The coronavirus pandemic has accelerated several industry trends over the last six months. One such trend is the decline of TV ad spending, which is now thought to have peaked in 2018. TV ad spending could decline by $5 billion from 2019 to 2023, according to estimates from MoffettNathanson analysts.
Media companies are quickly moving more content online and launching their own ad-supported streaming services. But the shift to streaming probably isn't enough to fully offset the decline in TV ad spending.
Where ad budgets are shifting
Ad budgets aren't just shifting from traditional linear television to connected TV and streaming. The entire digital advertising ecosystem is winning share. Total U.S. digital ad spend could double from 2019 to 2023, according to MoffettNathanson's estimates.
Connected TV ad spend is expected to grow by $7 billion from 2019 to 2023, which would certainly offset the decline in traditional TV ad spend. But that growth won't all go to services launched by media companies trying to offset the decline in traditional TV ad spending. Moreover, the bigger opportunity isn't necessarily on connected TV platforms.
The vast majority of digital ad-spending growth is coming from other sources. "The future tends to look more and more like advertising is going to be less prevalent through the consumption of entertainment and more prevalent on the retail and e-commerce side," Insider Intelligence analyst Blake Droesch pointed out. A company like Amazon (NASDAQ:AMZN) could see its ad businesses take off as consumer packaged-goods companies shift more of their spending from television to its online marketplace.
The economics of ad-supported streaming are much different
The shift to streaming has been a challenge for companies like Comcast (NASDAQ:CMCSA) and AT&T (NYSE:T). The two companies have had long holdouts recently with the biggest distribution platforms, Amazon and Roku (NASDAQ:ROKU). That's likely because the two media companies are used to doing business in one way with traditional pay TV distributors, but the business of streaming is quite different.
Most importantly, in terms of advertising, Roku and Amazon typically take a much larger chunk of ads than traditional distributors. That's been a point of contention for traditional TV media companies in the past. But it also means even if advertisers move all the ad spend directly from traditional television to media companies' new streaming platforms, they'll see ad revenue decline because they're not keeping as much of that spend.
A decline in ad revenue for both Comcast and AT&T seems inevitable. That said, they're able to absorb declining ad sales by bundling their new streaming services with other services they provide, like home internet and wireless phone service. If Peacock and HBO Max can increase retention for other high-margin services, Comcast and AT&T can get value out of them even if revenue doesn't offset lost TV ad spend.
Smaller media companies without big connectivity businesses attached aren't so lucky, and they'll see significant pressure on their business going forward. What's more, they won't be able to hold out against Amazon and Roku, which means they're more likely to accept worse terms, giving up a greater percentage of ad inventory or revenue. Combined with the fact that the bulk of the growth in ad spend over the next few years won't come directly to connected TV and streaming, it could be a rough path ahead for media companies more reliant on advertising.
Investors in media stocks need to take a close look at their television business, determine the importance of advertising revenue to the business, and assess management's plan to navigate the ongoing shift in ad spending. Simply launching a new ad-supported, video-streaming service probably won't be enough to fully offset the decline in traditional TV ad spending.