Member Mailing #271: AVOD after the 2021 Upfronts
"Off the hook" results for this year's Upfronts, but AVOD CPMs were punished, and the advantages of first-party data and scale may lie outside of media mergers
Key Takeaways
Ad sales rates are up after Upfronts but primetime audiences are down and therefore primetime ad volume is down.
In theory, addressable connected TV and streaming inventory at higher CPMs should be making up for the shortfalls in revenue from lower primetime inventory.
The only open question is whether media companies seeking more scale understand the post-Apple App Tracking Transparency (ATT) world may offer better solutions for scale outside of legacy media.
It is not clear that they do.
It was notable last month when Variety’s Brian Steinberg was unusually quick to burst the bubble of media companies issuing enthusiastic takes on this year’s upfronts:
Big entertainment conglomerates ranging from WarnerMedia to NBCUniversal have called this year’s haggle with Madison Avenue “historic” and “extremely strong,” because TV networks have managed to secure record increases in ad rates. Meanwhile, the process, which usually takes all summer to complete, largely wrapped in advance of the July 4 holiday.
But those big hikes and fast deals have come with a different kind of cost: Media buyers familiar with this year’s discussions say the TV companies have likely parted ways with a significant chunk of the volume of dollars they once received for their primetime programming — perhaps permanently.
The challenge is that audiences no longer tune into primetime programming at scale:
Advertising executives believe much of that lost primetime volume has, like a glacier breaking free after decades from an arctic shelf, drifted elsewhere, most likely to streaming video and other types of digital commercials.
Ad sales rates are up after Upfronts but primetime audiences are down and therefore primetime ad volume is down. So, in theory, addressable connected TV and streaming inventory at higher CPMs should be making up for the shortfalls in revenue from lower primetime inventory.
According to a conversation with Vinny Rinaldi EVP of GroupM’s Wavemaker (reported by Mike Shields), that is not happening:
Rinaldi was talking about how CMOs and especially traditional TV buyers are obsessed with pricing when buying ad space - “chasing cost” particularly in the upfront. In so many words, Rinaldi was saying that old school TV buyers are so hung up on showing their clients that they negotiated a nice healthy CPM that they lean on buying cheap tonnage - which leads to the same group of heavy TV viewers seeing the same ad hundreds of times.
At the same time -and I’m doing a bit of interpreting here - those same TV buyers tend to balk at the high CPMs common to some ad-supported streaming services (How can I justify a $50 CPM on Peacock when I can get $3 on the ION network?!?!), despite the fact that increasingly CTV is the only way to reach certain people -and often these people are uber-engaged with their favorite shows. You can tell it frustrates executives accustomed to real-time bidding and the like.
In other words, media buying agencies are not incentivized to make up this shortfall because of the optics- and bulk-pricing-driven practices of old school TV ad buying. As Shields puts it:
Brands are ready to shift. Agencies are still hung up on processes that once made sense, but don’t anymore - which is holding back the medium’s evolution.
These dynamics mirror the challenges of “First-Party vs. Third Party Aggregator 2.0 Bundles”, which I wrote about last week. The question in that Member Mailing was: if a streaming service cannot scale on its own, is it better to create a bundle of first-party services with an AVOD or to pass off and/or share the risk to a third-party bundler?
A bundle of first-party services in AVOD does not exist beyond Amazon (with IMDb TV). It requires first-party data from an aggregated suite of services. Advertisers can already bundle third-party services via demand-side platforms like The Trade Desk which allow buyers to mix-and-match inventory based on first-party data and across various ad formats.
The interesting question in AVOD is whether other versions of first-party and third-party “aggregator 2.0” bundles built around first-party data are feasible, especially in a post-Apple App Tracking Transparency (ATT) world. ATT is meant to make the process of privacy protection more intuitive to consumers, allowing them to opt out. Meaning, what do first-party and third-party “aggregator 2.0” bundles look like within walled gardens built around first-party data?
The emergence of “Content Fortresses” in Gaming (Zynga) and Shopping (Instacart), which offer more sophisticated data than most legacy media AVOD services, suggests that one good, “aggregator 2.0” outcome for legacy media AVOD business models may lay outside legacy media.
“Aggregator 2.0” Bundles As Better Alternatives?
Discovery and WarnerMedia are betting more consolidation leads to more scale in both linear and AVOD, and ad buyers will value both.
Rumors that ViacomCBS controlling shareholder Shari Redstone held “very preliminary merger” meetings at Sun Valley - “making it clear she was shopping ViacomCBS” - suggest that ViacomCBS has reached a similar conclusion about first-party bundles, too. Redstone met with Comcast CEO Brian Roberts, who at Sun Valley “also made it clear he needs to grow and is looking for deals”.
But, what if the best outcome for both Comcast and Viacom is an “aggregator 2.0” first-party bundle with a “Content Fortress”? Or even a third-party “aggregator 2.0” bundle with a “Content Fortress”?
An “aggregator 2.0” bundle in SVOD offers “the ability to personalize offerings like never before, mixing and matching television, news, e-commerce, gaming, health, and any other service that charges a monthly or annual subscription rate.”
In AVOD, an “aggregator 2.0” bundle could be described as “the ability for advertisers to target audiences like never before, mixing and matching television, news, e-commerce, gaming, health, and any other service offered within an ecosystem”. This is, in essence, Amazon Advertising’s value proposition.
A merger with another legacy media company will not accomplish an “aggregator 2.0” bundle. But some form of merger (first-party) like the Walmart-ViacomCBS proposed above, or ad inventory partnership (third-party) might accomplish this bundle.
Merging with A “Content Fortress” As A Potential Solution?
The concept of a “Content Fortress” has emerged recently in my Twitter feed after being originally proposed by the author Eric Seufert. He defines a Content Fortress as “any platform or portfolio of products supported by a rich advertising ecosystem serving owned and operated inventory using only first-party data”.
Seufert built the concept around gaming and mobile advertising, arguing that “the correct strategy for [mobile gaming studios] navigating the post-ATT environment is to pair core ad tech infrastructure with content so as to sever any dependencies on external ad platforms for revenue growth”.
He argues a content fortress requires a combination of:
Portfolio management: a content portfolio with some level of natural organic growth but also allows for what he calls the “fungibility of users”, or users moving across apps within an ecosystem without much resistance (e.g., Amazon)
Operational ad tech: a well-resourced, functional ad network supported by specialist talent and engineering support.
Command economy: centralized ad tech infrastructure requires a “command economy” to enforce decisions that might not be in the best interest of individual content teams, especially where cross-promotion is concerned.
It is important to note that Seufert is not making an argument about streaming or the AVOD business model.
That said, it is notable that every legacy media company with an AVOD now offers #’s 2 and 3. But #1 is their weak spot (except for Disney): streaming services are intended to capture cord-cutters, not simultaneous linear viewers.
Seufert’s argument reflects how “aggregator 2.0” bundles behind a walled garden may solve for both the growing importance of first-party data and the need for additional reach in AVOD. The challenge is whether “aggregator 2.0” bundles first-party bundles or third-party “aggregator 2.0” bundles are more feasible with a “Content Fortress” as a merger partner or simply a partner.
Potential “Aggregator 2.0” Partners
Because Upfronts undermine the value of AVOD inventory, the best solutions for a media company like WarnerMedia, Discovery, ViacomCBS or Comcast’s NBCU may not be in mergers with other media companies. Instead, they may be better off with first-party “aggregator 2.0” mergers or third-party “aggregator 2.0” bundles with platforms in other verticals,
The Peacock-Sam’s Club partnership I discussed in last week’s Mic Drop is a perfect example. On its own, it would be a third-party “aggregator 2.0” bundle where Sam’s Club would be a third-party bundler with zero marginal costs of marketing multiple services to an existing user base at scale. Users could move across Sam’s Club and a streaming service seamlessly.
The additional scale (40MM+ subscribers) would be particularly valuable to either Pluto TV (50MM+ MAUs) and Paramount+ (~10MM MAUs), or especially Peacock (14MM MAUs). Moreover, the first-party data used to sell inventory on AVOD services like Pluto and Paramount+ would become exponentially richer to advertisers with Walmart shopper behaviors.
Above all else, it would allow both Walmart and ViacomCBS to publish ad sales pitches similar to Amazon Advertising’s pitch for Thursday Night Football:
Compared to an average Amazon shopper, Thursday Night Football viewers over-indexed on key product categories available on Amazon, including Home Improvement (e.g., appliance parts and accessories, plumbing fixtures, electrical and heating), Sports-related Merchandise (e.g., team sports merchandise, cycling, athletic sports apparel); Toys (e.g., outdoor and sports toys, games, arts and crafts), Groceries (e.g., coffee, cold beverages), and Pet Products.
Why it matters: The Thursday Night Football audience has a higher purchase propensity of key product categories on Amazon – making them highly relevant for CPG, toy, and household brands.
But, if we put aside anti-trust regulatory concerns under the Biden Administrations’s Federal Trade Commission, one has to wonder whether a first-party “aggregator 2.0” merger with Walmart for ViacomCBS or NBCU might offer less friction for those bundles.
There are other potential walled garden, “Aggregator 2.0” mergers or partnerships with platforms now making bets in ad tech. Instacart has over 10MM users and is projected to generate $1B in advertising revenue in 2022. First-party data from Instacart ads matched with first-party data from Pluto TV and Paramount+ could be a powerful value proposition to advertisers. Merging Instacart with Pluto TV would more than double both services’ projected 2022 revenues.
Zynga, with 164MM Monthly Active Users of its mobile gaming portfolio, recently entered the ad tech marketplace with its $250MM acquisition of Chartboost. A merger with a legacy media company would both shore up any weaknesses in its new entry into operational ad tech and improve its first-party data for advertisers seeking to mix and match inventory in gaming and in streaming. Legacy media inventory, at scale, would add instant credibility to advertisers evaluating their objectives and integrated planning with a newer offering like Zynga’s Chartboost.
The question facing all three mergers still would be the discounting effect Upfronts have on AVOD inventory. A centralized “Command Economy” in an “aggregator 2.0” model will need to solve for that. Notably, that would require some difficult compromises with media buying agencies who still seek discounts for tonnage at Upfronts.
Conclusion
When I wrote about the core problem of Upfronts back in April, I highlighted:
a complex and dynamic tension that is emerging and evolving at “the intersection of context and data”. With ad buyers emerging who are savvier about addressable advertising, this tension threatens legacy media aspirations for higher margins through their bets on AVOD.
The reality of the advertising marketplace in summer 2021 is that advertiser demand has now been fundamentally changed more by Apple’s ATT than by the emergence of streaming ad inventory from legacy media companies. First-party data is more important than ever.
The question is whether legacy media companies will look “outside of the box” at gaming or e-commerce platforms for “aggregator 2.0” mergers or partnerships to meet this demand. Or, whether they simply will pursue mergers with other media companies.
Mergers with e-commerce or gaming platforms to build “Content Fortresses” around first-party data may solve more problems for legacy media companies than the problems those mergers may create. And, if mergers are too problematic, third-party “aggregator 2.0” bundles may solve the problems via partnerships with favorable economics, too.
Perhaps most importantly, these mergers and partnerships can minimize the negative impact of Upfronts on AVOD business models without undermining the co-dependent relationships of the Upfronts. Because they offer compelling bundles of ad inventory that do not require Upfronts.
The only open question is whether media companies seeking more scale via these mergers and partnerships understand that these new, post-ATT dynamics actually do impact both their AVOD and liner ad inventories.
It is not clear that they understand this.