TV dollars are following eyeballs and shifting to over-the-top.
Magna said Friday that its 2018 forecast for US OTT ad revenues came in short. The agency predicted OTT ad revenues would hit $2 billion in 2018, but they actually hit $2.7 billion at a 54% year over year growth rate.
As a result, Magna is revising its OTT ad spend forecast upwards, predicting 39% growth to $3.8 billion in 2019 and 31% growth to $5 billion by 2020.
“The penetration and consumption of OTT homes in the US grew faster than we thought,” said Vincent Letang, EVP of market intelligence at Magna. “There’s an increasing number of people accessing OTT and more content to be consumed.”
The growth in OTT ad spend is thanks in part to Hulu, which hit 25 million subscribers in 2018 and saw ad revenue grow 45% last year.
It’s also coming from YouTube, which people are increasingly accessing on TV sets.
“Smartphones are still the primary screen for the consumption of YouTube, but a sizable part of consumption is now on the big screen,” Letang said.
OTT is partly offsetting network declines in linear TV sales, which will shrink 3% to $41 billion in 2019. Network TV’s declines would have been as high as 3.6% if not for OTT sales, Magna found.
Linear TV also continues to suffer from pricing inflation, as demand spikes but ratings erode. Magna estimated that last year, the CPM for a primetime national TV spot reaching the 18 to 49 demo was as high as $50 – the most expensive inventory on the market, Letang said.
“The cost is becoming a problem for CPGs and other mass market brands,” he said.
The only way for brands to balance that pricing dynamic while still achieving mass reach would be if more inventory opened up in the VOD space, for example on Netflix. And the notion of an ad supported Netflix isn’t too far off, Letang said.
“Netflix is in a complicated situation with the launch of Disney and Apple products and the removal of Disney movies from its library,” he said. “They will either need to increase their monthly fee or they can introduce an ad supported tier.”
Ad spend momentum is strong
The fourth quarter of 2018 had the strongest growth in US ad spend in the past 18 years – it shot up 12% to $212 billion – thanks to a robust economy and cyclical events like the midterm elections. Overall, US ad spend grew 10% in 2018.
Ad spending grew in large part thanks to the tech sector, which is shelling out on big bucks on TV campaigns to promote new consumer products like 5G wireless and smart home devices, as well as to build consumer trust in a period of privacy backlash. Amazon in particular spent heavily on advertising this year, clocking in as the sixth biggest ad spender in the market as well as the third biggest vendor.
“2018 was a turning point for Amazon,” Letang said. “Up until last year they were a big spender but they were not a big vendor. Now they are big on both sides.”
Direct-to-consumer brands are also buying more traditional media like TV and out of home as their brands grow beyond niche audiences. Out of home grew 4.5% to $8.2 billion in 2018, remaining the only traditional media format to grow in the past few years.
“As connected screens become ubiquitous and replace static posters, that increases the revenue you can get on a particular location,” Letang said.
Audio also added to the growth of the overall US ad market, as broadcast radio came in stable after years quarterly decline. Digital audio’s growth rate, however, has slowed from roughly 20% year over year to 5% year over year as streaming platforms like Spotify and Pandora focus on gaining subscribers.
“Digital audio consumption is growing a lot,” Letang said, “but the ad supported part of digital audio consumption is growing at a slower base than before.”