Reports: AVOD Revenue to Grow 25% in 2020

Subscription streaming video’s counterpart, advertising-supported VOD, continues to gain traction among consumers — and advertisers. New data from eMarketer suggests AVOD revenue will grow more than 25% this year compared to 2019.

The AVOD market, which is spearheaded by The Roku Channel, Disney-owned Hulu, NBCUniversal’s Peacock, Redbox TV, Amazon’s IMDb TV, ViacomCBS’s Pluto TV and Fox Corp.’s Tubi, among others, saw ad revenue skyrocket 31% to $849 million in the most-recent quarter, according to MoffettNathanson Research.

“AVOD advertising benefitted from heightened usage and a mix shift in advertising budgets to OTT platforms, growing sizably in the quarter,” senior analyst Michael Nathanson wrote in a note.

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Speaking Aug. 20 on the DEG: The Digital Entertainment Group Mid-Year 2020 Digital Media Entertainment Report webcast, Nathanson called AVOD the underreported streaming video story.

“That 28% of streaming minutes is where we think the streaming wars are actually happening,” Nathanson said.

With many of the AVOD players owned by major media companies, much of the ad growth would appear to be due to shifting third-party ad dollars from linear TV to connected televisions.

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But with four of the five AVOD platforms owned by major media conglomerates, some of this growth is likely coming from reallocated TV spend. eMarketer contends the 31% rise in AVOD revenue among the top platforms compares with an estimated 28% decline in national broadcast and cable TV ad spending in Q2, according to Nathanson.

Eric Haggstrom, forecasting analyst at Insider Intelligence at eMarketer, believes that while marketers warm to AVOD, much of the revenue revolves around media giants pushing advertisers to proprietary streaming platforms.

“Some advertisers who bought ads in the upfronts are shifting money within the same media company to streaming services,” Haggstrom said.

Indeed, Tubi earlier this year added all episodes of Fox’s “Gordon Ramsay’s 24 Hours to Hell and Back,” in addition to 300 hours of separate Ramsay content, which includes “Hell’s Kitchen,” “Kitchen Nightmares” and “The F Word.” Tubi also added Fox’s music competition show “The Masked Singer.”

“Making this show available on Tubi alongside Gordon’s other series, will only grow his footprint while also further promoting his programs on Fox,” said Rob Wade, president of alternative entertainment and specials at Fox Entertainment.

Nathanson: 17-Day Theatrical Window a ‘Dangerous Precedent’

With the coronavirus pandemic shuttering movie theaters, studios have slowly embraced premium VOD and releasing lesser titles early into digital retail channels. When Universal Pictures and AMC Theatres announced plans to shrink the traditional 90-day theatrical window to 17 days for new-release movies, the studio business model was thrown on its ear.

Perennial box office champion Disney — a long-time champion of the traditional theatrical window — broke ranks announcing it would bypass theaters and offer live-action Mulan to consumers in the home next month.

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“We were not surprised by Mulan. We thought [the movie] would go SVOD direct,” Michael Nathanson, analyst with MoffitNathanson, said Aug. 20 on the DEG: The Digital Entertainment Group Mid-Year 2020 Digital Media Entertainment Report webcast. “We’ve speculated changing the theatrical window for years, and here we’re seeing it happen in real time. It’s been a year of experimentation.”

Nathanson said the theatrical business has been Disney’s domain for years (64% of all industry pre-tax earnings in 2019, according to Nathanson), and CEO Bob Chapek’s decision to alter traditional distribution models will “ripple” through the industry (including home video) for years to come. The analyst contends the country has too many movie screens operating under current market conditions.

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“The number [of screens] has to fall,” he said in response to the slate of original movies moving to SVOD and other digital channels. The analyst said that trend will accelerate as studios and their media parents roll out digital distribution platforms such as HBO Max, Peacock and Disney+.

Nathanson said he believes Disney has no plans to abandon the theatrical window altogether since the studio makes money ($1.4 billion operating profit) on most of its major releases at the box office. And theatrical releases often inspire amusement park rides and consumer goods.

“Disney is not all-in [on shrinking the window],” Nathanson said, adding he never expected the window to shrink below 30 days.

“We were shocked at AMC’s deal,” he said. “We think it’s a very dangerous precedent.”

The analyst said that when analyzing the percentage of box office revenue in the 90-day window, upwards of 30% of most $100 million movies’ box office is generated beyond 17 days.

“It didn’t make sense to us to cannibalize days 17 to 30,” he said. “We’re still puzzled by that decision to go to the shorter timeframe.”

He said much of the economics will be determined by how much Universal charges for the home video releases, but said that at the end of the day it will be a “bad outcome” for exhibitors.

Indeed, despite a saturation of movie screens, rising SVOD, AVOD and digital distribution for non-blockbuster movies has left plenty of opportunity for the traditional 90-day window, according to Nathanson.

“We are the most over-screened country in the world,” he said. “We don’t understand why we won’t see a reduction in screens first. We’ve been waiting for changes in the theatrical business for some time. And this crisis has really escalated behavior by some media companies that feel they have the green light to experiment.”

Analyst: AVOD ‘Under Appreciated’ Market Dynamic

While the growth of subscription streaming video services led by Netflix has dominated home entertainment headlines over the years, growth of ad-supported VOD platforms still remains a lurking presence, according to analyst Michael Nathanson with MoffettNathanson in New York.

Speaking Aug. 20 on the DEG: The Digital Entertainment Group Mid-Year 2020 Digital Media Entertainment Report webcast, Nathanson said during the first three months of the coronavirus pandemic streaming video consumption in the United States increased 86% from the previous-year period — driven by Netflix with 32% market share. Nathanson said that among the 28% of streaming services other than competitors Amazon Prime Video and Disney+, ad-supported VOD is gaining the most traction among consumers.

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Major AVOD services include ViacomCBS’s Pluto TV, Disney’s Hulu, Fox Corp.’s Tubi, The Roku Channel, Redbox TV, IMDb TV, Peacock and Shout! TV, among others.

“That 28% of streaming minutes is where we think the streaming wars are actually happening,” Nathanson said. Calling the ongoing COVID-19 pandemic a “once-in-a-lifetime” moment for SVOD, underscored by Netflix adding as many new subscribers in the first half of the year than it did in 2019, Nathanson said AVOD represents a cost-efficient alternative.

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“If you don’t think you want to get into the streaming wars and chase Disney and Netflix down a rabbit hole of spending, you can have advertisers underwrite the cost of content [via AVOD],” he said. “We think this is a place where [media] companies that don’t want to play in the streaming wars, but have content libraries looking for a home will play the game.”

Nathanson projects a quadrupling of revenue for AVOD over the next four years as traditional linear pay-TV  consumption falls and content holders look for alternative distribution channels outside of SVOD. The analyst believes AVOD and other forms of digital distribution will account for 75% of all ad spending by 2024 as linear TV consumption declines and broadcasters move away from original content spending.

“It’s pretty much going to be a digital-only world,” Nathanson said.

Analyst: Apple TV+ Should ‘Reconsider’ Business Model

Apple TV+ may have been the first of several big-name subscription streaming video services (Disney+, HBO Max, Peacock) to take on Netflix, Amazon Prime Video and Hulu, but its market penetration continues to lag, according to new data from Wall Street analyst MoffettNathanson.

Citing an online quarterly survey of 8,500 homes, the New York-based research firm found that just 7% of respondents used the $4.99 monthly service, that’s down from 8% in the previous survey in May.

By comparison, 73% of respondents used Netflix, which was up 1%, with Prime Video up 1% as well at 52%. Disney-owned Hulu use was unchanged at 36%, while Disney+ increased to 28% (from 27%).

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“The Apple TV Plus data points should force Apple to reconsider their [SVOD] strategies and options at this point,” Michael Nathanson wrote in a note.

Apple TV+ is currently included for free (for 12 months) with the purchase of any Apple hardware product, including iPhone, iPad, iPod Touch and Mac desktop computers. Disney+, which has offered Verizon subscribers a free year of service, saw the number of telecom users decline 18% in the quarter.

Nathanson contends much of the Disney+ shrinkage could be attributed to the lack of new episodes of original series “The Mandalorian” — despite the July 3 premiere of the Hamilton movie.

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“In short, both services are in danger of losing momentum during the current production shutdown,” Nathanson wrote.

Regardless, the analyst, who is bullish on Netflix, believes the SVOD pioneer can add 30 million subs worldwide in 2020. Motivating force behind SVOD growth: pay-TV costs. Nathanson found that 57% of Netflix subs opted for SVOD due to the exorbitant monthly cable bill. Data points reflected by Prime Video (59%), Hulu (56%) and Disney+ (49%).

Netflix reports second-quarter fiscal results at market close today.

Netflix Reportedly Eyeing Content Budget Restraint

With Netflix’s fiscal second-quarter ended June 30, the SVOD pioneer reportedly is re-evaluating its prolific content spending.

The service, which ended Q1 with $18.9 billion in third-party content obligations, spent more than $12 billion on original content in 2018 — a fiscal largess senior management is now scrutinizing.

CCO Ted Sarandos in June reportedly held a meeting with mid-level managers with a revised mandate that spending on original content should be commensurate with viewership — especially among new subscribers and long-time inactive members, according to The Information, which cited people at the meeting.

Netflix heretofore has eschewed spending restraint in favor of content’s social media buzz and establishing industry legitimacy.

“They are the leading game in town and were probably overspending relative to what they need,” analyst Michael Nathanson with MoffettNathanson told the website. “Now that they are in a strong position, they probably want to allocate more of that spending overseas.”

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The service in recent years has blown up industry norms outspending/bidding over-the-top competitors and traditional pay-TV players for content and exclusive license agreements.

With domestic sub growth maturing and a bevy of pending OTT video services launching from deep-pocket competitors such as Apple, Disney, WarnerMedia and NBC Universal, among others, Netflix now wants original programming to pay for itself — a challenge for a business model that shuns advertising, the theatrical window and transactional VOD.

Sarandos, according to The Information, was at odds with the reported $115 million spent on Triple Frontier, the original action movie with Ben Affleck and Charlie Hunnam (“Sons of Anarchy”) that apparently didn’t resonate with subscribers — or the service’s bottom line.

In fiscal 2018, Netflix generated negative cash flow of $3 billion on revenue of $16 billion — a figure projected to increase to $3.5 billion in fiscal 2019 — much of it due to content spending.

“There’s been no change to our content budgets, nor any big shifts in the sorts of projects we’re investing in, or the way we greenlight them,” said a Netflix spokesperson.

Meanwhile, pending original movie The Irishman, from director Martin Scorsese has a reported budget of $150 million. With Netflix eyeing the mob thriller for next year’s industry awards, the service will have to compromise on its concurrent theatrical/streaming release mandate, says Michael Pachter with Wedbush Securities in Los Angeles.

“We expect Netflix and exhibitors to reach an accommodation where there will be a shortened window in exchange for lower film rent,” Pachter wrote in a July 1 note.

A typical film earns 83% of its box office within four weeks, and 96% within 60 days, which Pachter believes could soften exhibitors’ revenue loss to around 3% as the result of a shortened theatrical window to appease Netflix’s business model.

“We think that if studios or platforms like Netflix are willing to trade film rent for an earlier window, the negative impact on exhibition would be limited particularly for films well-suited for the big screen,” Pachter wrote. “The Irishman may fit the bill.”

Netflix reports Q2 fiscal results July 17.