The drama unfolding on TV

For decades, manufacturers and retailers have made money from the sale of TVs on a cost of manufacturing basis plus markups for profit margins – the same as other consumer electronics. But now the market is changing. Many of us are streaming programs from smart devices rather than tuning in to watch traditional TV. The new business models that are emerging as a result of this shift mean manufacturers and retailers aren’t only relying on the mark-up on television sets to make a profit anymore. They’re also turning their attention to the potential of smart TV platform profits from selling advertising and viewing data. 
 
In this blog, the first in a series on the TV industry, we’ll describe the changes in more detail. Over the coming months, we’ll also consider what the developments mean for consumers, for well-established manufacturers and retailers, and for new entrants in the market.
 
Viewers are switching channels

In the United States (US), less than 50% of viewers watched programs on linear TV daily in the second half of last year, according to the Samba TV recent State of Viewership report. What are people doing instead? They’re streaming content via their connected TV sets. 
 
This change in the way we watch television is transforming the industry. Previously, we either paid a subscription for cable channels to watch ad-free content, or we watched over-the-air broadcast television with commercial breaks inserted into the programs. Now, with streaming services replacing these two traditional content sources, the streaming service can collect either the subscription fees or sell the advertising spots. If the TV manufacturer owns their TVs proprietary streaming service, they can collect the streaming profits. So, for manufacturers, it’s a new source of revenue separate from the initial sale of the hardware device.   
 
As a result, some are offering their TV sets at or near cost and retailers are selling the products at very low margins. For these manufacturers, like VIZIO and Roku, more profit is generated through the operating system platform, from selling ads and viewing data, than through the sale of TV hardware.
 
VIZIO, which operates exclusively in the US, realized the value of data and advertising early on. VIZIO sells TVs and sound bars but almost all its profit now comes from the viewer data it collects and the advertisements it features, not from its TV hardware. An analysis of its publicly reported quarterly earnings reports shows that each new connected TV platform user generates around $5 per quarter in data and advertising revenue. That adds up to $20 over a year. People usually keep a TV for an average of five years before replacing it. So, there’s about $100 of expected profit per account to be made from what they call ‘platform services’ over the life of the TV. 

Roku is another company that understands the value of this new business model. It started out as a software firm that sold streaming media devices (Roku Streaming Sticks) and licensed its user-friendly operating system to television hardware manufacturers. Its partnership with TCL from China enabled it to sell a 65-inch TCL Roku TV set at the incredibly low price of $228 during the Walmart Black Friday event in 2022. 
 
At this year’s CES, Roku announced its own brand of TV, and in March, an advertising and retail partnership with retailer Best Buy, which includes exclusive access to its televisions and the “pairing of data”. According to their media release: “Brands will be able to work with Best Buy and Roku to target, optimize, and measure their ads on Roku using Best Buy shopper data to ensure consumers are seeing the advertising content that most interests them.”
 
Advertising revenue will follow viewers
 
There are significant benefits for the companies that can adapt to the new ways of working. As noted above, the number of viewers of linear and smart televisions in the US is almost equally split. And yet, advertising revenue from ads on linear TV worldwide in 2022 was more than $163 billion a year, while there was just $30 billion of worldwide smart TV advertising revenue in the same time period. 
 
We expect that advertising revenues will shift away from linear TV to follow viewers to smart TVs as more manufacturers, retailers, and platform owners explore the potential benefits of the new business models and relationships. As the Roku and Best Buy deal highlights, there is a direct benefit to what’s called ‘closed loop advertising’ on smart TVs. Best Buy can provide Roku with advertising targeting data on consumers based on their purchase history at Best Buy, and/or browsing history on Best Buy.com. Roku can then feed relevant advertising customized to these consumers. After the advertising exposure Best Buy can see from the purchase history if the ad exposure results in a sale. Different ads can be tested and measured against each other to improve results. This makes it a more effective way to reach shoppers.
 
In theory, TV manufacturers, smart TV operating system companies, and retailers could all benefit from the new arrangements. But how will the profits be split? Many retailers have their own advertising departments, so they’ll be eager to capitalize on the opportunity to add smart TVs to their list of media advertising types. Google makes the popular Google TV operating system that’s used by most TV manufacturers that don’t own their own proprietary operating system. Will Google TV be asked to share the operating system profits with the TV manufacturers and retailers? 
 
For now, only smart TV operating system companies that market in the US are likely to benefit in the short term. The US is a unique market in several relevant respects. First, the vast majority of smart TV advertising revenue is made in the US market – in 2022 it was $24 billion out of the worldwide $30 billion, or about 80%. This is because viewers in the US are willing to watch the advertisements that accompany their programs. People in other markets are less tolerant. The US is also a good place to advertise because it’s a large common language market with sales concentrated in many major national retailers. This makes advertising more efficient. Omdia expects the new, smart TV advertising business model to reach other regions, particularly other English language markets and Western Europe by 2026.

There are also risks

Samsung is the biggest TV manufacturer in the world and if the shape of the industry was being determined by the number of sets being shipped, there would be no doubt about the future. But engagement is emerging as an important indicator of success and companies such as Roku are in a strong position. With advertising, it’s not just the number of TVs shipped, but rather the number of hours of content consumed that determines the winner. In this respect, the TV itself matters as well. Only the set in the main TV viewing room will get enough engagement to justify selling at close to manufacturing costs. The smaller sets in bedrooms and the kitchen, for example, will not get enough engagement to be profitable from advertising alone. We expect that in the US, TVs that are 50” and above and in the main viewing area of the house, will be the primary targets for advertising engagement.
 
The TV manufacturers that sell at close-to-cost face a risk if the consumer buys the TV, then rejects the installed operating system. The viewer can override the choice of TV operating system by installing a streaming media device, such as Roku, Amazon’s Fire TV stick, or Apple TV. People will increasingly make their new TV purchasing decision based on the ease and speed of streaming rather than the brand of television hardware. Manufacturers must avoid frustrating viewers enough for them to consider using a different streaming media device, especially if they are selling the TV at or near cost.
 
Data security and privacy are also an increasing concern and may even be as important to people as their viewing experience. Governments and standards organizations around the world are drawing up legislation and best practices to protect connected devices from cyberattacks and help to safeguard their citizens. In the UK, the manufacturers of connected products will have to meet minimum security requirements from next year. In Europe, there are plans to introduce EU-wide legislation to boost the security of devices and protect people’s privacy. Several security standards have already been introduced, including by ETSI, the European standards institute, the National Institute of Standards and Technology (NIST) in the US, and the International Organization for Standardization (ISO). The Connectivity Standards Alliance, which develops standards for connected devices such as the ones we have in our homes, has also just established a Data Privacy Working Group. According to the organization’s website, the Group aims to “... support customers in better understanding what data is being collected, how it is used, and if it complies with existing privacy requirements.” 
 
The TV industry is evolving. There has been significant change in just the past two years. We don’t know how the story will end but one thing is certain – what’s unfolding is worth watching.