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Bad News for Comcast Could Be Good News for Roku

Motley Fool - Fri Jan 27, 2023

If you think the cord-cutting movement has made it tough to be a Comcast(NASDAQ: CMCSA) shareholder in recent years, just wait -- the next few years could be even tougher. Conversely, shares of streaming middleman Roku(NASDAQ: ROKU) may be on course to reverse the 90% pullback they've taken since peaking in mid-2021.

That's the broad takeaway from a report recently published by TVREV. The market research outfit forecasts that the revenue collected by free ad-supported streaming TV (FAST) players like Roku will eclipse that of conventional cable platforms as soon as 2025. And by 2027, TVREV believes the global FAST advertising market could be more than twice as big as cable companies' piece of the market, and roughly three times bigger than network broadcasters' piece of the advertising pie.

That is too big a potential shift for investors in any media company to ignore.

Advertisers are shifting spending from cable to FAST

Take TVREV's outlook for the FAST market with a grain of salt. This piece of the streaming business is still relatively immature, so it's tough to accurately predict where it's going. In the meantime, the paid subscription video-on-demand (SVOD) players that FAST is competing with continue to test the boundaries of how much consumers are willing to pay per month for streaming services, and their efforts do impact the viewership of free-to-watch platforms. Besides, TVREV's forecast growth of the FAST business appears just a bit extreme. Neither consumers nor corporations change their habits as quickly as it sometimes seems they should.

On the other hand, TVREV's outlook for FAST isn't exactly outrageous compared to other firms making calls about the future of the business. The researchers at nScreenMedia expect the free ad-supported streaming television business in the U.S. to be nearly twice as big this year as it was in 2021. (And Omdia says the U.S. accounts for about 90% of the FAST market.) S&P Global's market intelligence arm expects the domestic FAST market to more than double in size again between 2022 and 2026. And Omdia's outlook calls for a tripling of the worldwide FAST business by 2027.

And although it's not the exact same thing as FAST, for perspective, Digital TV Research forecasts that the global AVOD (ad-supported video on demand) market will more than double in size between 2021 and 2027, growing from $33 billion to $70 billion.

The point is, a lot of industry experts expect a major shift in how and where video advertising dollars are spent.

With that as the backdrop, here's the graphical representation of TVREV's projected evolution of the business.

FAST (free ad-supported streaming television) ad revenue could eclipse conventional cable and broadcast advertising revenue within the coming five years.

Data source: TVREV. Chart by author. Dollar figures are in billions.

Wow. Even if the FAST business's ad growth doesn't quite live up to those expectations, there's still a major shift underway.

Streaming and cable investors must be aware of this shift

It's not just Comcast and Roku that will be impacted by this shift, of course. Paramount Global(NASDAQ: PARA) is the name behind FAST platform Pluto, which currently entertains 72 million people every month. Fox's (NASDAQ: FOX)(NASDAQ: FOXA) Tubi reports more than 50 million people regularly tune into its free-to-watch content. Meanwhile, sitting on the wrong side of this shift are cable companies like Charter Communications(NASDAQ: CHTR) and Altice USA(NYSE: ATUS), both of which depend on advertising for at least some of their revenue.

Roku and Comcast can be viewed as proxies for their respective businesses, though -- they have the most to gain and lose (respectively) from this brewing shakeup of the television advertising business. The Roku Channel has quietly become one of the most popular FAST services in the U.S. (maybe even the most popular -- surveys differ). Conversely, Comcast not only operates the nation's biggest cable service (Xfinity), but also the NBC broadcast network. TVREV believes networks' piece of the advertising market is also in jeopardy from the growth of FAST.

What to do about this ad-market evolution? There's not necessarily any immediate action that investors need to take. After all, these are multiyear forecasts, and the industry is not going to stand still while things play out.

Nevertheless, the growth of FAST is a dynamic that investors need to keep in mind when making longer-term buy or sell decisions about any company it will impact. This trend is going to exacerbate a host of changes that are already underway, pushing and pulling all of the industry's stocks for the foreseeable future.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku and S&P Global. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy. Investors should bear in mind that any third-party outlook such as the one from TVREV discussed above are only "best guess" efforts and can not be guaranteed.

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