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This Is the Beginning of the End of Cable TV as We Know It

By James Brumley - Aug 21, 2020 at 10:23AM

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Consumers have made it clear they're fine with sitting through the occasional streaming television commercial.

The early results of the ad-supported streaming video experiment being conducted by Comcast (CMCSA -1.02%) are in. In short, it works. It may even be working better than expected. The folks tuning in to the completely free, 100% ad-driven version of Peacock are collectively watching a lot more hours than their paying subscriber counterparts are. The company could end up driving more revenue per user via advertising than it ever could have by collecting subscription fees.

And that's yet another problem for the cable television industry, which has already struggled to hold onto its business as consumers migrate to piecemeal alternatives. If streaming television entertainment that's free can also be profitable, there's no reason others won't follow Comcast's footsteps. That makes cable even less relevant.

Man smashing a television set with a hammer

Image source: Getty Images.

An acceptable price for "free"

Comcast isn't the first player to try its hand at ad-supported video on-demand, or AVOD. Amazon (AMZN -2.19%) owns and operates IMDBtv, which offers free content with the occasional commercial injected into the stream. Tubi, now owned by Fox (FOX -1.28%) (FOXA -1.14%), does the same. The cheaper tier of Walt Disney's (DIS -2.14%) Hulu is subsidized by TV commercials as well. ViacomCBS (PARA -1.29%) (PARA.A -1.00%) is the name behind AVOD platform Pluto TV.

Comcast's Peacock is a bird of a different feather, though. It was built from the ground up after those rivals were established, and was developed by a cable player that also happens to own a television network and a movie studio. That's NBC and Universal, respectively, which operate as a combined outfit called NBCUniversal. These resources feature prominently (though not exclusively) in Peacock's selection of programming, including some original and exclusive stuff in addition to new shows currently airing via its network broadcast.

The strategy seems to be paying off. As of the end of last month, Peacock served more than 10 million subscribers. Comcast didn't indicate how many of those were its Xfinity customers receiving complimentary access. But the ones utilizing the free, ad-supported version are watching a massive amount of content relative to the premium version. Streaming TV guide Reelgood estimates that nearly 90% of Peacock's total streamed video during the latter half of July was watched by free users. Those viewers of free TV even watched more video than subscribers to paid services like Disney+ or AT&T's (T 0.03%) HBO Max did.

Translation: Consumers really don't mind the occasional ad if it makes a service free to use, just as they said would be the case. In fact, there are subtle hints that ad-supported video may end up being more lucrative than ad-free, subscription-based video.

Crunching the numbers

When Peacock was still in the planning stages earlier this year, NBCUniversal executives ventured a guess as to how much each watcher was worth -- between $6 to $7 per month, either as a paying subscriber or as a member of an addressable audience.

The company's essentially lived up to that target -- and more.

MoffettNathanson estimates NBCUniversal collected $80 million worth of ad revenue via Peacock during the second quarter of the year. While it's only back-of-the-envelope math that doesn't account for when during the quarter those TV watchers signed up (Xfinity customers themselves weren't able to tune in until mid-April), that's about $8 per member for the quarter, but only after a mid-July launch outside of the company's Xfinity customer base. The metrics should get better in time too, as Comcast and those advertisers have also just started their journey down the learning curve.

Comparable numbers apply for rival AVOD services, on average, though they can vary widely.

For instance, the same MoffettNathanson report suggests Hulu collected $546 million worth of ad revenue for the portion of its subscriber base that tolerates ads in exchange for a lower monthly price. Of Hulu's 32.1 million streaming-only customers, though, the average revenue per user figure of $11.39 implies that only a tiny number are opting for the cheaper $5.99/month option. Most are paying something closer to the ad-free price of $11.99. Between the two groups, Walt Disney may be collecting as much as something on the order of $17/month per subscriber.

Pluto was at the other end of MoffettNathanson's spectrum, collecting an estimated $80 million in ad revenue as well, but with somewhere between 26 million and 30 million viewers. That's only about a dollar per subscriber, per month. Of course, ViacomCBS's Pluto is arguably the least-ready AVOD platform in terms of appeal to marketers. (There's a reason Viacom nabbed it for a mere $340 million early last year -- it was more about the potential than the present.)

Regardless, the industry as a whole saw sweeping growth. MoffettNathanson notes a 31% increase in Q2's total AVOD ad spending. Advertisers are simply following the crowd.

The beginning of the end

To the extent the media industry needed a stand-alone, self-sufficient name with some new and exclusive programming to prove the ad-supported on-demand video model works, Comcast's Peacock just did. The occasional commercial really is fine. Ergo, we can expect networks, studios, and other content creators to accelerate their shift away from traditional cable to streaming platforms without as much concern over pricing and ad revenue.

And cable? Cable services -- including Comcast's -- are on the wrong side of the shift toward now-no-cost, ad-supported video delivered via the internet. Fortunately for Comcast and rivals like Charter (CHTR -1.34%) and AT&T, they're also broadband powerhouses. Nevertheless, their cable subscription and ad revenue is now in even greater jeopardy.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. James Brumley owns shares of AT&T. The Motley Fool owns shares of and recommends Amazon and Walt Disney. The Motley Fool recommends Comcast and recommends the following options: long January 2021 $60 calls on Walt Disney, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

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