In retrospect, Fox's (FOX 0.14%) (FOXA 0.20%) early 2020 acquisition of streaming platform Tubi was a genius move. Not only did the COVID-19 pandemic leave millions of people scrambling to find at-home entertainment, but it also forced consumers to start thinking about how much they're spending on streaming services. In that Tubi is completely free to watch (because its programming is sponsored by advertisers) it has been a popular, budget-friendly addition to a growing number of premium streaming options. As of the end of last year more than 64 million people use Tubi at least once per month, up from 51 million viewers a year earlier.
What's most compelling to would-be investors, however, is what has not happened yet. Within a matter of years, Tubi could be a major profit center for Fox. That's more than a little bullish for the stock.
Drawing a crowd, but not driving much revenue
Since Netflix launched the streaming industry as we know it back in 2007 the business has largely been a premium, ad-free alternative to commercial-laden cable programming. Ad-supported video-on-demand (or AVOD) has remained on the fringe since Tubi and Paramount's Pluto TV both debuted in 2014.
This sliver of the streaming industry's reaching a sort of critical mass, though. In addition to Tubi's continued growth to 64 million regular watchers, Pluto TV now serves almost 79 million worldwide viewers. That's an improvement of 14 million viewers over the span of a year.
Data sources: Fox Corp. and Paramount. Chart by author.
Connect the dots -- the AVOD business is getting too big to not take seriously. What's mostly missing thus far, however, is revenue.
To its credit, Fox's Tubi grew last quarter's revenue by 25% year over year to more than $200 million. That's great, until you break it down into a per-user figure. The platform's average monthly revenue per user (or ARPU) is closer to a scant $1. For perspective, Walt Disney's Disney+ generates roughly $6 per month, per U.S. subscriber, and $5.62 per international subscriber (excluding Disney+ Hotstar). Meanwhile, advertisements push Hulu's streaming-only average revenue per user (ARPU) up to more than $12 per month. Warner Bros. Discovery's HBO Max boasts a monthly ARPU of more than $10 when including ad-subsidized access to the streaming service.
Tubi's time is coming.
Tubi is getting better as it gets bigger
While Tubi's fiscal per-user metrics to date are anything but impressive, consider the circumstances. Premium, ad-free streaming players have either had more time to learn the business, spent more time and money perfecting recently launched services, or both. The AVOD industry as a whole is not only younger, but hasn't been given the same sort of attention that would boost its numbers.
That's changing, however, including for Fox's Tubi.
Case in point: While a content partnership has been in place for some time now, it wasn't until late last month Tubi announced it would be featuring new Warner Bros. content through 14 separate Warner-branded channels at the Tubi app. Some of this programming should be a major draw, too. Among the Warner Bros. titles now licensed to Tubi are WestWorld, Cake Boss, and the film Lord of the Flies. As viewership and engagement increase around this high-caliber content, so, too, will Tubi's ad revenue.
The platform is becoming a more powerful marketing tool for advertisers as well. In October Tubi announced it's integrating FreeWheel's Beeswax technology into Tubi's ad-buying interface, allowing marketers to not only fine-tune their reach, but also better measure the impact of their ads.
And advertisers are coming around to the idea of AVOD, following the ever-growing crowd to where it's increasingly going. Indeed, television research outfit Digital TV Research forecasts the global AVOD market will grow from last year's $38 billion to $91 billion in 2028, jibing with Standard & Poor's call for the United States' free-streaming industry to grow from $4 billion in 2022 to nearly $9 billion as soon as 2026.
Some of that growth will stem from a growing number of viewers. Much of it, however, will be the result of rising ARPU figures, with players like Tubi continuing to refine their nascent AVOD businesses.
A key growth driver for Fox stock
The potential benefit for Fox is clear if you just do a little number-crunching.
Annualizing last quarter's $200 million worth of revenue, Tubi is still driving less than $1 billion worth of yearly revenue. That's only a fraction of the company's roughly $15 billion annual top line, which is evenly split between affiliate fees and advertising, as well as evenly split between cable and network broadcasting. If Tubi's ARPU can even just modestly improve from around $1 per month now to $3 per month within the next few years -- and that's an achievable prospect -- Tubi's yearly revenue surpasses $2 billion per year.
That's without any viewer growth. If the company can also maintain Tubi's current viewer growth trend and ratchet up its current headcount of 64 million up to, say, 80 million, the AVOD platform becomes nearly a $3 billion enterprise. That's a big deal, accounting for roughly one-fifth of Fox's current top line by adding business that simply doesn't exist right now.
And, given the backdrop, these may be conservative assumptions. Bloomberg recently reported Fox CEO Lachlan Murdoch has turned down multiple offers of more than $2 billion for Tubi, which is more than 4 times what Fox paid for the platform less than three years ago. The size of the offers points to the potential the rest of the media industry sees in Tubi.
Investors would be wise to take the hint.
