The IAB Europe’s chief executive, Townsend Feehan, considers the landscape of connected TV and who is best placed to capitalise on its growth.
The Connected TV advertising opportunity lies at the intersection of two important trends. The first is the maturation of the digital advertising industry. Having secured double-digit growth for every one of the past eight years, IAB Europe’s latest forecast suggests that, while remaining steady, growth will stay below 10% through to 2023. As such, growth in digital will more or less reflect the overall advertising sector.
The second trend is the structural change overtaking the traditional TV advertising market. Historically, TV achieved its dominant share of media advertising spend as a result of two characteristics: 1) its audience reach and 2) its branding power. Today, audiences consume a broader range of alternative video content and the mass brands that were the underwriters of the TV ad ecosystem are starting to struggle.
Financial analysts, local trade bodies and media agencies all expect flat growth or declines for traditional linear TV advertising over the next five years. Our own meta-analysis of existing data suggests a cumulative decline amounting to €2 billion by 2023 for the major five European markets (France, Germany, Italy, Spain, and the UK).
Where will this money go? It is possible that combined, the maturity of the digital advertising market and the reach and branding power of TV will form a new opportunity? One thing is for certain – these numbers do not signal the often proclaimed ‘death of TV’.
The definition of TV is changing
The shifts described above are taking place in a world where TV is evolving. A growing range of audio-visual services are now part of a broader definition of TV. These include incumbent broadcasters, premium channels, cable networks, but also Over-the-Top (OTT) services, portals and digitally native aggregators. Increasingly, they are all competing for content rights, viewer attention and audience data. The rise of Smart TVs mean that channels are increasingly becoming Apps, and streaming services designed as Apps become channels.
The rise of connected devices exacerbates the fusion of formerly distinct media, distribution and business models by bringing digitally native video to the big screen in the living room. Analyst data (e.g. IHS Markit) highlights that connected device growth in the three years up to 2019 was largely driven from the home, with devices like Pay TV Set-Top Boxes and Digital Media Adapters outpacing the growth of smartphone proliferation.
The connected living room is helping fuel rapid growth in Subscription Video On Demand (SVOD) services, which will generate over $40 billion worldwide in the next two years according to analysts. Using the US as an example, the rise of SVOD may come at the expense of Pay TV. The US Pay TV market is now entering its fifth consecutive year of decline even as the SVOD market continues to boom (Ampere Analysis). Growth comes from both new users and users ‘stacking’ several services.
These developments impact the TV advertising proposition in several ways. First, rather than being just about reach and scale, TV is becoming fragmented and niche both in terms of what people are watching and how budgets are being spent (with more being spent on production, there’s less for advertising). Other challenges include consumer acclimatisation to ad-free (paid-for subscriptions) experiences, the difficulty in reaching specific demographics, and the overall complexity explosion in planning, delivering and measuring advertising.
The market opportunity
Despite these challenges, the market opportunity for TV advertising is actually expanding. The future of TV advertising can include a variety of formats, transaction mechanisms and approaches to buying. These range from classic AVOD via OTT, ads delivered over set-top boxes via cable and satellite services, programmatically purchased traditional TV ads, ads placed on the basis of big data analysis, and ads on apps or streams on TVs connected to the internet.
Quantifying this opportunity accurately is challenged by often unclear and overlapping definitions between Smart TV, Connected TV, Programmatic TV, and other concepts. Additionally, businesses provide different numbers for different parts of the market depending on where they operate. However, based on market data analysis and interviews with market participants, we believe the European ‘Next’ TV ad market is currently dominated by AVOD (including ads on Facebook and YouTube) at just under €4 billion. Ads on Addressable TV and Connected TV both amount to around €200 million in revenues.
Looking ahead, and on the basis of industry forecasts (e.g. Ovum), the outlook is optimistic. We expect Connected TV advertising in Europe to growth with a compound annual growth rate of 39% up to 2024. Of course, there are barriers to growth that will need to be overcome. These include factors that come with an immature market such as cost and a lack of measurement. There are also barriers unique to the European context including the lack of a unified market, less developed sales strategies and a lack of national or pan-European standards.
Who will own the opportunity?
The unbundling of content, distribution and data means that many market participants have their eyes on the new TV opportunity. Alongside broadcasters, these include ad tech companies, Smart TV manufacturers, and many others.
Another key question is around monetisation. Often, it’s not so much about whether the ad-funded or subscription-funded model will prevail so much as how they can be combined. Technology & bundle-based services usually have a high ARPU (Average Revenue Per User) but a low reach, while it is the reverse for content & advertising-based services. The ‘Holy Grail’ for advertisers is to find a service with a high reach but also the granular understanding of customers that could, for instance, come through a billing relationship.
The next step
The new TV market is young enough to be shaped so it can mature and scale more quickly. Key to achieving this will be simplification and standardisation, as well as broader collaborations. Already, there’s been an update in value-chain partnerships across Europe, and in the UK the trend has helped the Addressable TV market achieve scale. Such collaborations are essential for the pooling of costs for technology and data. They can also provide a single entry point for advertisers.
The evolution of television presents a clear opportunity for the advertising industry as the traditional TV market shrinks and digital advertising matures. The next few years will reveal which of the many industry players benefit most from this opportunity.