Kudos to Netflix (NFLX -3.89%) for launching one industry that's completely rattled another. eMarketer estimates the U.S. cable business has contracted from its peak of more than 100 million paying households in 2013 to a little more than 70 million now, en route to less than 64 million paying customers projected in just a couple of years. Netflix and other premium streaming services like Walt Disney's (DIS -1.70%) Hulu and Disney+ have provided consumers with the long-awaited alternative to increasingly expensive cable.
However, if you think the next 10 years of change within the television entertainment arena are going to look like the last 10, think again. Now Netflix and Disney+ have fresh competition from conventional cable content creator ViacomCBS (PARA -2.63%) (PARA.A -2.46%), which is making a point of handling its streaming business in a completely different way.
Yes, ViacomCBS is a streaming name, and a big one at that. The company boasts nearly 47 million direct-to-consumer customers as of the end of September, led by its Paramount+ platform. It's not continued growth from the subscription-based Paramount+ service that's apt to lead the charge in 2022, though. Instead, that honor belongs to Pluto TV.
If you're not familiar with the service, Pluto TV looks a lot like conventional cable combined with on-demand content. Much of the live programming even comes from familiar networks like NBC, BBC, Fox, CBS, and a wide array of entertain from the non-network channels that are part of the typical cable package; it's just not the exact same programming you'll find with the average cable bundle. For 54 million consumers that don't have to have everything cable brings to the table, though, Pluto TV's more-than-250 channels are a solid, free, cable-like alternative to conventional cable service.
You read that right. Pluto TV is free. ViacomCBS monetizes the platform strictly by injecting the occasional advertisement into a viewer's stream. In industry parlance, Pluto is an ad-supported video on demand (or AVOD) service. Some refer to it as free ad-supported streaming television, or FAST.
Whatever you call it, the business is not insignificant. CEO Bob Bakish commented in November that Pluto was generating business at an annualized clip of $1 billion, or on the order of $1.50 per viewer, per month. Perhaps more important, Bakish says Pluto TV's operation in the United States is already dancing with profits. That's incredible given that Pluto was only launched in 2013 and has only been given significant support since 2019, when the predecessor of ViacomCBS -- then known as Viacom -- acquired the AVOD service.
But, Pluto TV has still only scratched the surface of its potential.
Less SVOD, more AVOD
If you're not watching ad-supported streaming TV, you're in the minority. Data from Deloitte indicates that subscription fatigue has prompted 55% of U.S. consumers to watch ad-supported streaming television. Moreover, a good-sized chunk of these people is watching more ad-supported TV than subscription-based streaming. In December, a report published by TVision said that during the third quarter of 2021, TV watchers spent 37% of their viewing time watching AVOD content, versus only 32% of their watch-time on premium subscriptions to services like Disney+ and Netflix. Both metrics are marked improvements from just a year earlier.
For the record, subscription-based streaming services are still collecting the bulk of the streaming industry's revenue. Meanwhile, ad-supported video services have to cast a wide net by procuring a lot of programming. That can get expensive even if the bulk of it isn't what consumers would consider top-tier content.
The math of the model works, though. Again, Pluto TV is in the black in the United States, where most of its users reside.
And this sliver of the streaming market is only going to bear more and more fruit going forward. As consumers continue to cut the conventional cable cord yet also look for ways to avoid tacking on more monthly bills, they'll look to AVOD as a solution. MoffettNathanson Research estimates that AVOD outfits like Hulu, Paramount+, Comcast's Peacock, and Fox's Tubi will grow their collectice top line to $17.8 billion by 2025, quadrupling 2020's tally of $4.4 billion.
On a more global basis of looking at less familiar but better-seasoned ad-supported streaming platforms in overseas market, Digital TV Research believes annual worldwide AVOD revenue will reach $66 billion by 2026 -- a 144%, $39 billion improvement on 2020's number.
ViacomCBS is plain-old undervalued
Don't read too much into the message. ViacomCBS is expected to do about $28 billion worth of business in fiscal 2021. Even with massive growth potential, Pluto TV can't be considered a game-changer quite yet.
Nonetheless, ViacomCBS stock is priced at a trailing 12-month P/E of 6.4 and a forward-looking earnings multiple of only 9.1. The modest valuation already reflects headwinds blowing against the company's conventional cable content business. Even industry-average growth for Pluto TV could drive a measurable benefit for ViacomCBS's bottom line. Pairing this growth with the continued expansion of its subscription-based Paramount+ platform only bolsters the bullish case. Deutsche Bank's upgrade of ViacomCBS to a buy on Monday even notes that based on the company's streaming ventures' revenue alone, ViacomCBS shares are still valued much lower than Netflix or Roku.
Deutsche Bank analyst Bryan Kraft, however, specifically likes the way all of the company's pieces fit together in an arena that continues to move away from the cable carrier/content provider partnership and toward home-grown distribution:
"While not everyone will succeed in streaming, we think Viacom has an opportunity to transition its business model successfully given its content portfolio (including sports rights), brands, globally sourced content production model and an approach to the market that includes on-demand entertainment, linear channel feeds, sports and news in all three streaming formats -- subscription, subscription + advertising and free ad supported streaming."
He's absolutely right. Don't be surprised to see the stock move forward as more and more people arrive at the same conclusion.