Investor insight #2: The beginning of the end for TV advertising

Wednesday 03 February 2021

Portfolio insights, Industry insights

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Alphabet reported a strong fourth quarter result this week with revenue and earnings beating analysts’ expectations. One of the key takeaways from the call for us was the continued strength in Alphabet’s YouTube revenue, which grew a staggering 46% to $6.9 billion in the quarter.

We have conducted extensive research on the streaming industry, having recently added Disney and Netflix to the portfolio, and recognised YouTube’s exceptional performance was bolstered by the shift of advertisers from traditional TV to connected TV. Helped by the proliferation of smart TVs and inexpensive over the top devices such as the Amazon’s firestick, Roku’s streaming stick and Google’s Chromecast, connected TV provides integrated internet delivered viewing, rather than the traditional form of cable or scheduled programming on free to air channels. 

With around $150 billion currently spent on traditional TV advertising, the opportunity for Alphabet to grow YouTube’s revenue is substantial.

Global TV ad spend (US$ Billions)

Source: Magna, Bloomberg, Swell

Traditional TV advertising has been under pressure since ad spend peaked in 2016, with budgets moving to digital. However, it appears the scale of connected TVs has reached a level where it could significantly accelerate the decline in traditional TV advertising.


“We’ve seen brands steadily shift budgets to YouTube to complement their linear TV buys as TV audiences really become more fragmented. And as traditional TV ratings continue to decline, TV advertisers are turning to streaming platforms like YouTube to reach people who are no longer watching TV”

 

Philipp Schindler Google’s Chief Business Officer on the fourth quarter earnings call.


More than 100 million Americans each month now watch YouTube on their TV. YouTube reaches more 18 to 49 year-olds than all TV networks combined, and its short video feature, YouTube Shorts, introduced in September 2020, now garners over 3.5 billion views per day.

While it is still early days for connected TVs, as Alphabet and others invest in sophisticated tools for advertisers to improve targeting and measurement as well as new ad formats, we can’t help but ask: is this the beginning of the end for traditional TV advertising?

About the Author
Alex Clunies-Ross, CFA

Alex Clunies-Ross, CFA

Senior Investment Analyst

Alex commenced his career with Swell in August 2015 and developed many of the technical models and quantitative screens used to manage Portfolio investments and research. In addition to his responsibilities for allocated investments in the Swell Global Portfolio, he directs investment team research projects.

Alex earned the right to use the CFA designation granted by the CFA Institute in 2021. He holds a Bachelor of Commerce (Finance) from Griffith University and was an inaugural member of the Griffith University Student Investment Fund.