Remember Free TV? It’s Coming Back in a Big Way

In January, almost a year after Viacom CEO Bob Bakish told investors his company was preparing to launch a streaming service in late 2018, Viacom finally unveiled its OTT strategy—but it wasn’t what anyone had been expecting. Instead of creating its own subscription video on demand (SVOD) service—as rivals Disney, Comcast and AT&T are doing—the company had opted to buy Pluto TV, the free, ad-supported streaming video platform, for $340 million. The news left many Viacom investors and partners scratching their heads. “They’re like, ‘You bought what?’ Most of them didn’t even know what it was,” says Bakish. But many of them quickly warmed to the CEO’s new acquisition, which was finalized a month ago, after he and his other execs explained how Pluto is “integral” to Viacom’s distribution and advertising strategy. “This is much bigger than people realized when we did it,” says Bakish. “We think it’s a real game changer, not only for our company, but for the industry.” That’s because it’s the biggest spotlight yet for AVOD (advertising video on demand), which has been quietly, yet rapidly, gaining momentum in the OTT space over the past year. The largest AVOD outlets—including Pluto TV, Xumo and Tubi—now attract as many as 12 million users each month, and boast libraries of more than 10,000 movie and TV episodes. And with cord-cutters and cord-nevers only able to afford subscriptions to a small number of SVOD services, like Netflix and Amazon Prime, AVOD outlets—which now enjoy prominent placement on smart TVs and connected TV devices—have established themselves as a frictionless and free way to expand their viewing options. Cable subscribers have joined the party, too: Tubi became the first AVOD outlet added to Comcast’s Xfinity X1 and Cox Contour set-top boxes. AVOD also provides advertisers a long-awaited opportunity to secure a streaming toehold while reaching two elusive audiences: the adult 18-34 demo (which makes up half of Pluto’s audience) and cord-cutters (Xumo says 70 percent of its users are cord-cutters or “light TV” viewers). [caption id="attachment_1037103" align="alignleft" width="450"] Illustration: Matthew Billington; Photography: Patrick James Miller[/caption] Suddenly, the retro notion of free TV—with ad loads that are roughly half of the linear average—has emerged as a lucrative and essential component of the industry’s streaming future. Now bigger players like Viacom are eagerly pushing into AVOD. “Everybody likes value—and it’s hard to beat the value of free,” says Scott Blanksteen, vp of Walmart-owned Vudu, which created its own AVOD offering in 2017, the same year that Roku rolled out the Roku Channel. In January, Amazon-owned IMDb joined the bandwagon by launching Freedive. Most recently, on March 28, Sony Pictures Television—which had been looking for a partner on its Sony Crackle AVOD since last summer—said it was selling a majority stake in the service to Chicken Soup for the Soul Entertainment; the new venture, Crackle Plus, will feature content from both companies. The velocity in the AVOD space “is an acknowledgment that OTT is really coming into its own,” says David Cohen, president, North America, Magna Global. “Marketers are starting to sit up and take notice. These are not tiny endeavors. These are large-scale, full-sight, sound and motion opportunities with good targeting and good measurement.” Last year, OTT ad spending topped $2.7 billion, a 54 percent increase over the previous year, according to Magna Global’s U.S. ad forecast. While that is a drop in the bucket compared to the $70 billion TV advertising market, it’s a rapid growth area—especially as companies like Viacom begin deploying their massive ad sales forces. Currently, says Cohen, “OTT represents something like 14 or 15 percent of an average consumer’s video diet, yet it’s under 5 percent of spend. That will right-size itself over time,” just as it did in the mobile space. “We’re pleased about that. Marketers are looking for additional outlets to capitalize on the decline in linear viewership.” The AVOD platforms also stand to benefit from the upcoming SVOD glut: Most industry experts expect that consumers will only subscribe to two or three SVOD services, even as Apple, AT&T, Comcast, Discovery and Disney enter that market over the next year. “For a long time, the industry was all gravitating toward SVOD, and nobody was running the math to realize consumers can’t afford any more than they spend on TV today,” says Scott Rosenberg, svp, gm of platform business, Roku. The idea that households will be subscribing to most of the new SVOD offerings “is just ludicrous,” adds Tubi CEO Farhad Massoudi. As viewers make tough choices about their SVOD subscriptions, AVOD “becomes a critical part of your bundle,” says Pluto TV CEO Tom Ryan. [kickout id="6" label="AVOD STATS NEW"] AVOD is coming into its own after several years of struggle, as the companies attempted to raise money at a time when the entire industry seemed convinced that its future would revolve solely around SVOD. “Across all categories—content, distribution, advertising and fundraising—we were pursuing something that looked at first glance like traditional TV,” says Ryan. “Silicon Valley investors are notorious for looking for the shiny new object, and in many ways what we were creating was born of the idea that traditional TV has done so many things right over the years.” The services also had to navigate the lengthy process required to create chips and integrate themselves into smart TV platforms. “I used to go to board meetings in the early days and have to explain why I’m spending so much money but I don’t have any users yet,” says Xumo CEO Colin Petrie-Norris, who worked with LG for two years before Xumo was added to its platform. Also, several AVODs launched with meager library offerings—often just short-form digital content. They slowly began licensing higher-quality movies and TV shows from content partners, which has attracted more users, who are drawn both to the content and the shorter ad loads compared to linear. “Consumers are saying, 'This is worthwhile spending not just an hour a month on, but an hour a day,'” says Petrie-Norris. The addition of news platforms like ABC News on several of the services has helped boost daily consumption and engagement. Slowly, more naysayers began to see the light. Roku created the Roku Channel after content partners, many of whom have their own apps on the platform, asked the company to aggregate content themes to create a better ad-supported user experience, using the insights gleaned from Roku’s platform. “Many content owners or distributors who assume their only way to reach the consumer was by standing up an app are realizing that partnering with a platform like Roku is going to help them grow faster and generate more money,” says Roku’s Rosenberg, adding that many partners see more traffic from the content they syndicate to the Roku Channel than their stand-alone Roku apps. As Walmart remains on the SVOD sidelines, the company is devoting more resources to Vudu’s AVOD offering, because “we think we can do something that’s unique in the world of AVOD,” says Blanksteen, and work with advertisers on partnerships that will ultimately direct people to buy products at Walmart—allowing the company in essence to benefit twice. AVOD is also capitalizing on the decision of Netflix and other SVOD services to shrink their library content as they focus on creating original series and movies. (Most AVOD services, in contrast, do not produce original content, with the exception of Sony Crackle, though Vudu recently struck a deal with MGM to make a series based on the 1983 comedy Mr. Mom.) Tubi, which is spending more than $100 million this year licensing movie and TV shows, wants to “aggregate the 99 percent of content that’s non-original and non-exclusive” to SVODs, says Massoudi. Among Tubi’s recent content acquisitions: early seasons of The Bachelor franchise and a NBCUniversal package including Xena: Warrior Princess, The A-Team and Magnum, P.I. But even as their libraries increase, the companies are focusing their marketing efforts on what remains the biggest draw for consumers: the fact that they’re free. This year, Pluto has blanketed New York, Chicago and Los Angeles with a splashy outdoor campaign—its largest ever—aimed at content partners, advertisers and consumers, featuring a simple two-word message, “Free TV,” in bright yellow letters. (The campaign, in the works before the Viacom deal was announced, will evolve to be more content-specific, says Ryan.) After all, not even Netflix can compete with that. The AVOD space began heating up last year, just as Viacom was souring on the prospect of joining the already-overstuffed SVOD marketplace. “We didn’t like how crowded the space was likely to become, and candidly, we didn’t have the capital horsepower to go into it,” says Bakish, who determined that Viacom would be better off acquiring a streaming service instead of building one from scratch. “It was about the totality of what we thought was required for success, which is a combination of a platform plus its distribution.” Viacom spoke with many of the big AVOD players but was drawn to Pluto TV because of its linear-channel-based approach (its 113 channels are arranged like a TV grid, in addition to its VOD offerings). To that end, Bakish considers Pluto “ad-supported free” TV and not strictly AVOD, “because there’s very much of a lean-back component which fits with consumers.” Also attractive to Viacom: Pluto’s distribution deals with Samsung and Vizio (which represent 60 percent of U.S. smart TVs), its robust base of 12 million monthly users and a library with offerings from 140-plus content suppliers. Plus, “time was important,” says Bakish, who wanted to take advantage of “a very significant white space” in OTT before his rivals beat him to the punch. “We thought we were at the place where usage was approaching an inflection point. The time was right.” [kickout id="2"] As for Pluto, Ryan says there was “a complete alignment of vision and ambition over what free streaming television could be, not just in the U.S. but on a global basis.” While benefiting from Viacom’s resources, Pluto will operate as an independent subsidiary, with Ryan continuing as CEO, and will remain based in its own L.A. headquarters. The arrangement, says Ryan, offers “the best of both worlds.” Rich Greenfield, a media analyst at BTIG Research, says Viacom’s Pluto acquisition was “very logical. Viacom doesn’t have the balance sheet or the scale to build a massive SVOD platform. They’re already in the ad-supported content business, they want to sell more ads and they want to be bigger on connected TVs. And I think Pluto was under-monetized because they didn’t have an ad sales force like Viacom’s.” Viacom is happy to be going against the grain of its rivals when it comes to OTT. “A lot of ad-supported business, particularly in tech, have been out of favor, but the biggest technology opportunities in the world are largely ad-supported,” including Facebook and Google, says Viacom CFO Wade Davis. The company sees Pluto as the next leg in its distribution strategy to provide value to its cable and satellite partners, who want to bring more product to their subscribers, “but in a way that doesn’t add fixed cost to their P&L,” says Davis. Already, Pluto (along with Tubi) will be part of Comcast’s just-announced Xfinity Flex streaming platform aggregator for its internet-only customers. As Viacom begins to roll out its library content on Pluto next month (see sidebar), the company will also market Pluto via its TV brands, while using the streaming service to point viewers toward its own niche SVOD products, like Comedy Central Now, Noggin and Nick Hits. But Davis says boosting Viacom’s advanced marketing solutions (AMS) business is “at the core” of its Pluto acquisition. Viacom's premium, full-episode addressable-video supply will triple next year with the addition of Pluto—which gives Sean Moran, Viacom’s head of ad solutions, a shiny new tool in his upfront arsenal. Moran is highlighting Pluto TV in Viacom’s annual upfront dinners with agencies, which are occurring this month. [kickout id="1"] While marketers can continue to purchase inventory directly from Pluto’s ad sales team (led by chief revenue officer Rich Calacci), it will also be available as part of a broader Viacom buy “that will allow us to sell 18-34 reach and associated impressions that are flat year to year, versus everyone else selling decline. You’ll be able to buy half of 18-34s in the country,” says Bakish. Not surprisingly, other big media companies are now considering their own AVOD acquisitions. Petrie-Norris would not comment on reports that Xumo has been in talks with Sinclair Broadcast Group and others, but notes that “we’ve gone from pitching a PowerPoint deck to some of the biggest TV industry players—and getting furrowed brows and questions around whether this will work—to today, where we have caught their eye.” Analysts expect more AVOD deals in the offing. “If you have a big library of content that’s sitting around collecting dust, AVOD creates an interesting way to monetize it,” says Greenfield. Still, he cautions that Pluto and its peers won’t exactly be giving Netflix a run for its money. “I don’t think the AVOD opportunity is nearly as large as the subscription video space. But I’m a big believer that there are lots of consumers who don’t want to pay for things. That creates an opportunity for AVOD.” Whether or not they find buyers (and a few outlets, like Vudu and the Roku Channel, are decidedly not for sale), all of the AVOD players have plans to expand, both in the U.S. and internationally. Xumo has six new countries on tap this summer, while Viacom will take Pluto TV to Latin America and the U.K. New ad formats are also in the works: Vudu is working on shoppable ads, which will allow users to add products to their Walmart cart, or possibly even purchase them, while watching Vudu’s free content. In other words, AVOD’s audiences and ad revenue will continue to surge. “This is going to be the biggest year for AVOD to date,” says Tubi’s Massoudi. “For years, I was preaching AVOD, and no one was listening. So this is such an exciting moment.”

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Remember Free TV? It’s Coming Back in a Big Way

Ad-supported platforms are now key to streaming’s future

Jason Lynch

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