It’s been an awful week for US TV companies. Cable stocks plummeted as investors had nagging concerns over viewers cutting the cord on cable television.
Meanwhile, media companies’ earnings reports revealed a continued softening of the $US70 billion TV ad market as big marketers increasingly shift more and more of their budgets to digital advertising.
If you want to get a handle on what’s happening with TV and the state of the digital video market, investment bank LUMA Partners’ CEO Terence Kawaja delivered another of his epic presentations at VidCon last month on exactly that.
The deck covers:
- The rise and rise of new players in the digital video market
- Traditional TV versus digital video players
- The new economics of TV
- And the increasing M&A activity in the video market
Commentary on the slides is courtesy of LUMA Partners’ CEO Terence Kawaja, with light editing from Lara O’Reilly.
With the proliferation of new devices and video formats, it is no surprise that digital video is rising so quickly. Since the very beginning, YouTube has dominated the rise of digital video.
But now YouTube is not the only game in town. New entrants include the largest consumer Internet companies like Facebook and Twitter to start-ups like Vessel and Meerkat, that are all looking to offer better content, engagement, and distribution.
Thanks to the nature of Facebook's auto-play videos, daily views have soared past 4 billion in less than 2 years since the company first debuted its popular video format. Facebook's ubiquitous videos are mostly viewed on mobile, where the company has proven that videos can be very engaging on a smaller screen.
Mobile apps like live-streaming Periscope and Meerkat enable users to view live content anywhere they are. Gone are the days when live content viewing was restricted to traditional TV.
Popular messaging app Snapchat pioneered vertical video and subsequently built advertising that is natural and less intrusive for the mobile form factor.
Publishers from BuzzFeed to Vice are creating original video too as they recognise there isn't enough supply of premium inventory that marketers seek.
Digital video advertising is a lucrative business as evidenced by the dramatic difference in average CPMs between normal display ads and video ads.
Digital video spend is growing rapidly with the proliferation of devices and new video formats. Digital video is also increasingly being bought and sold programmatically.
Despite its incredible growth, the digital video market pales in comparison to the TV market. The world's major marketers reserve most of their advertising budgets to TV, which is the largest and most preferred channel for brand advertising.
Until recently, the dialogue around convergent TV seemed to be taking place in silos. The traditional players until recently have not been that concerned about digital largely because they don't count in numbers that small. The digital players are equally ignorant and assume they will crush TV just like what happened in music or newspapers. This is decidedly not the case.
The motivations of traditional TV and digital video players differ vastly. Traditional TV guys are worried about losing share of their large, incumbent business whereas the digital guys see the $70 billion in TV spend and want a piece of the action.
Traditional TV and digital video are two fundamentally different ecosystems. The traditional TV landscape has half as many categories of companies and a quarter of the number of players as compared to digital video. When you factor in the amount of spend per company in each of these ecosystems it's a 100 to 1 ratio between traditional TV and digital video. So the great change we're all expecting might not necessarily come from the smaller, VC-backed companies.
However, there are some new entrants that are very powerful. These are household names like Google, Apple, Verizon, Samsung, Amazon, Netflix, Microsoft and Sony that have combined market caps and cash that are multiple times greater than the entire traditional TV market.
The world used to be simple. TV content was consumed on televisions and digital content was consumed via digital channels. It was straightforward and bifurcated.
Then came the adoption of multiple screens. With this we saw the beginnings of content partnerships between traditional and digital-first players. OTT emerged as a means to bring digital content to traditional screens. This was then complemented by TV Everywhere to bring television content to digital screens.
LUMA believes the future looks like a happy marriage between the traditional and digital players where there will be little distinction between what was previously thought of as traditional linear and digital delivery.
Content gets grouped into channels, which then get packaged by media companies, that are then again packaged and delivered by MVPDs, which ultimately gets viewed on the consumer's devices.
The return path is dollars. Subscription dollars get shared between the delivery companies, the media companies and all the way back to the beginning to fund the creation of production of new high-quality, long-form content.
TV ad spend comprises upfront buys that are committed to at the beginning of the year, network scatter for inventory that is not bought on an upfront, annual basis, and spot buys reserved for local markets. Retransmission fees and affiliate fees from MVPDs go to broadcast companies and cable networks, which serve as additional revenue streams.
Media companies use the revenue committed upfront towards investing in new content. Traditionally, high-quality content has been very expensive as only a small minority of pilots produced may be picked up to actually air on TV. This means that the 10% that is picked up supports 100% of what is created.
This economic model differs from digital because in digital the publisher only gets paid well after an ad actually runs. There is no upfront payment.
Hit shows used to deliver enormous audiences. This meant that it was easy for a marketer to reach an audience at scale at a specific time in conjunction with a specific event / show. Fast forward twenty years and the hit shows don't even have a fifth of the audience they once had and many don't even have a fraction of the audience they once attracted. Increased choice in what and where to consume video content has lead to audience fragmentation.
New entrants have varying disruption strategies. Some are coming forward with content solutions while others are focused on delivery, new pricing models or hardware. Netflix and Hulu are disrupting delivery but partnering with the traditional content players while others are bringing their own content directly to the consumer, bypassing all others in the middle.
The last GRP (gross rating point,) the marginal GPR, is the most expensive. So, with TV fragmentation increasing, so has cost of advertising in an effort to gain the same, large audiences.
However, the outlook for the TV market seems challenging. Upfronts, which are often used to gauge the health of the market, have shown weak interest from TV's major advertisers over the past few years. Consumers are watching content on multiple screens and marketers are adjusting their advertising spend accordingly.
Alternatives to TV are growing quickly. OTT (Over-the-Top), offers consumers programming they want to watch, with more flexibility and far less money.
At LUMA, we are firm believers in the convergence of traditional and digital video. A key to this convergence will be M&A. Both sides of the ecosystem will bring their strengths. Additionally, integrated ad buying workflows will unite TV and digital ad buying.
Traditionally during Upfronts season, TV networks pitch programming to marketers that featured great plots, casts, and high production quality. Meanwhile, digital companies sold marketers on their data-driven approach to targeting and advertising. The opposing sides played to their strengths…
But in 2015, the selling points have reversed. TV networks are introducing new data products after feeling pressure from marketers to provide more granular targeting. Digital companies are selling marketers high quality content that they feel deserve premium dollars because of their coveted audiences and engaging content.
To satisfy their advertisers' needs, TV networks are offering data products with similar capabilities to digital advertising. NBCUniversal, for example, is combining Comcast's subscriber data with Experian and Acxiom's credit card data to help advertisers like Chobani target yogurt-buying consumers.
Digital companies, on the other hand, are increasing their investments in original content. Ever since the success of Netflix's House of Cards series, other leading digital companies have produced premium content of their own to keep consumers on their properties longer and attract major advertisers.
These new content creation models have caught the eye of tier-one talent who are not only lending their names to but also funding these new ventures.
If you were to take the last 7% of television spend, which is arguably the most inefficient due to getting the least scale per dollar, and apply it to digital, you would double the size of the digital video market. Some studies would argue that up to 25% of that TV spend would be more efficiently used in the digital channel.
The perception of addressable TV is that there are only two sides of the coin, linear and programmatic TV. The reality, however, is that there are multiple node points in between the two offerings that each have their own unique capabilities and challenges.
All you have to do is look at recent activity to see that M&A will be the way traditional TV and digital video converge. This consolidation is already occurring with over 30 scaled transactions in the past two years.
In conclusion, we believe digital video has a very bright future. It is increasingly clear that digital video is the preferred consumer media and is the most sought-after digital inventory for marketers amidst the rapid change of traditional TV. Finally, the rise of digital video is fuelling the uptick in strategic exit opportunities in the space.
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