We asked Ian Whittaker, media and digital advisory expert, to take a look at the future of Connected TV to elaborate on industry trends and to give some perspective.
The next 12 months’ for CTV
When I was asked to write a piece on how CTV advertising would develop over the next 12 months, the first thing that came into my head was a famous US Supreme Court case in 1964 regarding the definition of obscenity. Justice Potter Stewart stated: “I shall not today attempt further to define the kinds of material I understand to be embraced… but I know it when I see it …”. That may seem an odd way to start an article on CTV, but I think it’s crucial. CTV is a phrase that is used frequently, but different people have different interpretations of what it means. That has crucial implications for how far CTV advertising progresses, as I will show later.
How will the advertising environment change?
Let’s start with the more obvious factors that will impact the development of the CTV advertising market. Firstly, the advertising environment. Fears over recession are mounting and, as advertising is correlated historically with economic growth, that is raising concerns over 2023 advertising spend. The picture is more complicated than that (I would argue there are grounds for believing advertising may be in a structural growth phase and, crucially, the United States looks to be a healthy position for now), but the macro picture will determine CTV advertising growth. I believe it will grow even if advertising generally falls sharply, but the growth rate will obviously be impacted.
What is the macro setting currently, and in the future?
The macro environment is likely to exacerbate the second point, namely signs that SVOD penetration is flatlining, which is likely to push more of the streaming players towards AVOD / FAST to support both revenue and subscriber growth. US SVOD penetration is over 80% according to Kantar, with each household having nearly four services on average.
In Europe, there is research in several countries suggesting that SVOD penetration is unlikely to reach US levels and that consumers are unwilling to pay substantially more. On top of that, there are also signs – particularly in Europe – that the macro situation is leading consumers to cancel their packages. The shift to a greater focus on AVOD will help boost the CTV advertising market.
What are the new advertising offers?
Disney+ launches its advertising product in the United States later this year, while it is likely to take 12-24 months for Netflix to ramp up significantly. Both have recruited powerful partners (Disney is working with The Trade Desk and Netflix with Xandr). Disney and Netflix have gone for different approaches. Disney has upped the price of its basic package without ads by $3 to $10.99 per month whilst its previous price point of $7.99 now has adverts. That suggests Disney is focusing more on the bottom line than subscriber growth. Netflix seems to be doing the opposite, keeping’s its basic package without ads the same price in the US but introducing a new low-price tier with adverts at $6.99, which suggests a greater focus on sub growth. The CTV advertising market will be given a major boost by the introduction of these services. Yet, with concerns around TV inflation mounting and signs of resistance to Disney+’s proposed CPM rates, it may be wise to exercise caution.
In Europe, research suggests that SVOD penetration is unlikely to reach US levels and that consumers are unwilling to pay substantially more. There are also signs that the macro situation is leading consumers to cancel their packages. The shift to a greater focus on AVOD will help boost the CTV ad market.
What is the industry environment when looking at competition and partners?
Consideration of the strategy of other players in the streaming space is also important. There are increasing signs of corporate weariness as streaming subscriber growth plateaued and losses mount (Comcast’s Peacock service is expected to generate $2.5bn of adjusted EBITDA losses this year). This was most visibly expressed by Warner Bros Discovery, whose CEO David Zaslav made clear that, while streaming would continue to be a priority, WBD would no longer design its entire strategy around its needs. This could play out in several ways. Some players may decide to retire from the streaming space altogether and / or merge to create bigger players. What that means for CTV advertising is uncertain. My guess is that it will accelerate the shift in focus towards AVOD / FAST.
What actions are broadcasters taking?
In Europe, the existing Free to Air Broadcasters have launched their AVOD services which are growing, in most cases, rapidly. This causes a further complication in viewing how well CTV advertising will grow, and it relates back to my point earlier about the definition of CTV. In virtually all cases, the Broadcasters are bundling-in sales of their linear product with AVOD, blurring the definition of what is ‘traditional’ TV advertising spend and what may be part of CTV (the same is happening in the United States). That bundling is likely to continue. We are likely to see quite wide differences in estimates on CTV advertising depending on what is included.
What role do TV advertising budgets play?
What happens to TV advertising budgets? The death of traditional TV advertising has been proclaimed for well over a decade yet, in many countries, TV advertising revenues are above 2019 levels, which is different from print post the 2008/9 financial crisis. The declining audiences, particularly amongst younger viewers, and the accompanying inflation in CPT TV prices is raising questions yet, as the growth in AVOD has shown, the broadcasters have cards to play. There are several other factors that suggest the shift in advertising spend may be more delayed. Firstly, natural conservatism amongst advertisers. Secondly, the reversal of the argument that linear TV’s decline was inevitable due to the growth of SVOD. Thirdly, the dangers of assuming the 16-34 year olds of today will never watch TV in their 40s and 50s.
What about major tech changes?
Finally, one point to consider. Could CTV advertising benefit from the growing signs of structural weakness amongst the biggest players in the digital video space i.e. Meta, YouTube, Snap etc? The last several quarters of results have shown slowing growth at the major tech giants and the evidence is increasingly pointing to Apple’s privacy changes, together with increasing regulation and the upcoming ending of cookies, driving an increasing questioning from advertisers of the big platforms’ ability to deliver targeted audiences. If those concerns continue to mount, there is an argument that advertising money may shift and CTV may be one of the major beneficiaries. Here is to an eventful next 12 months.
