Every year, media companies like Walt Disney (DIS -1.95%) sell advertising space at up-front ad-sales events. And this year, even though it's roughly 100 years old, Disney set a new company record -- it locked in $9 billion in up-front commitments from advertisers. But this story isn't about Disney.
Connected-TV (CTV) platform company Roku (ROKU -4.65%) and streaming service Peacock also secured record up-front commitments. But it's not about Roku's or Peacock's up-front sales either.
This story is about why investors need to be invested in the ongoing rise of streaming.
The up-front numbers
Media companies like Disney plan programming and present schedules to advertisers once a year. If advertisers like what they see, they commit to spend -- known as up-front ad sales. Other ad slots are filled later.
Disney operates traditional cable and broadcast channels in addition to streaming. Its $9 billion in up-front sales mostly went to these traditional sources. However, 40% of up-front ad spending is dedicated toward its streaming services like Hulu and its upcoming ad tier of Disney+. That's massive.
NBCUniversal, owned by Comcast (CMCSA 0.04%), also celebrated record up-front commitments of over $7 billion, according to Adweek. And according to the company, up-front sales for its streaming service Peacock more than doubled from last year, surpassing $1 billion.
Roku joined the billion-dollar club as well this year. What makes Roku's $1 billion interesting is that almost half of advertisers that committed this year didn't commit last year. In other words, advertisers that were perhaps too nervous to commit money toward streaming last year have warmed up to it now.
Why CTV is the real winner
Suddenly, billions of dollars are going to streaming services up-front. Consider how profound this is. Disney hasn't even launched its ad-supported tier yet, but advertisers don't mind not knowing how many eyeballs there will ultimately be.
With Peacock, its up-front commitments just doubled year over year, far outpacing Peacock's growth. It only had 27 million monthly active accounts as of the end of the second quarter of 2022, compared to about 20 million in the prior-year period. This suggests a growing appetite among advertisers for CTV advertising.
There are two reasons for the growing appetite for streaming-ad slots. First, it's where consumers are going. According to recent research from advertising-technology (adtech) company The Trade Desk (TTD -2.34%), there are 8% more ad-supported, streaming-service subscribers now than last year. And according to eMarketer data cited by Roku, only 52.4% of U.S. households even subscribe to traditional TV sources like cable at all anymore.
Second, also according to eMarketer, advertisers are only spending 22% of budgets on streaming even though that's where roughly half of the people are. This is something advertisers are awakening to and why a service like Peacock is suddenly seeing revenue growth outpace the growth of its subscriber base -- the entire space is under-monetized.
Ad dollars are just now starting to flow into the space. And this secular trend could have a long ways to go.
How to invest in streaming
Some investors may be tempted to invest in the streaming services with the hottest growth. But I'm not sure if that's the best approach. Consider Peacock as an example yet again. It generated $444 million in Q2 revenue, which was good. But it also lost $467 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It's a loss-leader for Comcast.
Content creation is an expensive hamster wheel. Any service can create a hit show today and attract advertising dollars. But it will need to spend those dollars to create tomorrow's content or risk losing it.
All this means I prefer investing in the distribution of streaming content and in the technology that makes it all work. With distribution, I prefer Roku. It has 63 million active accounts and is well-positioned for future customer growth. Moreover, its monetization is soaring as budgets shift toward streaming.
That said, Roku is at risk of being disintermediated by other players with deeper pockets. Specifically, Amazon's Fire platform could erode Roku's market share eventually. To be clear, I still like Roku, and I'm invested. However, its vulnerability might make The Trade Desk the best way to invest in the streaming trend.
We started this article with Disney, and it recently teamed up with The Trade Desk. But this simply makes Disney's ads more effective by integrating its first-party data with data that The Trade Desk has.
The Trade Desk primarily generates revenue by partnering with advertisers to get ads placed at the best price. And the company says ads running through its platform already reach 120 million CTV devices in the U.S. This is tremendous scale and means it's positioned for the spending shift away from cable and toward CTV that's already underway.