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Free TV Is a Rerun That Investors Should Watch

Free TV Is a Rerun That Investors Should Watch

Tuesday, 16 August, 2022 - 04:45

With the price of Walt Disney Co.’s Disney+ and Hulu streaming services rising sharply in the next few months, following Netflix’s price increases earlier this year, budget-conscious consumers may soon be culling the streaming outlets they pay for. As they do, services that should get more attention from viewers and investors are those that don’t cost anything, such as Paramount Global’s Pluto TV, Fox Corp.’s Tubi and Amazon.com Inc.’s Freevee.


These free services, which generate revenue with ads, aren’t likely to serve as a substitute for a paid service for too many people. Viewers who want to catch the latest episode of buzzy shows like “Stranger Things,” for instance, won’t find it on Pluto or Tubi. What they will find are older movies and TV shows — some made decades ago, like the original “Mission: Impossible” or “Gunsmoke” — interrupted by plenty of commercials. If that sounds like much of the cable TV universe, so be it. But unlike cable, these services are free, in a throwback to the original days of television, which makes them a decent supplement to the now-costly array of subscription streaming services.


Moreover, the growing number of subscription services with ad-supported options should make the presence of ads on these free services less of an issue. There’s already data suggesting these services are drawing more attention from viewers while still badly lagging behind paid subscription services. Just more than 22% of US households were using one of the free ad-supported streaming services in the second quarter, up 2 percentage points from the first quarter, according to a regular survey by Kantar’s Entertainment on Demand service. In contrast, nearly 83% of households were using ad-free paid services.


And this is part of the streaming equation that investors seem to be ignoring. Wall Street has now lumped entertainment stocks into two categories: the streaming leaders, defined by Netflix and Disney, and the rest, including Warner Bros. Discovery, Paramount and Fox. While Netflix and Disney trade at an average of 3.5 times this year’s expected revenue, the other three are trading at an average of 1.5 times the same metric. And Paramount is at the bottom of the pile, trading at one time revenue.


Paramount’s position makes little sense. Aside from the solid prospects of its paid streaming services — Paramount+ and Showtime — and its relatively healthy balance sheet (at least compared with debt-laden Warner), Paramount’s ownership of Pluto could be a significant bonus. While reliable viewership data in the market is difficult to find, given that the services don’t all follow apples-to-apples metrics, Pluto appears to be one of the most popular services along with Fox’s Tubi and Roku’s Roku Channel.


Paramount says the number of devices tuning into Pluto at least monthly rose to 69.6 million at the end of June from 12 million at the end of 2018, soon before Paramount acquired it. While that’s not the same as the number of people — viewers can access Pluto on both their iPads and TVs, for example — it’s a reasonable proxy. Pluto’s ad revenue, meanwhile, reached $1.06 billion in 2021, up from $70 million in the same period. Not bad for a business that Paramount bought for just $324 million in early 2019.


In comparison, Fox is hoping Tubi will generate $1 billion in ad revenue within the next couple of years, the company said on Wednesday. Meanwhile, Warner’s total ad revenue from its streaming segment, including both HBO Max’s ad-supported tier and Discovery+, was just under $100 million in the second quarter, less than half what Pluto generated in that period.


Pluto, like other free services, has to share its ad revenue with its program suppliers and the TV-set and streaming-device makers that make Pluto available. Assuming the revenue split is around 50/50, that still adds up to $500 million in net revenue for Pluto last year. Take out marketing costs and staff, and it’s not surprising that as Paramount Chief Executive Officer Bob Bakish disclosed, Pluto made money last year, at least in the US. Overseas, it is still expanding.


What isn’t clear is how vulnerable Pluto is to competition. Because these services typically pay for content and distribution on devices by giving a cut of their ad revenue, they’re cheap to launch. There are plenty of program suppliers willing to license their content to anyone. That means the barriers to entry are almost nonexistent.


And the market has become crowded, with offerings from Roku, lesser-known outlets like streaming tech firm Distroscale’s DistroTV as well as TV-set makers themselves. NBCUniversal’s Peacock has a free tier, while NBCU’s parent, Comcast Corp., partly owns another Pluto rival called Xumo. Earlier this year, YouTube, the original free ad-supported streaming service, started offering full seasons of TV shows free, putting it directly in competition with Pluto. Warner said last week that it was considering jumping into the market as well.


Pluto has some advantages. For one thing, thanks to its parent Paramount, Pluto gets special access to the Paramount film and TV studio’s library, which includes the “Mission: Impossible” franchise, “Forrest Gump” and “The Godfather” and its sequels. That means directly competing free streaming services won’t be able to license the same programming from Paramount as Pluto. So yes, Netflix might air an old Paramount show, but Tubi won’t.


For another, because Pluto is well established, it has plenty of leverage in negotiating with program suppliers that are looking to maximize revenue. Anyone who gets paid by getting a cut of the ad revenue is more likely to license their content to a service that can deliver a bigger audience than to one that no one has heard of or whose distribution isn’t as broad.


There is a risk, though, that over time Pluto has to spend more cash on programming. It already pays a fee for some programming rather than paying through a share of the ad revenue. A related issue is that some competing free services, such as Amazon’s Freevee and Roku’s eponymously named channel, are investing in original programming to make their services stand out. If Pluto decides it has to follow suit, the beauty of its business model would fade quickly.


On the positive side, the ad market is likely to continue to expand. Brian Wieser, global president of business intelligence at GroupM, says that free services offer only limited targeting capabilities to help advertisers reach the specific kinds of viewers they want, while there is almost no cap on the frequency with which ads are shown. Fixing those issues could bring more advertisers into the market.


Over time, this market is likely to evolve, with some of the early offerings losing ground. But Pluto seems well positioned. Investors should pay it more attention. It’s brightening the picture for Paramount Global.


Bloomberg


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