What started out as a curious -- and questionable -- acquisition made by Fox Corp. (FOX -1.53%) (FOXA -1.36%) a little over a year ago has since evolved into a brilliant decision. Fox's free-to-watch, ad-supported streaming platform known as Tubi is expected to more than double its revenue this year to $380 million, according to estimates from MoffettNathanson Research, before tripling this figure by 2023. MoffettNathanson further believes that by 2025, Tubi could be driving $1.7 billion worth of annual ad sales.
Fox's forecast for Tubi hasn't been quite as bold or as specific, but CEO Lachlan Murdoch also isn't shy about suggesting Tubi will indeed eventually be a billion-dollar business.
The outlook is impressive, to say the least.
Largely lost in the numbers and noise of Tubi's pandemic-prompted growth, however, is just how much of a game-changer Tubi could be for Fox and its shareholders. At $1.7 billion worth of annual revenue, this streaming platform will be one of Fox's biggest operating units, approaching nearly half of the company's typical television advertising tally.
Fox's revenue breakdown
The graphic below tells the tale, breaking down Fox's fiscal 2021 revenue by source for the nine-month stretch spanning the middle of last year and March of this year. Tubi's contribution has been and will continue to be to the advertising unit of the television arm, which in fiscal 2020 ending in June of 2020 (mostly before Tubi was acquired) produced nearly $4.2 billion in revenue. In 2019 this sliver of Fox's operation did $3.9 billion worth of sales.
Aside from Tubi, Fox's television arm consists of Fox-owned television stations, offering a bigger opportunity to drive advertising revenue, although this same unit also collects some affiliate fees for distributed content. Cable network programming refers to Fox's creation of shows and programming sold through traditional cable companies like Comcast's (CMCSA) Xfinity and Charter Communications' Spectrum.
The affiliate fees collected from these cable companies are the breadwinner for this unit, although this programming also offers some opportunity for Fox to monetize a limited amount of its own inventory.
Given Tubi's suggested growth prospects, it will expand from accounting for around one-tenth of this year's television advertising business to roughly one-third of this business in just a few years. By that time, it should make up more than a tenth of Fox's total sales.
Ad-supported streaming is reaching critical mass
Tubi's trek toward a $1 billion-plus top line isn't going to translate into absolute growth, of course. Some of Tubi's growth will reduce revenue on other fronts -- namely, advertising. IAB's 2021 advertising market outlook suggests advertisers are, on average, redirecting 21% of their advertising budgets from linear (traditional) cable to connected television streaming platforms.
This shift is obviously a direct threat to the ad business being done within Fox's cable unit as well as its television unit. It's also an indirect threat to Fox's affiliate fees, as cable companies retreat from the streaming-driven effect of cord-cutting that's ultimately sapping cable's advertising reach.
The trade-off is disproportionate, though -- in a good way. At least some of its growth will come at the expense, not of Fox's other business lines, but rather of cable companies that had been winning a piece of the TV advertising market.
Indeed, we're already seeing hints that cutting out the cable middleman is proving more profitable for content providers offering direct paths for delivery of their content to consumers. ViacomCBS CEO Bob Bakish and Discovery CEO David Zaslav both recently suggested their ad-supported streaming platforms were generating more per-user revenue than their linear cable operations are.
It's not unreasonable to expect Tubi to move in the same upward per-viewer-revenue direction at a faster pace than its non-streaming businesses slows, or even contracts, at.
In the meantime, the entire ad-supported video-on-demand (or AVOD) market itself is growing, further boosting Fox's prospects for Tubi. MoffettNathanson Research further estimates that yearly advertising revenue for all U.S. ad-supported platforms will swell from 2020's $4.4 billion to $17.8 billion as soon as 2025.
It's still too soon to guess exactly how much net new business Tubi will create. Of MoffettNathanson's 2025 estimate of $1.7 billion worth of revenue, however, it's not a stretch to suggest this growth will net Fox $1 billion (or more) worth of additional annual sales. In other words, don't be surprised to see this company, which is doing about $12 billion worth of tough business per year now, drive its annual top line to something in excess of $13 billion per year thanks to Tubi alone.
Any growth from other business units is just a little extra gravy.