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With TV advertising hard-hit, video companies turn to AVOD for hope

The second quarter hit advertising hard, leaving ad-supported video-on-demand platforms caught between strong growth in usage and sharp declines in ad budgets.

Ad spending was down across the media industry in the second quarter, a fact that drove top-line shortfalls for companies ranging from online search titans like Alphabet Inc. to traditional media companies like Fox Corp. However, despite how different those two firms are, Fox, Alphabet's Google LLC and others reported gains for their AVOD services.

Google's YouTube, which accounts for about 12.8% of the internet company's advertising revenue, reported $3.81 billion in revenue, topping the $3.60 billion reported in the 2019 second quarter, even though it slipped a little sequentially. YouTube showed plenty of growth in usage, with children's content leading the way. Regardless, YouTube's growth was not enough to offset broader losses, resulting in an 8.4% drop in corporate-wide ad revenue.

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The Roku Channel AVOD network
Source: Roku

Fox, which completed its acquisition of AVOD service Tubi in April, did not offer specific financial metrics for the platform during its earnings results. However, the company said that Tubi revenue did grow and marginally offset a 22% drop in overall advertising. Tubi surpassed 200 million hours streamed per month, up more than 100% year over year, and CFO Steven Tomsic said the platform would be "a key source of revenue growth for many years to come."

Other major television companies have acquired AVOD services in recent years. Comcast Corp. closed its acquisition of the XUMO platform in February, and ViacomCBS Inc. has operated Pluto TV since March 2019.

Comcast, which reported advertising declines of nearly 30% in both its cable and broadcast segments, did not mention XUMO ad revenue, focusing instead on its new ad-supported platform Peacock. Peacock added more than 10 million sign-ups in the two weeks between launch and its earnings report, but executives said it was too early to offer other user metrics like monthly active accounts or monthly active users. While the platform was supposed to get a boost from the 2020 Summer Olympics, the pandemic-related delay in the event should boost usage in 2021, supporting usage through the Winter Olympics seven months later, executives said.

Pluto TV was one of the first high-profile streaming platforms to test the AVOD model, and ViacomCBS shared bullish remarks on the service. Corporate-wide, ViacomCBS advertising revenue was off by more than 25%, but it saw unspecified growth in Pluto TV ad revenue. After absorbing a brief pandemic slump, the platform "quickly returned to pre-pandemic growth rates, and pricing was very strong in Q2," CEO Bob Bakish said on the company's earnings call. Pluto TV's monthly active users grew 61% to finish the quarter at 26.5 million, and Bakish was confident the platform would make its year-end target of 30 million monthly active users.

In a note on the company's earnings, equity analyst Michael Nathanson said Pluto still represents a $1 billion opportunity for ViacomCBS.

Prior to the pandemic, data from Kagan's MediaCensus online consumer survey showed select AVOD services ranging from about usage among 3% to 11% of respondents, with 10% saying they used Pluto TV. The group as a whole trailed leader YouTube by a very wide margin, with 49% of respondents saying they used Google's online video service.

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Seth Shafer, an analyst with Kagan, a media research group within S&P Global Market Intelligence, noted earlier this year that while free AVOD services have carved out a niche for themselves in the broader streaming landscape, "their ultimate upside could be limited, as their lack of original content and older movies and series may relegate them to a supplemental role in a consumer's daily digital video diet.

Pluto TV and XUMO also garner revenue outside of their own branded apps. Smart TV manufacturers license those platforms and rebrand them as their own AVOD services. For example, VIZIO Inc.'s WatchFree platform is essentially Pluto TV renamed. Pluto TV and XUMO were two of the top services licensed in this way, with estimated monthly active users of 24 million and 10 million, respectively, according to Kagan, a media research group within S&P Global Market Intelligence.

Roku Inc. also leans heavily on such alternative means of streaming revenue. The company operates The Roku Channel, which is a network of ad-supported streaming services bundled together in a channel format and for which Roku collects a share of ad revenue. The device manufacturer also collects a share of sales on streaming apps sold on its devices.

CEO Anthony Wood said that while it does not expect traditional TV advertising to return to pre-pandemic levels before 2021, Roku's own monetized video ad impressions grew by over 50% and its ad clients grew by 40%. While much of that growth was sold in the traditional way through meetings with marketers, largely due to the fact that many new clients are coming from the traditional television space, its automated, programmatic ad service saw a 346% jump in business.

"All advertising is going to switch to OTT for video, and we're just still in the very early days," Wood said. "COVID ultimately pulled forward a bunch of cord cutting that was going to happen anyway. Linear television was already experiencing double-digit ratings declines year over year."