Traditional TV spot advertising has been living on borrowed time and a major correction will occur within the next year, as about $220 billion in ad revenue shifts online. This will be driven by a combination of factors amounting to a perfect storm for pay TV operators, particularly in the US, according to the latest report from our research arm Rethink TV, titled The Year of TV living Dangerously – How traditional TV advertising value collapses.
We see this not so much as a bubble about to burst as it has not been inflating that fast, but more as a boil that must be lanced by the advertising industry to reach the promised land of digital. This does not mean TV advertising will disappear but does mean it has to be recast around addressability segmenting audiences more intelligently so that effective revenues per hour of broadcasting increase. Some pioneering broadcasters have already harnessed that potential, notably Sky with its AdSmart addressable advertising service.
Until now, TV advertising has defied commercial gravity by continuing to grow revenues at a time when the underlying viewing base has been eroding from cord cutting and growth in online viewing. Rethink TV has modelled the factors likely to provoke an overdue and therefore painful correction, including the likely effect of SVoD and original content emergence on pay TV subscriptions, lowering the ratings which essentially drive broadcast advertising revenues. We note that US broadcasters have been increasing the price of advertising to satisfy their shareholders precisely when viewing has declined, while indulging in aggressive original content acquisition or development to strengthen offerings and make the ratings battle “the other guy’s problem.”
This trend will only continue as SVoD and other OTT business models will grow by around 76% in the number of streams they deliver over the five years to 2023. The other major factor is the anticipated migration of live sports online, with ominous signs this process is already well underway. As noted in the report, it is only a matter of time before sports associations are swayed by how much money can be made delivering online direct to customers. At that point, they will either take the sport direct to market, taking on the risk themselves, or increase rights fees and guaranteed revenues significantly. The latter will make pay TV operators less and less profitable and so unable to sustain the massive original content spend of the big OTT players with their SVoD, AVoD and other models.
We have already seen services like fuboTV in the US and GolTV in Spain on the rise, as well as NFL in the US slowly committing to going direct, while even Disney’s ESPN has spoken about this as a long-term aim for ESPN, to counter falling audiences. Then just this week the UK based Perform Group’s DAZN OTT subscription service has admitted interest in bidding for live rights to Bundesliga, Germany’s premium soccer division.
We think these factors will conspire to trigger a collapse in TV advertising value late in 2019 or early in 2020. In fact we anticipate two major corrections in the TV advertising market taking place in quick succession. First will come a fall of around 20% of advertising value, correcting for the fact that fewer and fewer people watch less and less broadcast and pay TV. This will be followed by the inevitable temptation this will give sports rights owners to go digital only or direct, creating a second correction of similar magnitude.
This will come when even more US homes cut the cord, resulting in fewer pay TV homes and diminishing viewing while advertising opportunities will fragment further. This will overcome the one factor that has held TV advertising together and resisted the collapse so far, which is the fact that while online advertising has worked very well for interactive sales, it has failed to build brand awareness as successfully as the traditional TV spot. As online advertising evolves to address this deficit, perhaps by building stories with multiple shorter form ads, this false message propagated by Nielsen in particular will evaporate.
There are naturally significant regional variations in this overall theme as our report explains. In Europe, advertisers are only just waking up to the situation and we believe traditional TV broadcasters there must rise to the challenge of delivering their own online and OTT long form video, triggering addressable features for linear TV and programmatic for VoD assets.
Then Asia Pacific is a very different market altogether, where the digerati – Baidu, Tencent and Alibaba – are in clear control in AVoD and beginning to ascend the quality scale as they must to establish a strong SVoD offering. Addressable advertising technology will emerge there far later, only after linear TV advertising stops growing in 2022, so the correction will not happen as quickly there.
Traditional broadcasters and operators must then mitigate the damage by riding these trends as best they can. They must take as much of the online advertising pie as possible and above all exploit the opportunities presented by addressable advertising. When addressable is added to the mix, potentially TV players will be able to charge twice as much or more for a given program audience. This is because that audience can be segmented into sectors based on preferences into say those interested in beauty products and those more taken by motorcycle brands, with overlap in that case between the two. So if these two sectors can be targeted with separate ads, the operator can charge twice as much for advertising, or sometimes even more if other sectors can be carved off as well, say people interested in cultural vacations.
With the rise in analytics, operators can chuck data at this problem to convince advertisers that it is worth paying more for these targeted spots, providing good reasons for addressable advertising to generate higher revenues for TV companies. For this reason, programmatic and addressable will go from a few percent of total ad inventory sales now, to the point where globally something approaching 20% of all views are possible to sell in this way, leading to a market of some $30 billion globally during 2023.
The future then is not all gloom for traditional TV players even if they may have to negotiate a shrinking market.