Just when it seemed that free, ad-supported streaming-TV platforms like Pluto TV and Tubi were ready to deliver a death blow to traditional cable television -- wham! -- they've been sucker-punched themselves. On Wednesday, Alphabet's (GOOG 0.37%) (GOOGL 0.35%) YouTube announced it would be adding entire TV series to its lineup, making them free to watch by injecting the occasional television commercial into the stream.
On the surface, it seems like the sort of news meant to be read and then forgotten. YouTube was already offering a respectable number of movies for free to viewers willing to watch commercials. Meanwhile, Paramount's (PARA 1.48%) Pluto TV and Fox Corporation's (FOX 1.07%) Tubi are just two of several players already in the ad-supported streaming video business. Comcast's (CMCSA 1.62%) Peacock also comes in a free-to-watch, ad-supported version, while Walt Disney's Hulu and AT&T's WarnerMedia platform HBO Max are available at a discount for those willing to sit through the occasional commercial too. So YouTube's move isn't exactly earth-shattering.
Except, it could shatter the hold AVOD powerhouses like Disney and Paramount have enjoyed to date.
Here comes AVOD
AVOD is short for ad-supported video on demand. You'll also sometimes hear it referred to as FAST, or free ad-supported television.
It's a more popular monetization model than you might think. Paramount's Pluto TV ended last year with 64 million regular monthly users, adding 10 million to its head count during the fourth quarter, mostly by expansion into overseas markets. Comcast's media arm NBCUniversal has been a bit cryptic about Peacock's user base, though it did confirm in January it ended 2021 with 24.5 million monthly U.S. watchers. Of those, nine million are paying subscribers, meaning the remainder aren't. Fox's most recent disclosure suggests there are 33 million regular Tubi users.
Image source: Getty Images.
Those big numbers make sense in light of research from Deloitte that indicates around 40% of the world is willing to sit through 12 minutes of ads per hour for access to a free streaming service.
While consumer interest is strong, AVOD revenue isn't exactly mind-blowing, at least not yet. Paramount reported Pluto TV generated $362 million in revenue during the company's most recently completed quarter, or less than $2 per user, per month. Fox CEO Lachlan Murdoch said a year ago that Tubi could drive more than $300 million worth of ad revenue in 2021, en route to becoming a billion-dollar business by 2023. Even at $1 billion per year, however, that's still on the order of around $2.50 worth of monthly revenue per user, which is well below the premium/hybrid streaming industry's average.
The point is, even if YouTube's foray into ad-supported television programming is a relatively smashing success, it's not going to meaningfully move the company's revenue needle.
For every other AVOD name out there, however, there are two noteworthy problems with Alphabet's newest interest. One is how these per subscriber/per month metrics are constantly improving, and the other is YouTube's sheer reach with consumers.
An unexpected favorite in an unlikely place
YouTube might be the world's biggest (by far) repository for short-form video, but a shocking number of people are enjoying its content on devices other than their smartphones or laptops.
eMarketer fleshed out the idea with some specific numbers late last year, reporting that within the United States, 53% of YouTube's viewers watched the platform's content on an actual television set. That's 113 million people. Nielsen says 135 million U.S. television watchers tuned in during Dec. 2021 alone. eMarketer also reckons YouTube is already the country's second-biggest streaming service in terms of total hours spent watching via connected TV, closely trailing Netflix.
Yes, YouTube is taking over our living rooms. According to YouTube, "U.S. users can access these movies and shows and up to 100 new titles each week on web browsers, mobile devices, and most connected TVs via the YouTube on TV app." So look for this takeover to continue gaining traction.
It's not just bad news for conventional cable providers like Comcast's Xfinity or Charter, though. It's bad news for existing AVOD providers that had been helping accelerate the cord-cutting movement. There are only so many hours the world can watch TV on any given day.
Lots of future dollars up for grabs
At stake is leadership of an AVOD industry growing twice as fast as the conventional streaming business, according to research from Fox. Indeed, Fox's study suggests the viewership for the world's ad-supported streaming services will eclipse conventional streaming's total viewership this year, and by 2025, the total number of AVOD users should outnumber all users of any pay-TV service.
Perhaps just as important (if not more so) are shares of an AVOD market that Digital TV Research suggests will grow from $27 billion in 2020 to $66 billion by 2026, with the United States accounting for the vast majority of that growth.
That was business streamers like Fox and Paramount were positioned to win. With Alphabet's YouTube creeping into the picture, though, this growth driver's potential for these companies is suddenly in question.
There is at least one upside to Alphabet's updated content strategy: For the time being, it's licensing these television shows from studios like Paramount, Fox, and NBCUniversal. It remains to be seen if that will be a better deal for them. It probably won't be, since most media outfits are leaning toward selling their own content to their own streaming customers.
Investors just need to understand the changing dynamic.
