly quickly stopped me: "No. It's two words: retail velocity".
He then went on to explain how retail velocity was a key variable of the Cola wars: it reflected how many units of Cola had moved off the shelves at retail locations like convenience stores or groceries in a given period of time.
The consumer is making an either/or choice when they are thirsty for soda, and they are paying each time. If a Coca-Cola or PepsiCo could not move enough bottles of soda in that period of time, they lost shelf space. To win it back, they would need to change their marketing strategy or change their spending.
That shelf real estate is so important that all linear advertising spend is devoted to winning it or defending it by influencing the consumer's decision while standing before a shelf of soda, or a fridge of soda. The target market of soda companies is 18-35 year olds, who have been the core demographic of the Viacom portfolio of brands, both then and now.
Soft drinks in the U.S. alone are a $32B marketplace of which PepsiCo and The Coca-Cola Company represented approximately 22% and 20%, respectively, of the U.S. liquid refreshment beverage category by estimated retail sales in measured channels in 2020, according to Information Resources, Inc. [1]
Soft drinks accounted for 69% of Coca-Cola's worldwide unit case volume in 2020, 2019 and 2018.
Numbers don't lie: the two market leaders have territory to protect and territory to gain, and it's war between them and also the long-tail of competitors they face who make up 58% of the market in the U.S.
Retail Velocity & "The Streaming Wars"
One problem with the concept of "war" in streaming is that there is no hardware or software architecture in streaming that mirrors the space constraints of hard architecture like retail store shelves in streaming (though one could make the argument that App Store Top 10s are analogous).
An app is downloaded once, the subscription payment is once-a-month and not per-use. This all makes any either/or viewing decisions between apps effectively a roll of the dice over the course of a month.
Another problem is there is no "war" over the real estate of a consumer's Smart TV or OTT home screen. The consumer and not the retailer chooses which device to use, which apps to download, and in which order they are arranged. Consumers may choose to order the apps on device home screens, and the software enables infinite permutations of how apps may be ordered.
The Cola wars emerged because there were and continue to be hard constraints around consumer choice that impacted retail velocity. The hardware and software architecture of Smart TVs and OTT devices do not force the same either/or decisions.
Are the "Streaming Wars" in AVOD?
Are there any hard choices for consumers in streaming?
I think one answer to this question has emerged as of late: the lower-priced ad-supported version of streaming applications, or the ad-free version. These choices have been offered, to date, by Disney's Hulu, HBO Max, Peacock, Paramount+, and discovery+.
AVOD is an increasingly important bet for these companies because they deliver marginal revenues on top of subscription revenues - $8.59 in ad revenue per user for Hulu, as I wrote in last week's If Streaming Growth *Is* Slowing, What Will Advertisers Buy In CTV?.
The rest of this essay on marginal revenues to AVOD subscribers is for Members, only. To get access to this essay and all future mailings, click the red button below.
A lower price point can attract audiences at a larger scale than a higher-priced ad-free price point. In the cases of Hulu, Peacock, Paramount+ and discovery+, the majority of their paying subscriptions are ad-supported.
All AVODs will face the same challenge in filling that marginal inventory with higher CPM ads like Connected TV (CTV) ads. The more AVOD inventory is filled with higher CPM ads, the higher the marginal return per subscriber is from ad inventory.
As a recent ANA and Innovid study found, CTV inventory can average $23 effective CPM and $123 average cost per unique reach (or, the average cost per 1,000 unique households).
But, as I wrote last week, the challenge is marginal ad inventory may be more valuable to the AVOD service than to the ad buyer. Innovid recommends that ad buyers buy 3x the reach than they currently are (13% of CTV households) - a problem in itself - but that will require ad buyers to spend more on flat or declining audiences, at least in the domestic U.S.
Notably AT&T CEO John Stankey suggested this disconnect in valuation is impacting WarnerMedia on its Q4 2021 Earnings Call:
I expect there'll be some customers that choose to go the ad-supported route that may have gone the subscription route before.
However, what will happen is it's not that one is less accretive than the other. The subscription line will possibly dilute a bit, but the advertising line will increase. So when you look at the customer overall, they're no less profitable. It just books to two different places on the P&L.
And our goal, and in fact, what we are seeing today, we are indifferent as to what the customer chooses. Frankly, maybe in some cases, it's a bit more accretive if they go the ad-supported route.
Stankey's last line "maybe in some cases, it's a bit more accretive if they go the ad-supported route" implies that not all HBO Max with Ads customers are valuable to advertisers, but some are.
The other implication is that any and all ad buying is marginal revenue to HBO Max With Ads. This feels like an underselling of the ad-supported tier: meaning, yes, all ad-buying is incremental to HBO Max with Ads, but it needs to meet that demand.
In one sense, that seems surprising: AVOD has always been sold and perceived as an opportunity for marginal revenues and subscription revenues greater than the ad-free tier, like Hulu.
In another sense, this may not be surprising given the new trend of flat or declining audiences in streaming across all services. Meaning, market trends in the U.S. imply that AVOD is about to get incredibly competitive over who can deliver reach and scale, and better for Stankey to now undersell the AVOD opportunity.
This is why the concept of a "streaming war" may apply better in AVOD than SVOD. Ad inventory is more analogous to shelf space - it is limited and highly competitive. The AVODs that will be able to sell the most inventory will generate more marginal revenues from users
But they're competing with so many other AVODs and Free-Ad-Supported-TV services (FASTs) which are offered in the same App Stores - sometimes owned by the OTT platform itself - and offer similar inventory: some at greater scale and others at lower scale, some with better ad tech and others with weaker ad tech, and some with larger libraries and others with smaller libraries.
They are also competing with programmatic solutions that serve ads across apps, like platform solutions Disney XP, Amazon or Roku, and third parties like The Trade Desk.
All will share the same need for marginal revenues to recoup growing content spend - expected to total over $230B in 2022. This brings us back to the Cola Wars analogy: any loss of audience this early in the game will lead to loss of ad inventory, advertiser demand, and, in turn, less likelihood of recouping content spend.
All will also share the same demand-side disconnect: advertisers are not aggressively diving into connected TV ad buying at the same time streaming services need them to buy higher CPM inventory. The implication is, the AVOD services that survive will have more of those types of ad buyers than not.
Other than Hulu, it is not clear who else that favors in the AVOD model. Platforms and programmatic seem better positioned.
If we believe John Stankey, the open question is whether this dynamic will also play out internationally. There are no guarantees that it will not.
Must-Read Monday AM Articles
* Four of the biggest ad-supported video on demand (AVOD) platforms in the U.S. generated $3.5 billion in advertising revenue in the 12 months leading up to September 2021.
Emerging "Metaverse"-type convergence strategies
* Advertisers are "wary" of Meta's first Metaverse pitch ($ - paywalled).
* Casey Newton has a good summary of three key problems with Web3 and crypto that need to be solved in 2o22.
* We’re already in the beta-metaverse
* CocoMelon launching its first-ever podcast venture with Spotify as part of an exclusive, multi-year deal with parent company Moonbug
Aggregator 2.0
* The Hollywood Reporter's George Szalai asks, "Will Hollywood’s Streaming Ambition Lead to Big Gaming Buys?"
* Stripe has partnered with Spotify to help podcasters accept payments, launch recurring revenue streams, and deepen their connection with fans.
Sports & Streaming
* The reason why sports streams have advertising gaps, explained, from Morning Brew's Kelsey Sutton
* Disney secured exclusive rights to WWE streaming in Indonesia. SBJ's John Ourand broke down how the WWE "bears little resemblance to the WWE of a year and a half ago"
Creative Talent & Transparency in Streaming
* Spotify responded to recent controversies and artist protests over its COVID-19-related content with a letter from CEO Daniel Ek outlining new moderation policies.
* Jellysmack, a digital media company and content studio, recently announced a Hollywood-Meets-Creator-Economy model of a partnerships program where Jellysmack partners with celebrities to co-create social video content
* YouTube CEO Susan Wojicki shared data points on Shorts and YouTube's creator economy in an open letter. YouTube also lost three executives to Web3 and metaverse startups this week.
Original Content & “Genre Wars”
* Forbes' Scott Mendelson argues "Hollywood chased Netflix’s share price, but I’d argue Wall Street may be sending them all (Comcast, AT&T, Viacom, etc.) over a cliff"
* Recently retired Disney Chairman Bob Iger gave a must-listen podcast interview to a punchy Kara Swisher
* Details on presumptive Warner Bros. Discovery Chairman David Zaslav's approach to planning culture and management of the new entity, expected to emerge in May 2022.
* In the UK, "as Disney+ begins to reclaim high-performing titles it had previously licenced to Netflix. Disney+ challenges Netflix in a way that Prime Video does not"
Comcast’s & ViacomCBS’s Struggles in Streaming
N/A
AVOD & Connected TV Marketplace
* Amazon's ad pitch has changed to attract companies like movie studios or insurance companies that don't sell on Amazon but are critical to the growth of its advertising business ($ - paywalled)
* New data from Hub Entertainment Research suggests consumers dislike heavy ad loads during shows, and it has a strong impact on their perception of the entire viewing experience
* Brian Weiser, global president of business intelligence at GroupM, explains why the growth of ad spend isn’t a return of that in early 2020.
Other
* A string of recent deals among African film and TV producers and global studios and streamers may mark "a real tipping point" for African content.
* Streaming competitions in India has intensified after Netflix reduced its price