Alphabet’s YouTube Just Disrupted TV Disruptors

Just when it looked like free, ad-supported streaming TV platforms like Pluto TV and Tubi were poised to deliver a deathblow to traditional cable TV — pan! – They themselves were beaten. Wednesday, Alphabetit’s ( GOOG 0.15% ) ( GOOGLE 0.07% ) YouTube has announced that it will add entire TV series to its lineup, making them free to watch by occasionally injecting TV commercials into the stream.

On the surface, it sounds like the kind of news meant to be read and then forgotten. YouTube already offered a respectable number of movies for free to viewers willing to watch commercials. Meanwhile, Primordialit’s (PARA 1.56% ) Pluto TV and Fox Companyit’s ( FOX 0.67% ) Tubi are just two of the many players already in the ad-supported streaming video business. Comcastit’s (CMCSA 0.70% ) Peacock is also available in a free and ad-supported version, while waltz disneyis Hulu and AT&TThe WarnerMedia HBO Max platform is available at a discount for those who also want to attend the occasional commercial. YouTube’s decision is therefore not really shocking.

Except it could break the grip AVOD powerhouses like Disney and Paramount have enjoyed to this day.

This is AVOD

AVOD is short for ad-supported video on demand. You’ll also sometimes hear it referred to as FAST, or ad-supported free 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 in the fourth quarter, driven mainly by expansion into overseas markets. Comcast’s media arm, NBCUniversal, has been a little cryptic about Peacock’s user base, though it confirmed in January that it ended 2021 with 24.5 million monthly U.S. watchers. Of these, nine million are paid subscribers, meaning the rest are not. Fox’s latest reveal suggests there are 33 million regular Tubi users.

Image source: Getty Images.

Those big numbers make sense in light of Deloitte’s research which indicates that around 40% of the world is willing to watch 12 minutes of ads per hour to access a free streaming service.

While consumer interest is strong, AVOD revenues aren’t exactly mind-blowing, at least not yet. Paramount reported that Pluto TV generated $362 million in revenue in the company’s last quarter, or less than $2 per user per month. Fox CEO Lachlan Murdoch said a year ago that Tubi could generate more than $300 million in ad revenue in 2021, on track to become a billion-dollar company by 2023. Even at $1 billion per year, however, is still in the range of around $2.50 in monthly revenue per user, which is well below the premium/hybrid streaming industry average.

The thing is, while YouTube’s foray into ad-supported TV programming is a relatively resounding success, it’s not going to move the company’s revenue needle significantly.

However, for all other AVOD names, there are two notable issues with Alphabet’s new interest. One is how these per-subscriber/per-month metrics are constantly improving, and the other is YouTube’s consumer reach.

An unexpected favorite in an unlikely place

YouTube may be the (by far) largest repository of short videos in the world, 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 in the US, 53% of YouTube viewers watched the platform’s content on a real TV. That’s 113 million people. Nielsen says 135 million US viewers tuned in December 2021 alone. eMarketer also estimates that YouTube is already the second-largest streaming service in the country in terms of total hours spent watching via connected TV, just behind netflix.

Yes, YouTube invades our living rooms. According to YouTube, “U.S. users can access these movies and shows and up to 100 new titles each week across web browsers, mobile devices, and most connected TVs through the YouTube on TV app.” So look for that takeover to keep gaining momentum.

This isn’t just bad news for conventional cable providers like Comcast’s Xfinity or charter, corn. This is bad news for existing AVOD providers who had helped accelerate the cord-cutting movement. There are only a limited number of hours the world can watch TV each day.

Lots of future dollars to be won

At stake is the leadership of an AVOD industry that is growing twice as fast as the conventional streaming business, according to a Fox study. Indeed, Fox’s study suggests that the audience of ad-supported streaming services worldwide will eclipse the total audience of conventional streaming this year, and by 2025 the total number of AVOD users. is expected to exceed all users of any pay-TV service.

Perhaps equally (if not more) important are the shares of an AVOD market which Digital TV Research predicts will grow from $27 billion in 2020 to $66 billion by 2026, with the United States representing the large most of this growth.

It was commercial streamers like Fox and Paramount who were well positioned to win. However, with Alphabet’s YouTube slipping into the picture, this growth engine’s potential for these companies is suddenly in question.

There’s at least one upside to Alphabet’s updated content strategy: For now, it’s licensing these TV shows from studios like Paramount, Fox, and NBCUniversal. It remains to be seen if this will be a better deal for them. It probably won’t, as most media outlets tend to sell their own content to their own streaming customers.

Investors just need to understand the changing dynamics.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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