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Fox Is Understating Tubi's Potential

By James Brumley - Mar 10, 2021 at 7:45AM

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CEO Lachlan Murdoch is calling it a billion-dollar opportunity, but that's only about half of what could be in the cards.

It's been less than a year since Fox Corp. (FOX -5.12%) (FOXA -4.97%) announced it was acquiring ad-supported video platform Tubi, but there's no denying it was a smart purchase. CEO Lachlan Murdoch commented last month that the streaming service's revenue was on pace to exceed $300 million this year -- more than doubling last year's top line -- en route to annualized revenue of $1 billion within a few years. 

Those aren't the sorts of numbers Walt Disney's (DIS -4.01%) Hulu or Netflix (NFLX -3.79%) is generating, but it's impressive growth all the same for an on-demand video platform that only recently received the help of a major media powerhouse.

And Murdoch's suggested $1 billion in yearly revenue may actually be a conservative expectation.

Rising red arrow chart breaking above a computer monitor.

Image source: Getty Images.

Tubi's monetization is miles behind that of rivals

What's a streaming subscriber worth in any given month? It depends.

Netflix collects anywhere between $9 and $18 per month per customer, depending on their preferred bells and whistles. But Netflix also spends more than its rivals on content, with plans to shell out $19 billion this year on programming. It also doesn't collect any ad revenue to offset that expense.

Hulu costs $6 per month with ads and $12 per month without. Disney reports it's collecting roughly $13.50 per month per subscriber, however, suggesting it's raking in about as much money selling ads to ad-supported customers as it is selling the higher-end service to ad-free customers.

Comcast's (CMCSA 0.44%) premium ad-free tier of Peacock goes for $10 per month, while a less robust, ad-supported version is completely free to watch. The company hasn't offered many details since the service launched in the middle of last year, but before it debuted, Comcast teased the idea of Peacock driving monthly average revenue per user (ARPU) of between $6 and $7.

Do some rough mental math. Whether you're talking about ad-supported or ad-free streaming, the going monetization rate is around $8 per month. Tubi is nowhere close to that.

It's admittedly only a back-of-the-envelope calculation, but at the low end of this year's expected revenue of $300 million, divided by Tubi's 33 million active monthly users as of the end of 2020, Fox is collecting a scant $0.75 per viewer, per month.

Fox is stepping up its streaming ad game

That's a troubling disparity, but keep it in perspective. Prior to April's completion of the Tubi acquisition, the young streaming service was arguably in need of a bigger partner with a few more tools in its toolkit. We've already started to see the upside of Fox's contribution, too. As was noted, revenue is expected to more than double this year.

This year's projected growth only scratches the surface of Tubi's potential, though, given some of the changes underway.

One of these changes is Tubi's shift away from programmatic sales of ad inventory and toward Fox-led upfront and scatter purchasing. The former is largely a self-service approach that typically doesn't maximize revenue. Upfront ad sales, however, are generally negotiated before television seasons kick off, while scatter ads are paid for closer to the time those commercials air. Scatter and upfront advertising typically come at higher prices, but such an approach also allows advertisers to build the exact ad campaigns they want to develop.

Tubi is also benefiting from new ad-management technologies unveiled in the middle of last year. One of these tech upgrades is the ability to limit the frequency with which a viewer sees the same TV commercial. Another improvement is Tubi's ability to integrate with third-party campaign management platforms from companies like Adobe Systems and The Trade Desk.

Then there's the more obvious nuance to consider: The melding of Fox and Tubi is not just a work in progress, but a pairing that took shape in the midst of a complicated pandemic. We've yet to see a Fox-owned Tubi operate in a normal environment, but that's coming.

A more plausible number

So if an annualized revenue forecast of $1 billion is too modest, what's a more plausible figure? Take any forecast with a grain of salt, but if Tubi's 33 million current viewers are worth an unusually low $3 per user per month to advertise to, that's still $1.1 billion in annualized revenue.

And that's without any subscriber growth. Tubi is almost certain to add more users, boosted by last month's addition of 100 local news channels. Other recent subscriber-adding content deals include an expanded relationship with anime outfit Toei Animation and a partnership with Mattel, and the service is also becoming available on platforms like the Xbox. 

To this end, MoffettNathanson Research estimates Tubi will be driving $1.9 billion worth of annual advertising revenue by 2025. That's nearly twice Murdoch's working figure, but within easier reach than it may seem. A mere 40 million viewers would generate that level of revenue when monetized at less than $4 per month apiece, for example.

This still wouldn't rival the $12 billion worth of more conventional cable TV advertising revenue Fox drives in the average year, but it's certainly nothing to sneeze at.

Bottom line: If you're a shareholder who's less than thrilled with Fox's streaming efforts thus far, just wait. It's coming.

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Stocks Mentioned

Fox Corporation Stock Quote
Fox Corporation
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The Walt Disney Company Stock Quote
The Walt Disney Company
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Netflix, Inc. Stock Quote
Netflix, Inc.
$180.34 (-3.79%) $-7.10
Comcast Corporation Stock Quote
Comcast Corporation
$43.07 (0.44%) $0.19
Twenty-First Century Fox, Inc. Stock Quote
Twenty-First Century Fox, Inc.
Fox Corporation Stock Quote
Fox Corporation
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