The COVID-19 pandemic was a double whammy for the pay-TV industry. First, marketers pulled back on their television advertising spend. Then, consumers started canceling their pay-TV subscriptions as sports were canceled and TV series productions were delayed. Around 6.6 million U.S. households will cut the cord in 2020 while ad spend falls 15%, according to estimates from eMarketer. Importantly, those numbers will not bounce back to their pre-pandemic highs, instead continuing to trend downward over the long run.
As more consumers cut the cord and advertisers move to digital platforms, it's forcing legacy TV media companies to accelerate direct-to-consumer plans.
A forcing function for direct-to-consumer
More and more media companies are assessing their direct-to-consumer streaming options.
ViacomCBS (PARA -1.99%), Discovery Communications (DISC.A), and AMC Networks (AMCX -3.18%) are all heavily reliant on advertising and affiliate fees from distributors. While affiliate fees have been propped up by contractual annual rate increases offsetting declining subscribers, advertising has been much harder to sustain. And as cord-cutting accelerates, affiliate revenue will fall as well.
All three have made several moves to push further into the direct-to-consumer streaming video space. ViacomCBS is expanding CBS All Access, transforming it into Paramount+. It's also investing more in Pluto TV, its streaming service with dozens of "live" channels. Discovery is planning an ad-supported direct-to-consumer service launching next year. And AMC has revamped its streaming services, working closely with traditional distributors. It's notably resisting going directly to consumers, but it may explore other distribution channels like The Roku Channel in the future.
The move is necessary for the three media companies, as they are heavily reliant on the pay-TV ecosystem. The other option is to bow out of the direct-to-consumer space and license more content to bigger players, which may become necessary for smaller media companies to survive.
Other media companies, even those with existing direct-to-consumer services in place, will need to consider the long-term viability of staying loyal to the pay-TV ecosystem. Disney (DIS -1.78%), for example, already shuttered several cable networks in foreign markets. It's focusing more on its direct-to-consumer services in those markets, including its forthcoming Star-branded service. Disney may need to follow a similar strategy in the U.S., folding existing networks into Disney+ or Hulu, which could help it increase its pricing over time.
As the trend continues, investors should expect more direct-to-consumer launches, revamps of existing services, and big streaming content deals.
The big winners
As more people cut the cord and more advertisers shift their ad budgets away from TV, forcing more content to move to direct-to-consumer platforms, there are a couple clear winners: Roku (ROKU -3.64%) and Amazon (AMZN -1.65%).
The two absolutely dominate the connected-TV space, accounting for the vast majority of viewing. They stand to benefit from media companies needing to promote their new direct-to-consumer services, the potential for growing subscription revenue flowing through their platforms, and the rising demand for advertising in ad-supported streaming services.
While there are lots of other companies that will support the growing streaming video ecosystem, Roku and Amazon can capitalize in multiple ways. And with such concentrated consumer viewing on their platforms, neither has been afraid to ask a lot of media companies looking for access to their audiences. Long negotiations with new streaming services have become the norm for the connected-TV duopoly.
Their position will only get stronger as competition in the streaming space grows and media companies need to stand out. That ought to support long-term revenue growth for both platforms.
Roku is the best pure play for investors looking to capitalize on the growing amount of streaming content. While Amazon's position is nearly as strong, its streaming video business is dwarfed by its other operations.