Power

With streaming surging, even advertisers are cutting the cord

The coming weeks will reveal just how much trouble traditional TV networks are in.

With streaming surging, even advertisers are cutting the cord

Will 2021 finally be the year for advertisers to cut the cord?

Photo: Getty Images

Did you miss the Oscars last month? You're not the only one.

Only 10.4 million people tuned in for the Academy Awards, Nielsen revealed last week. That's a record low for the awards show. In 2020, 23.6 million people watched the Oscars. A decade ago, the show regularly attracted around 40 million viewers.

The low ratings sent shockwaves through an industry that saw ratings erode across the board during the pandemic, but had hoped for a resurgence now that the world is opening up again, and live events don't have to look like Zoom happy hours anymore. Those hopes were shared by advertisers, which spent an estimated $2 million per 30-second Oscars spot, with ABC selling out its entire inventory for the night.

The Oscars ratings miss couldn't have come at a worse time for the TV industry: Later this month, the networks are holding their annual Upfront presentations to pitch their fall programming to advertisers. This week, tech companies like Amazon, Samsung and Twitter are participating in IAB NewFronts to convince those very same advertisers to spend their dollars on digital instead.

For many years, NewFronts didn't really compete with the Upfronts head-to-head. Advertisers were all dabbling in digital, but no one was ready to give up on the massive spigot that is linear television. But after a year of double-digit ratings declines and record growth for streaming, many in the industry are wondering: Will 2021 finally be the year for advertisers to cut the cord?

2020 was tough, the future may be tougher

There's one thing everyone in the TV industry can agree on: 2020 was a year unlike any other. When the pandemic hit the U.S. in March, advertisers, like the rest of us, were scared, shocked and uncertain about the future. "Most advertisers put pauses on their schedules," said Fox Networks Group President Marianne Gambelli during a fireside chat last week. "People didn't know what to do. The world was in a paused state."

Key industry sectors like travel, hospitality, out-of-home entertainment and automotive felt the impact of the pandemic right away, and paused advertising for months to come. Others were unsure how hard they would be hit and proceeded cautiously. U.S. TV advertising spend declined anywhere from 8% to 15% in 2020, according to various estimates.

At the same time, networks were losing some of their key audience drivers. Much of live sports got put on hold overnight, and marquee event shows, including last year's Academy Awards, were scaled back. Production shutdowns forced networks to cut short or delay seasons of popular TV shows, all resulting in more uncertainty for advertisers.

Many in the industry believe that things won't return to normal anytime soon, even with the U.S. starting to open up again. "The next three to five markets will make last year look like a walk in the park," commented Matthew Sweeney, chief investment officer of ad agency juggernaut Group M, during the Advanced Advertising Summit last week.

Everyone is streaming, except for older viewers

One reason for such caution: The pandemic may have led to unprecedented levels of disruption, but many of the underlying trends already existed before the world ground to a halt in 2020. Cord cutting, for instance, has plagued the industry for years. The number of pay TV households has declined nearly 23% since 2014, according to eMarketer.

And while 2020 was disruptive on many fronts, cord cutting didn't actually accelerate during the pandemic. Altogether, around 5.5 million households canceled pay TV services offered by the industry's top five providers last year, compared to 5.8 million in 2019. And there is no end in sight, either: eMarketer estimates that by 2023, fewer than half of all U.S. households will pay for a linear TV service.

What did accelerate last year, though, was the adoption of streaming, with homebound consumers flocking to both paid and free streaming services by the millions — to the detriment of traditional television. "The viewing time was dropping at a much faster rate," said Sean Doherty, CEO of ad-supported streaming startup Wurl. "Even though people still have that Comcast subscription, they were spending less and less time watching pay TV and more and more time watching streaming."

That's a trend that Samsung was able to observe firsthand last year: During the last nine months of the year, streaming accounted for more than 60% of the watch time spent on the company's smart TVs. Three out of four people who own Samsung TVs now stream content with them, the company revealed in recent weeks.

Samsung also shared another data point that could make North American advertisers rethink their priorities. Among its Canadian customers, just 19% of all viewers were responsible for 89% of all traditional TV viewing. The remaining 81% were making up just 11% of linear TV viewing. In other words: Four out of five smart TV owners in Canada already spend almost all of their viewing time streaming.

Samsung didn't offer any further demographic breakdown of those numbers, but one can guess who is watching TV which way these days: Older audiences are behind the vast majority of traditional TV viewing, with Roku executives recently pointing out that "the median viewing age for the three major broadcast networks is now over 60 years old." Younger audiences, the exact audience that advertisers are after, are almost exclusively on streaming services. "This pattern is not sustainable for TV marketers," said Roku CEO Anthony Wood.

Ad-supported streaming services are becoming billion-dollar businesses

These massive shifts toward streaming aren't necessarily all bad news for the owners of the big broadcast and cable networks. After years of smaller experiments, most of them are wholeheartedly embracing streaming now as well.

Much has been written about the industry's many would-be Netflix competitors, with Disney+, HBO Max and Paramount+ all vying for those subscription dollars. However, ad-supported streaming has become a key part of the industry's strategy as well, as just a casual look at this week's NewFronts program reveals: Next to Amazon, Twitter and YouTube, marketers will find presentations from Pluto TV (owned by ViacomCBS), Tubi (Fox) and Peacock (NBCUniversal). Not in the (virtual) room, but still heavily invested in advertising is Disney's Hulu. Just around the corner: WarnerMedia's HBO Max, which will launch an ad-supported tier next month.

Even media companies that don't have their own ad-supported streaming services aren't waiting on the sidelines anymore. Both A&E Networks and AMC Networks are running a number of free, ad-supported streaming channels that are available on services like Pluto, Plex and Xumo (which itself got acquired by Comcast last year). "2019 was sort of a tire-kicking year for a lot of the content companies," Doherty said. "2020, the content companies really started migrating to streaming en masse."

"This past year, there has been an explosion of AVOD," said Fox's Gambelli, using the industry shorthand for ad-supported video services. "A lot of the money migrated there."

Fox, the Murdoch company that owns all of the assets not sold to Disney as part of the Mouse's takeover of 20th Century Fox, paid for the ad-supported streamer Tubi in 2020. Now, executives are predicting that Tubi will become a billion-dollar business over the next few years. "With the growth trajectory, it's not too far off," Gambelli said last week.

Fox CFO Steve Tomsic went even further during an investor event earlier this year, admitting that Tubi will at some point bring in more ad revenue than the company's TV networks. "Over time, you'll see the curves cross," he said.

Exactly when that will be is anyone's guess — and media companies will probably not offer too much guidance. Not only are Fox, Disney, NBCUniversal and others looking to convince advertisers that buying ads on their legacy TV networks is still very much a good idea (even if data points like those released by Samsung suggest otherwise), these companies also have another revenue stream to protect: retransmission fees paid by the cable and satellite TV providers, which collectively are expected to shell out around $12.4 billion for the rights to carry TV networks as part of their bundles.

That money is being paid whether anyone watches these networks or not, and any admission that audiences and advertisers have migrated to streaming may lead to even more pushback from pay TV service operators to future carriage rate hikes. That's why the official party line, at least for now, is that streaming is additive. An extra course for an already opulent menu.

Behind closed doors, industry insiders are often a lot more frank. "This may be a watershed year," I was told by an executive of a major streaming service who wasn't authorized to talk on the record. With linear networks declining, even traditionally conservative advertisers have decided that they're beyond testing and are ready to bet on online video, the executive said. "The laggards are going to be on board. There will be some bigger shifts than in the past."

An industry first: Dollars and eyeballs align

Traditional industry wisdom has long been that ad dollars do eventually follow audiences, but with a significant delay. Some believe that gap may be closing. "This is the [first] time in my career that the dollars and the eyeballs are actually kind of in parity," said IAB SVP of research and analytics Sue Hogan.

One explanation for the closing of this gap: Unlike in years past, advertisers got to experience the shift to streaming firsthand in 2020. "We are all consumers as well," said Group M's Sweeney. "And we've seen the migration to all these screens." Not only did the personal TV habits of ad buyers at big brands and agencies change last year, but with a shift to working from home, they also got to see firsthand how their children were consuming media.

As a result, many have already been allocating more money to streaming. An IAB survey of 350 marketer and agency executives, which is being released at the NewFronts this week, revealed that connected TV video ad spending per advertiser increased on average by 22% in 2020. This year, 35% of ad buyers expect to increase ad spending on TV streaming apps and services. And it's clear where that money is coming from: 73% of connected TV ad buyers are shifting money away from broadcast and cable TV, according to the survey.

video ad spensding growth in 2020 by segment Ad spending on smart TVs and streaming devices saw massive growth in 2020.Image: IAB

There are still a bunch of open questions about this transition of ad dollars from TV to streaming. Among them: What kind of impact will ad-free subscription services have? Will the transition to streaming ultimately lead to consumers watching a lot less ad-supported programming altogether because they prefer binging on Netflix over watching ad breaks on Pluto?

"Every percentage of viewing time that Netflix consumes is viewing time that ad-supported services can't consume," Doherty acknowledged. "That's the obvious downside." However, he also suggested that Netflix plays the role of the anchor tenant for streaming — the one big store that draws everyone to the mall, where they then wander around and spend time and money on other things. Consumers may replace their old TV set with a new smart TV with Netflix built in, and then discover a number of free services right next to that familiar Netflix icon. "Netflix has been the anchor tenant for quite a few years now," Doherty said.

With that opportunity also comes a responsibility to get it right. Just like that big mall store with its well-designed window displays, Netflix has an army of employees optimizing its user experience. The smaller store next door, or the free streaming app with an unfamiliar name, has to try extra hard to measure up to that experience. Otherwise, consumers will just turn around on their heels. "You're a click away from going to a subscription, ad-free service," said IAB Media Center VP Eric John. "So the ad experience better be great in a free, ad-supported service."

Some marketers aren't taking any chances, and are already looking at ways to move beyond traditional advertising to reach those Netflix audiences, including with product placements and other ways to attach brands to popular shows. "We are not giving up on those environments," Sweeney said.

Still, right now, everyone is looking at the next few weeks to figure out where the chips will fall. How much money will ad buyers allocate to linear TV, how much will they move to streaming platforms and how much will ultimately skip the TV screen altogether and end up on mobile and social? "The Upfronts is that moment where you really see where the spend is landing," John said.

And with early data from ad buyers suggesting significant shifts, everyone had better pay attention. "This is a bellwether moment in media," John said.

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