The Future Of TV - TTD On Panel

Investment Analysis Clubs Saul’s Investing Discussions
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Here’s about a 40-minute video of Jeff Green on a panel with leaders from the TV/Content industry. Both Buy-Side and Sell-Side advertising leaders.

Really great discussion on the potential growth of Connected TV and Ad-funded TV models. Green has argued for a long time that NFLX will have to eventually move to some type of an ad-funded model if they wish to continue growing internationally.

What I had never considered before this talk was that as more and more networks move their content off of Netflix (Disney, NBC, etc), NFLX will have to start producing more and more of their own content and continue advertising as much or more to stay competitive.

They can cover that with price increases, but only up to a certain extent. I’m more and more of a believer that they will eventually have an ad-subsidized model.

  • TTD is my largest position at around 19%

https://www.youtube.com/watch?v=a_NclUR7BYk

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David Wells, former CFO of Netflix is a friend of Green’s and long-time board member of TTD. Clearly Green’s not just blowing smoke. Except for Hastings, no one on the planet is better qualified to make this call.

The Trade Desk - BoD
http://investors.thetradedesk.com/corporate-governance/board…

It makes sense - in America countless people struggle to save, make car payments. Around the world there must be 100s of millions of people who prefer free ad-supported content to another sub.

Green also insists that Facebook/Google will eventually have to open their sites to allow other companies like TTD to help buyers place ads. I have watched a lot of videos of Green lately and did a search but can’t find detailed justification for his belief this will happen. Regulation is my best guess. Is there an economic argument for FB/Youtube allowing the likes of TTD access their ad space? They still make money selling that space. Seems reasonable that allowing TTD to seamlessly bring in millions of buyers increases revenues.

Bottom line, obviously if you had Facebook, Youtube, Netflix all open to TTD business, it makes TTD’s already-promising story even more compelling. Green likens walled gardens to Great Wall of China and Berlin Wall, says they all fall eventually. The downgrade from an analyst recently was based on his belief that FB/Youtube will never open up to TTD and therefore Green’s projected TAM of 1 Trillion is exaggerated. Green strikes me as exceedingly authentic, credible, with a career-long passion for making advertising better, more effective.

Obviously he’s incentivized to make TAM seem as big as possible, but he is well aware of how important trust/credibility are to the entire TTD model and his own legacy. He is clearly revered in the ad industry. You can tell from response of interviewers, shots of crowd when he speaks at events. So I believe he’s sincere in his conviction and not a mere carnival barker.

BD

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Moving to ad supported product for Netflix is not an easy thing. Netflix is probably on the streaming devices of 90%+ of people who have cut the cord and probably in a good percentage of homes who have not cut the cord. These people pay between $8.99 per month and $12.99 a month (or whatever fee increases. I think it might be $9.99 and $14.99 a month now).

Suddenly, you move to ads, how many of these $9.99 a month people suddenly move to $0.00.

This is different from Hulu that charges something like $5.99 a month plus ads. Maybe Netflix does a hybrid model like this. But I don’t see how this gets Netflix more customers, as they are everywhere anyways. Internationally, yes. It may become a necessity in lower income countries. Then again, the ads will be worth less there as well, but you do what you have to do.

How does moving to ads increase Netflix market penetration in the United States, Canada? Seems it won’t, they are already everywhere. How does moving to ads increase Netflix revenues? Since market share is not going to change, seems to me the only question is how can moving to ads increase Netflix revenues when it has to be offset by loss of monthly subscription fees?

It is not a no-brainer for a Netflix to go ad supported. At least not in the first world countries. Depends on ho much the ads are worth, how many they can run, how many people will put up with it, and will it actually create additional profits?

Clearly subscription revenues are more valuable then advertising is. If not, why do premium channels charge subscriptions and not do advertising? E.g. HBO, Showtime, Netflix, Amazon (through its Prime fees - although Amazon does have a Roku like ad supported solutions as well for certain programming). It seems for a very long time that subscription revenues have been the way premium channels have gone when they easily could have gone ad supported as well. But still, to date, despite the ads that would have sold for a fortune on Games of Thrones (regardless how utterly awful the last episode was…ickkk!!!), HBO still stuck to its basic subscription fees.

I will leave it up to the MBAs and experts at Netflix, but ad supported viewing is not a no-brainer nor inevitable solution. The real world evidences this, despite for decades companies like HBO having such an option.

Tinker

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Green never states/stated the TTD TAM is $1T…he is touting the total global ad spend, and says it is $700-800m and growing to $1T in a few years time.

Plus…whether global ad spend grows, the secular trends benefiting TTD continue to be the MIX with ad budgets of moving dollars that used to be spent on legacy tv or newspapers or print or radio, over to digital/programmatic.

Of that pie, I have seen different numbers, but the biggest chunk is TV advertising, and google/fb can’t have control on that, except google to an extent with youtube as the dollars shift to CTV and streaming venues. But youtube is user-generated, which is a different venue than commercially-created content (like Netflix or Hulu or Disney+, etc).

So even if you call it a given that 3/4 of the market, to be conservative, is Google/FB/Amzn, than you will have a measly $250b/yr TAM for TTD, the single largest independent adtech/programmatic firm, to take share in. They get a 20% “take-rate” so if they ever had 10% of the 25% total TAM, or $25b, flowing thru their platform, they would be bringing in $5b/yr in revenue. They are on pace for $650-700m in revenue this year, easily on pace for $1b/year in 2020, which would still equal only $5b of spend flowing thru their platform.

I don’t know if they can ever get $25b of the ad spend flowing thru their platform, but I am pretty sure they can get to $10b at their current pace, probably by end of 2022. Which would mean about $2b in revenues in 3.5 years. If their P/S plummets from 20 to 10, it would still be about a double from today’s prices, or about 19-25% CAGR during that time.

If their P/S manages to somehow stay at 15 after they get to $2b in revenues, it is a 31-44% CAGR.

Dreamer

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When you have enough streaming options, ATT/HBO, Disney+, Hulu (which is getting better at original content), Prime, Netflix, CBS interactive, Roku, etc… the sub fees start to add up.

While people may not “quit” netflix for good, I can easily see people putting them on hold for longer and longer periods until their favorite shows have a new season, and then they turn it back on.

I would wager nearly a majority of people did this with HBO to watch Game Of Thrones and then cancelled afterwards.

When Netflix loses all but their original content, they will have less and less to keep people on the service 24/7/365. A way around that is a lower-priced ad-supported model. Just low enough that the consumer thinks “ah…only $6 a month…whatever” and they don’t bother to cancel. But the idea that Netflix can just keep raising their monthly fees and no one will cancel is not sound. They will.

The Box Office numbers tell you that Disney has an edge on original content…many will view subscribing to that as a must. Kids programming and adult action films and more now with the Fox library in the fold.

I agree though that Netflix would first do an ad-supported model outside the US. And they may never go ad-supported in US, but they will see their US revenues erode with memberships being put on hold more often, as households start paying for more and more monthly streaming options.

Either way, I don’t care about Netflix stock, and DIS already ran up pretty good (for them), so the point is that CTV trends appear to remain intact, which is ultimately good for TTD in the long run.

Dreamer

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Clearly Green’s not just blowing smoke. Except for Hastings, no one on the planet is better qualified to make this call.

Except that Hastings has repeatedly said “no ads” in earnings calls, and Sarandos just reaffirmed this weekend that NFLX won’t have ads:

https://deadline.com/2019/06/netflix-ted-sarandos-weighs-in-…

So, investing in TTD and thinking they’ll be tapping into NFLX is pretty wishful thinking.

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No one remotely said that is THE thesis, just that if it happens a nice possible bonus. And Hastings/Sarandos do not need to pull that lever yet so will deny necessity to do it and ride increasing subs as long as they can. They are gonna run table on subs then either add ad-free option or stop growing. If I had to bet on it I’d take Green’s vision.

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Yeah. Wouldn’t expect Hasting to admit that until they have to. I’m sure Netflix would take some heat for it.

And like BD said, this is not the thesis nor is expecting FB or GOOGL to open up.

But that’s the thing. TTD can be a great investment without that IMO and if it does happen, even better.

That’s what happens with the best companies, they Lee innovating and surprising the world for many years.

SHOP is a great recent example with the Distribution Centers.

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Green has said in the past that the walled gardens will eventually open up because it is economically irrational to limits bidding on s commodity. You want all bidders possible participating in the market because maximizing demand for your commodity product increases pricing. As the TTD and Amy other DSPs grow and billions in spend is up for grabs, Google will want a piece of that pie. Maybe FB will not, but media and a YouTube ads make a ton on sense for the TTD model.

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Moving to ad supported product for Netflix is not an easy thing.

I totally agree.
But the way to do it would be something like $5/month with ads.

However, you only get low-def video (however they want to define this), new releases of some content aren’t available until 30 days later, single device usage, etc.
This keeps the vast majority of current subscribers paying the higher rate and brings in new subscribers that want the lower price.

Mike

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Keep in mind though that Green’s vision for ad-tech is ads are going to get much more relevant, personalized and therefore each will generate more money and make the overall viewing experience better. So you will see far fewer ads, be more likely to click/buy and at least theoretically this could be win-win-win-win for consumer, TTD, ad buyers, ad sellers.

For example if band is coming to hometown and TTD can pretty much guarantee 100,000 people most likely to buy tix, it makes sense to spend more on the quality of the ad, the ad will not annoy, tix will be easy to buy w voice control, so the overall ad-sponsored free experience is much better all around.

I’m a hockey fan and Stanley Cup on NBC Sports App on Apple TV runs the same awful ads over and over (my personal most-hated is girl yelling about saving money with her Discover Card). Those ads seriously damaged fun of watching cup. They will not exist in future. Green’s vision is skating to where the puck is going as Gretzky famously said.

I realize this seems ludicrous now but it’s entirely possible ads make experience better AND generate more revenue - watching a cooking show and can one-click buy pots, pans, etc.

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