Why Comcast and Fox Want Ad-Supported Services Like Xumo and Tubi

Ad-supported streaming services (AVODs), once considered the redheaded stepchildren of major subscription streamers like Netflix and Disney+, have suddenly caught the attention of major media companies.

On Tuesday, Comcast acquired Xumo, the ad-supported free streaming service best known for offering 190 channels that are automatically installed on smart TVs from companies like LG and Sony. And Fox, we learned last week, is looking at acquiring ad-supported Tubi, which just passed the 25 million monthly viewer mark, for around $500 million. Comcast is also exploring a deal for Walmart’s Vudu, which has offered ad-supported free streaming since 2016, The Wall Street Journal reported.

This all comes about a year after ViacomCBS paid $340 million to acquire Pluto TV, another staple of the AVOD space. Industry analysts say there are a few reasons why media conglomerates are showing an interest.

Also Read: Comcast Acquires Xumo, the Ad-Supported Free Streaming Service

AVODs tend to be capital efficient — inexpensive to maintain — once they’re acquired, according according to Bruce Leichtman, president and principal analyst of Leichtman Research Group. Pluto’s $340 million price tag looks like a bargain when compared to ballooning content costs, he added.

Perhaps more importantly, content companies like Fox and ViacomCBS with their own stable of TV networks are familiar with the business model, Leichtman said. This allows them to take their current expertise in ad-supported television and adapt it to ad-supported streaming. This is especially important as traditional TV continues to shed customers.

“Essentially, it’s a revenue share. And content companies like ViacomCBS or Fox, they’re in this business. They know the advertising business (because) it’s something they’ve done for ages,” Leichtman said. “And obviously, they’re concerned about affiliate revenue. That’s a challenged part of the market, with net losses in the pay TV industry and limited ability to raise rates in they way they used to on an affiliate basis. So they see this as a segment of the industry they know.”

The idea — meeting customers where they’re headed — is sound. AT&T, DirecTV’s parent company, lost nearly 1.2 million pay TV customers during Q4, and Dish lost another 194,000. As traditional ad-supported TV continues to wane in popularity, AVOD services become more appealing to both advertisers and media companies with the size to acquire them.

For advertisers, interest in these services has grown exponentially of late. Ad revenue from AVOD hit $3.8 billion last year, according to Magna Global estimates, marking a 39% increase from 2018. And in 2020, the industry is expected to increase another 31% to hit $5 billion in sales. Granted, this is much smaller than the $70 billion advertisers still spend on TV ads each year, but AVOD is a a growth sector — which automatically sets it apart from the contracting pay TV business and makes it more attractive.

At the same time, AVOD is growing because streaming, in general, is mushrooming. And by offering viewers a free alternative, services like Tubi and PlutoTV can pull in customers who are accustomed to streaming, but also conscious of how much they’re spending each month.

“Consumers are becoming more comfortable with jumping around different living room apps and ecosystems, so they are willing to test AVOD services,” IHS Markit analyst Sarah Henschel said. “With the launches of Apple TV+ and Disney+, there becomes greater pressure on consumers’ wallets and how much they are willing to spend on (pay streaming) services. AVOD offers an easy alternative to consumers with a much lower ad-load than traditional linear TV.”

Also Read: Why ViacomCBS Just Pulled an About-Face With New Streaming Plans

By the third quarter of 2019 — the most recent quarter for which data is available — the average U.S. streaming household spent money on 2.7 streaming services, which came out to about $32 per month, according to data shared by Ampere Analysis. With more subscription services entering the market in the next few months, including Peacock, HBO Max and Quibi, that figure could continue to rise. But it could also drive viewers to look towards free alternatives, Henschel and Leichtman agreed.

“For consumers who have reached breaking point for spend, AVOD services — typically built around older, cheaper library content — are an attractive way to access more content,” Ampere’s Toby Holleran said. “From an operator perspective, it allows them to build an expansive audience online, and thereby attract advertisers keen to engage them.”

Taken as a composite picture — the cheap maintenance costs, the lower content spend, and growing interest from both viewers and, consequently, advertisers — it’s easy to see the growing interest in AVOD services.

Why AVOD Services Like Xumo Stand to Benefit With Rise of SVOD Offerings Like Disney+

NBCUniversal in Talks to Buy Walmart's Vudu Streaming Service

Fox Looks at $500 Million Deal to Buy Tubi, The Ad-Supported Streaming Service (Report)