Television ad spending in the United States has consistently stuck around $70 billion for the better half of a decade, despite the rise in cord-cutting. But the resiliency of the television industry may start to fade next decade. Big events in 2020 -- the Olympics and the U.S. presidential election -- will support growth in ad spend of about 1% next year, according to estimates from eMarketer. But ad spend will start to decline relatively quickly in 2021, and it's unlikely to ever bounce back to the level we saw this decade.
Media companies with significant investments in traditional television, including AT&T (T 0.33%), Comcast (CMCSA -0.64%), and Disney (DIS 0.03%) have already taken steps to diversify with over-the-top streaming options. Each will have an ad-supported streaming service by 2021.
But the transition in ad spend from traditional TV to connected TV has the potential to have a much more outsized effect on smaller companies like Roku (ROKU 0.35%).
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The shift in advertising budgets
U.S. TV ad spend will fall from $71 billion next year to $68.9 billion in 2023. That $2.1 billion decline in ad spend will move toward connected TV advertising, which will grow from $8.9 billion next year to $14.1 billion in 2023.
Connected TV's growth is more than offsetting the decline in traditional TV, but that doesn't mean AT&T and Comcast investors can rest easy knowing management is working on ad-supported streaming options for consumers. Those companies face considerably more competition for ad budgets on streaming than they do on pay TV.
Most notably, two big digital advertising giants have a sizable stake in connected TV advertising. Google, the Alphabet (GOOG -0.28%) (GOOGL -0.32%) subsidiary, has benefited from the growth in YouTube streaming on televisions. The company revealed users streamed over 100 million hours of YouTube per day on television sets two years ago. It's since developed ad products specifically for YouTube television streams.
Meanwhile, Amazon (AMZN -0.56%) has built the foundation to take a sizable portion of the connected TV advertising market. Its Fire TV platform is used by over 37 million households worldwide, and it's started demanding ad inventory from ad-supported video streaming services on Fire TV.
Roku represents one of the biggest challenges to the incumbent television advertisers. While its global user base is slightly smaller than Amazon's, it spends more than twice the amount of time streaming than Fire TV owners. Combined with a head start in connected TV ad tech (and helped by a recent acquisition), Roku is poised to win an outsized share of the growth in connected TV ad spending.
That doesn't leave much for Comcast, AT&T, and Disney to offset their declines in traditional TV. Comcast's management expects Peacock, and its ad-supported streaming tiers, to bring in just $1 billion to $2 billion in total revenue -- subscription and advertising combined -- after five years.
Disney is arguably the best-positioned of the legacy media companies to manage the shift in ad spending thanks to its control over Hulu, the rapid growth of ESPN+, and its other established digital advertising efforts that span games, apps, and audio.
Roku will see a much bigger impact than anyone
Roku is the smallest company competing for traditional television advertising dollars. And, as mentioned, it's arguably best positioned to win a substantial portion of the money flowing from traditional TV to connected TV.
Roku's platform revenue totaled just $633 million over the last four quarters. By comparison, Amazon's ad revenue totaled around $11 billion, and Google's was nearly $130 billion. AT&T's advertising business across WarnerMedia, Xandr, and its own TV distribution totaled over $7 billion over the last year. Comcast's NBCUniversal sold over $7 billion at Upfronts this year, on top of the $2.6 billion the cable communications segment brought in over the last year.
So, while the competition is competing for revenue that'll have a relatively small effect on their overall business (especially in the case where it's merely offsetting lost revenue from traditional TV), the effect on Roku could be massive. Taking just one-third of the ad revenue that's shifting from traditional TV over the next few years would result in Roku more than doubling in current ad revenue. The same amount would translate into growth of roughly 6.4% for Amazon's ad business or less than 1% for Google.
As TV ad spend starts to shift from traditional to connected TVs, Roku presents one of the best options to invest in the trend.
