Consumers are spending more and more time streaming video instead of watching traditional live or DVR television. Over-the-top viewing now accounts for 29% of all watch time, according to Magna Global. Much of that time is spent viewing ad-free streaming services like Netflix or Amazon (NASDAQ: AMZN) Prime, but a growing share is watching ad-supported services like Disney 's (NYSE: DIS) Hulu and ESPN+ or the Roku (NASDAQ: ROKU) Channel.
However, the percentage of time spent watching those ad-supported streaming services and the percentage of ad budgets that marketers put toward them are way out of proportion. Magna Global reports that just 3% of television ad spend goes to streaming services. Advertising dollars eventually follow eyeballs, so investors should expect significant growth in ad spend on those services over the next few years. Here are the three companies that stand to benefit the most.
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The companies in the best position to benefit may be the distribution platforms. If a streaming video service wants to compete, it needs to be available on consumers' television sets. That means working with Amazon and Roku. Even Apple has conceded the two platforms are necessary for launching a streaming service , despite selling its own TV streaming device.
Amazon and Roku have 30 million and 27 million active users for their streaming devices, respectively.
Amazon and Roku typically control 30% of ad inventory in the ad-supported streaming video apps on their devices. Roku also offers a revenue split for some of the third-party content on the Roku Channel, which is itself becoming a distribution platform.
Importantly, as platform owners, Roku and Amazon have access to more and better data than the streaming apps themselves. Roku, for example, knows its users' streaming habits and it knows which users have a pay-TV subscription and which ones don't. Amazon, meanwhile, has access to even broader data sets, including its users' shopping data, which is incredibly valuable to advertisers.
Additionally, the broad reach of Amazon and Roku as platform owners enables them to attract a larger number of advertisers. Having more targeting data and more active advertisers helps the companies show the right ad to the right user, generating better returns for advertisers. Ultimately, that translates into higher average ad prices.
Both Amazon and Roku have developed their own ad-supported streaming services to capitalize on their advertising advantages. The Roku Channel is a top five channel on Roku's platform, and it has expanded to the web and certain smart TVs. Amazon released its ad-supported IMDb Freedive at the start of the year, but it's already working on expanding the service with other channels. Both should help the platforms take a large share of ad dollars flowing into streaming.
The giant media company
Disney currently stands out as a media company that can offer something Amazon and Roku cannot: broad reach across platforms. The company owns 60% of Hulu, which brought in nearly $1.5 billion in ad revenue last year, and it's quickly growing a subscriber base for its ESPN+ service too.
Hulu's 25 million subscribers hold enough weight that Amazon and Roku don't take their usual 30% of inventory. It's simply too important for both platforms to be able to offer the popular streaming service on their devices. Disney may be able to leverage Hulu's strength to strike similar deals for ESPN+ in the same way it manages to raise affiliate fees for its cable networks by leveraging ESPN. As a result, Disney controls a significant amount of ad inventory.
Disney's streaming video ad inventory isn't tied to specific devices, so advertisers can reach a broader audience through a single purchase. Disney can reach audiences inaccessible to Amazon or Roku, which could make it an essential piece of a marketer's strategy.
The battle is on
Surely there are other media companies that will grow their ad-supported direct-to-consumer businesses, but Disney is already well positioned to win ad spend. The company's focus on its streaming services going forward will only make it a stronger competitor for those over-the-top ad dollars alongside Amazon and Roku.
Those three companies are best positioned to win advertising budgets as they shift from traditional TV -- where consumers are spending less time -- to streaming video -- where consumers are spending more time. That trend should accelerate as more ad-supported streaming options come to market.
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