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Advertisers Are Ready for Streaming, but Streaming Isn't Quite Ready for Ads

By James Brumley - Updated Feb 7, 2020 at 10:12AM

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During the fourth quarter of last year, streaming platforms got worse at handling advertisements.

A couple of weeks ago, I presented the notion that for ad-supported streaming video to prosper, it had to get as good at handling advertisements as the cable television industry is now. For all its woes, including shrinking customer bases, advertisers know exactly what they're getting with their TV ad dollars. Commercials airing during a digitally streamed movie or program, though, are still ultimately a crapshoot. It matters because Comcast's (CMCSA 1.52%) NBCUniversal division is preparing to launch the first major ad-supported video-on-demand (AVOD) streaming service, called Peacock. The underlying technology has to be ready.

Conviva's fourth-quarter State of Streaming report posted just a few days ago, however, suggests it's still not quite up to snuff despite the ticking clock. There is one name in the business that seems to have its stuff together, though. That's Roku (ROKU 3.92%).

This acknowledgment from Conviva doesn't inherently make Roku a buy, particularly at its current valuation. But it does position the company as the standard-bearer for an AVOD market that could be worth more than $20 billion in the United States alone by 2024.

Montage photograph of business people, television monitors and technological themes.

Image source: Getty Images.

Getting worse, not better

The good news is, the amount of time a typical consumer spent watching digitally delivered video in 2019 grew by 58%. The arrival of Disney+ from Walt Disney and Apple's Apple TV+ late in the year gave Conviva's measure a late shot in the arm.

The bad news is that the ramp-up in views was paired with ramped-up challenges in delivering the advertisements that break up those broadcasts. The average amount of time it took to start playing an ad jumped from 1.14 seconds to 2.27 seconds, increasing the odds that a viewer may switch to a different program -- or switch to a different video provider. Ad buffering -- temporary pauses during a commercial -- also grew by 44%.

There was one bright spot in Conviva's Q4 metrics. The number of times an ad failed to start altogether decreased from 35.7% to 30.8%. But, with nearly one-third of all digital video ads never launching, clearly, the industry still has challenges to resolve.

Time for a new technological priority

Roku seems to have addressed such challenges as well, if not better than, other names in the business. The Conviva study noted Roku's platform reduced video start failures by 58% year over year. Roku's buffering also fell 34% compared to Q4 2018's buffering, with Amazon's (AMZN 2.07%) Fire TV devices also making measurable strides forward in buffering and video start times.

Conviva didn't say how Roku and Amazon achieved that much-needed progress, though it's noteworthy that both AVOD players have looked beyond their own efforts to build a superior advertising platform. Amazon announced in mid-2018 that it would allow advertisers to utilize third-party ad-buying services to purchase some of its inventory. Roku has teamed up with Innovid to bring detailed ad-campaign reports to its advertisers.

Conviva's report, however, suggests that most of the other names in the business watched their ad-delivery processes deteriorate, perhaps struggling under the weight of greater video traffic. Addressing that is the next big step in streaming video's march toward dominance of at-home entertainment, as it's clearly less ready for more scale than it was just a few months ago. Taking that step is apt to involve a new direction in partnerships and acquisitions of needed technologies.

Looking ahead

As this sliver of the streaming industry matures, advertisers will eventually figure out which advertising platforms are the most reliable. That's good news for both Roku and Amazon given their technological progress last quarter, though it means decidedly more for Roku simply because it's so singularly focused on being an AVOD middleman. Amazon is still predominantly a merchant and cloud computing service that dabbles in ad-supported video through its IMDb TV service.

Conversely, the new report raises concerns about NBCUniversal's planned Peacock service, which may be the boldest ad-supported video on-demand play yet. Amazon's IMDB TV is free ad-supported streaming TV, but hasn't attempted to take on mainstream rivals -- because it doesn't need to. Ditto for Tubi TV. NBCUniversal is hoping Peacock signs on as many as 35 million subscribers by 2024 though (via a combination of free and paid subscribers), making it an incomparably widespread hybrid of conventional and over-the-top television. For that to pay off and push the service to the expected breakeven by the same year, management of its ads has to be better than what we're seeing from other services' technologies today.

Let's hope Comcast understands now just how challenging it is to seamlessly inject ads into a streamed video when a few million viewers are all plugged into the network at the same time.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, Roku, and Walt Disney. The Motley Fool recommends Comcast and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.

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