As a content aggregator, fuboTV (FUBO 6.86%) has a tough road ahead of it. The sports-first streaming service is highly dependent on the smart TV operating systems it's available on. Further, since it doesn't make its own content it needs to continually negotiate licensing deals with media companies.
So where does fuboTV attempt to make up for its missing edge in these areas? A compelling ad business. Fortunately, fuboTV is firing on all cylinders on this front.
fuboTV announced impressive financial results this week. The tech company said its total adjusted fourth-quarter revenue rose 98% year over year to $105.1 million. Subscription revenue, which jumped 91% year over year to $91.4 million, was the key driver for this growth. However, it was the company's 157% year-over-year increase in advertising revenue that investors should really care about, even though it only accounted for 12% of revenue.
Driving home the momentum fuboTV is seeing in its ad business, consider how ad revenue is growing at more than double the rate of fuboTVs subscribers. This led to average advertising revenue per user per month increasing 52% year over year to $8.47 during the fourth quarter
Yet these are still early days for fuboTV's nascent ad business. fuboTV CEO David Gandler has said he believes the company can achieve average advertising revenue per user per month of $20.
Why fuboTV's advertising business is critical
Investors should note that the bulk of fuboTV's subscription revenue simply comes from passing on the costs of network and content licensing agreements to subscribers. So, it's primarily fuboTV's ad business that is driving the company's profitability, making the segment particularly important.
There are some other ways, of course, that fuboTV is expanding its contribution margin, or the difference between its average revenue per user and its average cost per user. The company sells bundled products with additional streaming channels on top of its base subscription and it offers cloud DVR upgrades. But fuboTV's most mature high-margin revenue stream is its ad business. With ad sales playing a key role, fuboTV's adjusted contribution margin in the fourth quarter of 2020 was 11.7%, up from 0.7% in the fourth quarter of 2019 and negative 4% in the fourth quarter of 2018.
Going forward, fuboTV's ad business will likely continue growing rapidly, further expanding fuboTV's adjusted contribution margin and helping drive strong revenue growth. Providing a tailwind for this continued growth is a convergence of three major trends: marketers shifting TV budgets away from linear toward CTV, the transition of sports entertainment from linear to CTV, and rapid consumer adoption of CTV.