Linear TV ad revenue and pricing — until now largely immune to cord-cutting and the shift of viewers to streaming — is getting close to a tipping point with Netflix and Disney Plus entering the ad-supported video business, Wells Fargo Securities media analyst Steven Cahall said in a new report.
The report — provocatively titled “Advertising: Death of the Linear TV CPM” — notes that as linear ratings have declined, advertising prices on a cost-per-thousand viewers (CPM) basis have risen annually by double digits. That gravy train is about to end, maybe as soon as next year’s scatter market, Cahall contends.
Cahall forecasts that digital TV revenue will rise to $19 billion in 2023 from $4 billion in 2019. A chunk of that will come from linear TV, which has been holding fairly steady at about $70 billion for the past few years.
Of the $72 billion Cahall expects to be spent on linear TV in 2023, just $18.5 billion goes to live sports, which he said is the most secure content for traditional broadcast and cable networks. Upfront deals will also be slow to change in 2023, leaving the $10.5 billion in non-sports, non-new ad inventory sold in scatter as the "low-hanging fruit" that could shift to spending on streaming.
By 2024, even the upfront will shift towards ad-supported video-on-demand (AVOD), he said.
"The way we see this playing out is that the 2023 upfronts will proceed similar to history as AVOD will still be a trickle, but by H2 2023 we could see much softer linear scatter demand due to AVOD that pressures linear CPMs," Cahall's report said. "Over time, this is likely to negatively impact all linear TV pricing and by 2024 the upfronts could be much different."
At this point, Wells Fargo estimates that broadcast sports generates TV's highest CPMs at $70, followed by what it describes as "super-premium AVOD" such as Netflix and Disney Plus at about $55. Premium AVOD like Hulu draws CPMs in the $35 range while cable news and other prestige cable programming attracts CPMs of about $40. Average cable advertising is sold at a $25 CPM, according to Wells Fargo.
"The emergence of AVOD is set to provide a growing alternative for large format advertising, and we believe linear TV will increasingly be at risk to shifting budgets," Cahall said.
From an investing point of view, Cahall said the risk to linear TV revenue represents "material earnings downside to AMC Networks and Paramount, though all media and broadcast stocks will need to grapple with the pressure over time." ■
