Dispatch from the Streaming Wars: ViacomCBS Previews OTT Strategy

Why broadcasters are betting on ad-supported streaming services

Richard Yao
Mar 5, 2020 · 12 min read

In collaboration with Brian Hughes, EVP, Audience Intelligence & Strategy, MAGNA GLOBAL

March has finally arrived, bringing us closer to the prospect of spring. As the weather warms, so do the streaming wars, with the likes of Quibi, HBO Max, and Peacock readying their respective launches, whether in official or preview capacities, over the next few months. Last time we wrote about the streaming space, we analyzed NBCUniversal’s streaming strategies, based on its announced plans for Peacock, and assessed its odds of success.

As Disney, owner of ABC, rolled out Disney+ to some early success and NBCUniversal laid out their plan for launching Peacock, the pressure is on for CBS, the remaining of the original Big Three TV networks, to unveil its plan for the streaming era.

Meanwhile, acquisitions of ad-supported video on-demand (AVOD) services, led by legacy TV players, are popping up in quick succession, fueling a sense of urgency to pivot from the legacy TV companies and raising the all-important question: can the linear, ad-supported TV business peacefully transition into the streaming era? Or has viewer behavior for entertainment content evolved far beyond the linear model past the point of no return?

ViacomCBS Unveils OTT Strategy

Among the U.S. broadcasters, CBS was among the first to experiment with direct-to-consumer streaming services with the launch of CBS All Access in October 2014. However, over the five years that followed, CBS All Access lagged behind its competitors in terms of subscriber count, partly because CBS’s core audience skews older — with a median age of 63.2 years across its primetime programming. In addition, the lack of a breakout, streaming-exclusive original series, combined with the fact that their popular back catalog content is being syndicated all over cable networks and is thus readily accessible, has made CBS All Access less compelling than other services.

Following its merger with Viacom last year, many have speculated that the new company will buff up its SVOD offering to fend off free-spending newcomers in the streaming businesses. Existing streaming services of Viacom and CBS, including CBS All Access and Showtime, have 11 million paying subscribers combined. In comparison, Hulu currently has 30.7 million paying subscribers in the U.S. while Disney+ has garnered 28.6 million subscribers since launching in November.

During the most recent earnings call last week, CEO Bob Bakish shared with investors and analysts a high-level strategy for transitioning the company into the OTT era. Reportedly, ViacomCBS is looking to make CBS All Access more competitive by adding content from Viacom cable network brands such as MTV, BET, Nickelodeon, and Comedy Central (which have significantly younger audiences than the broadcast network), as well as movies from Paramount Pictures, which have thus far been licensed to other streaming services such as Amazon Prime Video and Netflix. However, Showtime will remain an independent entity focused on premium content.

In addition, sports rights will play a crucial role in getting cord-cutters to consider subscribing to CBS All Access. One of the features of CBS All Access is the ability to live stream local CBS affiliates. Considering that CBS sports just re-signed Tony Romo to a multi-year, multi-million dollar broadcasting deal, ViacomCBS definitely intends to hang on to their NFL rights and leverage it to drive consideration.

It is worth noting that, unlike its rivals, ViacomCBS is still looking to license some of its popular content out to the highest bidder in order to, as Bakish put it, “maximize the value of our content by reaching the largest addressable audience.” This means that some existing content deals that Viacom and CBS negotiated prior to their merger, such as making a SpongeBob spinoff for Netflix and licensing the streaming rights to South Park to WarnerMedia, will stay put for now.

Too Little, Too Late?

This is a somewhat understandable stance, given that at about five million subscribers, CBS All Access currently lacks the kind of substantial user base for the company to properly monetize its most valuable content. Plus, compared to its competitors, ViacomCBS, and its parent company, National Amusement Inc., lack the kind of non-media assets that they could leverage to build a super bundle like the way Disney or Amazon can.

In the long run, however, this move could turn out to be the kind of “bet-wagering” that may be playing it a little too safe. Rivals like Disney and WarnerMedia that are pulling their most valuable assets off streaming rivals to include on their own services, losing hundreds of millions of easy profits in the process. In comparison, ViacomCBS is making a seemingly sensible decision, but it is also opting to put short-term profits before its long-term brand-building, at least for now.

Judging by the numbers, the CBS-Viacom merger has been quite value-destructive so far. When CBS announced its merger with Viacom in August, the combined market value of the companies was $30 billion, with Viacom independently valued at $12 billion. Fast forward to this week, ViacomCBS has a market cap of $15.2 billion, which means that the company has lost the entire value of Viacom, and then some, since the announcement of the merger. This is putting the company at a disadvantage to bid on the precious NFL rights against its more cash-rich competitors.

The issue with ViacomCBS, at its core, is the same malaise that troubles the other legacy TV players when faced with the challenge of going OTT. The blandness of network TV content — often in the formats of familiar procedural dramas and innocuous family sitcoms catering to the “lowest common denominator” mainstream taste — is becoming more pronounced than ever in the age of Peak TV. Without a reputation for creating buzz-worthy content, it’s hard to stand out and justify a paid subscription.

In today’s streaming era, the economy of abundance rewards niche, differentiated content of a large variety, so that there’s something for everyone. Disney, for example, is putting all of FX’s award-winning, edgy content on Hulu to drive new subscriptions. But that has never been the broadcast TV model. Traditionally, broad-appeal shows have worked well for network TV, but as audiences fragment, they end up repeatedly hitting the same viewers in dwindling numbers. The median age of broadcast primetime is now 60, and even among the classic 18–49 demo, more than half are in the 40–49 bucket, according to Nielsen data reported by MAGNA.

The Impact of Algorithmic Consumption

Some may point to the resurgence of popularity enjoyed by some classic sitcoms such as The Office and Friends in recent years as evidence that broad-appeal shows still have a place in the streaming era. While it is true that “comfort food TV” is all the more bingeable via streaming services, it is also important to remember that those shows were already big hits back in the day, and it is becoming increasingly difficult for other catalog content to break through.

To go one step further, the entertainment content landscape has fragmented to the point where a new monocultural hit is unlikely to happen. In 1983, the finale of M*A*S*H made television history by scoring 105.9 million viewers (nearly half the U.S. population at the time). Last year, cultural juggernaut Game of Thrones ended its record-setting final season with 19.3 million same-day viewers while series finale of The Big Bang Theory, the most viewed network sitcom in the past decade, scored 18 million total viewers, not even one fifth of the viewers who tuned in for the M*A*S*H finale. As entertainment content increases in volume and fragments in distribution, and factoring in the rising popularity of time-shifted viewing, we simply don’t have the same market environment for another Friends to break out and stay evergreen any more.

A lot of our content consumption today is heavily influenced by algorithms — be it the personalized recommendations curated by Netflix, or the memes we see in our social feed — and algorithms favor the new and the exciting: the kind of high-engagement, appointment TV content that networks like CBS lack today.

Unknown Factors Abound

That being said, it would seem unfair to judge ViacomCBS’ plan for transitioning into the OTT era this early, especially with a lot of unknown factors still up in the air. For example, what would the pricing scheme for this revamped CBS All Access look like? Following Peacock’s lead, it could likely add an ad-supported free tier, but perhaps with limited access to its library content.

Another question is who would be ViacomCBS’ launch partner to give out free access to ensure a subscriber base big enough at launch for it to effectively monetize content via ads? Disney’s got Verizon; Apple is practically giving away Apple TV+ for free; HBO Max and Peacock will be free for AT&T and Comcast customers, respectively; and even Netflix and the upcoming Quibi are available for free for some T-Mobile subscribers. If there will be an ad-supported tier, then it will be imperative for CBS to secure a distribution partner to ensure scale at launch.

The other big question mark that remains is Pluto TV, a Los Angeles-based video streaming service that Viacom acquired for $340 million prior to the merger in January 2019. Today, it operates an ad-supported platform that has attracted 22 million monthly active users by mimicking the experience of channel surfing for cord-cutters. Given its recent UI upgrade and new marketing campaign, it seems like ViacomCBS is trying to test if Pluto TV can stand on its own while the company gets ready to relaunch CBS All Access. In the long run, one could easily see a combined, free, ad-supported version that integrates Pluto TV within CBS All Access, which already allows viewers to livestream their local CBS affiliate stations.

All in all, based on what we know of ViacomCBS’ OTT strategy so far, which is admittedly not very much, the company seems to be rather hesitant about jumping headlong into the direct-to-consumer streaming business like Disney has. Hindered by its legacy business interest in carrier fees and licensing revenues, and disadvantaged by its relative lack of non-media assets to monetize its content across product categories and offline channels, ViacomCBS is seemingly playing it safe. But as analyst Matthew Ball points out in his insightful piece on Viacom’s history and recent failures in the streaming world:

“ViacomCBS will ultimately need to decide whether it’s in the network TV business, the OTT D2C video business, or the content supplier business. It can’t prioritize three different channels with three different business models.”

The Comeback of Ad-Supported TV

The streaming wars have been very much focused on the Netflix-style, ad-free subscription model so far, which comes naturally for tech companies like Apple and Amazon as well as premium cable channels like HBO, but would mark a departure from the ad-supported business model that the vast majority of traditional TV business has ever known. As the old guard in the TV business finally starts to get serious about transitioning their business into the streaming era, it is unsurprising that they are looking to port their ad-based business model into OTT as well. Over the last two weeks, there have been several rumors swirling around about broadcasters in talks to acquire ad-supported streaming services.

Fox is reportedly in talks to buy Tubi, a free, ad-supported streaming service showing catalog content from studios like Paramount, Lionsgate, and MGM. Notably, Tubi also has a virtual MVPD component featuring ten live channels such as A&E and Lifetime. With TV content increasingly being delivered over Internet Protocol (IP) networks, and over the air (OTA) broadcasting to be overhauled with the new ATSC 3.0 protocol over 2020, Fox buying Tubi seems to be an asset acquisition aimed at future-proofing its distribution networks.

Similarly, NBCUniversal is reportedly close to acquiring Walmart’s OTT service Vudu. The brick-and-mortar giant has been operating Vudu since 2010 when Walmart bought it for $100 million. Over the years, Vudu’s digital rentals and purchases business model has also fallen a bit out of vogue, and the service has been trying to transition into an all-you-can-binge streaming model. Earlier last year, Walmart even announced a slate of original content for Vudu, led by a reboot of the 1983 movie Mr. Mom, which premiered in September to little fanfare and impact. Given the crowded marketplace it now faces, it is no secret that Walmart has been looking to spin off Vudu.

While it is clear why Walmart would be selling it off, it is less clear why NBCU would be interested in buying Vudu, especially considering that Comcast just bought Xumo, a small internet TV service co-owned by the Viant Technology subsidiary of Meredith Corporation and Panasonic. Buying Xumo is mostly a tech play for NBCU to get the streaming infrastructure and expertise and its reasons for buying Vudu could be in a similar lane. But Xumo also has a negligibly small user base compared to the over 25 million registered users that Vudu claimed to have in 2018, which could potentially explain why NBCU would be interested in taking Vudu off Walmart’s hands and bringing the streaming infrastructure in house.

It should not come as a surprise that there seems to be brewing industry-wide pushback against the ad-free subscription OTT services as broadcasters try to bring their ad-supported business model into the streaming world. With even more paid subscriptions launching over the next few months, the abundance of available content competing for audience attention is only going to be complicated by the fragmentation of distribution, leading to a worse viewing experience.

Per MAGNA’s recent SVOD perceptions study, US consumers tend to agree that three video streaming services is their upper limit for paid subscriptions. It is quite possible that a growing sense of subscription fatigue will drive the more cost-conscious consumers to choose the upcoming AVOD services from the broadcasters as free supplements to their existing paid subscriptions, thus giving the networks a fair shot at transitioning into the streaming world. Better yet, if they can successfully mimic the linear viewing experience, like Peacock and Pluto TV have set out to do, and incorporate must-see live content, such as sports and breaking news coverage, into their streaming services, the broadcasters would presumably have a easier time to get the late adopters of streaming — the ones that are still loyal to linear TV and cable packages today — to make the leap, by offering the kind of free, ad-supported viewing experience they have always known.

Brand Takeaways

In response to recent moves by broadcasters in the OTT space, brand advertisers should be ready to follow media partners and spread the TV advertising budget to AVOD channels as well. Specifically, there are three takeaways to keep in mind.

First, don’t count out the older TV audience in your media planning. With the impending rise of AVOD services, many of which will mimic a linear TV viewing experience one way or another, a considerable amount of age 50 and up audiences may be about to come online, giving advertisers a larger audience pool to monetize against. More importantly, as we move to more precise digital-style targets based on behavior and propensity in TV, age no longer matters. Typically overlooked by most ad buyers based on the 18–49 ratings standard, the cohort still has great purchasing power and should be taken into account.

Second, ad buyers will also need to brace themselves for a pricier market as broadcast networks shift to OTT services. With NBC’s Peacock more or less setting the AVOD standard for fellow broadcasters with a lighter ad load on AVOD than linear TV, there will be less ad inventory for those streaming services and the ad pricing will likely increase as a result. So far, linear TV’s long-winded decline has been largely mitigated by the continuous support of incumbent brands in the auto, CPG, pharma, and retail sectors, whose scale-dependent business models, in turn, rely on linear TV’s mass reach and synchronicity to work. As broadcasters move into streaming, there is no guarantee that their ability to reach a substantial number of national audiences at the same time will remain in the same capacity, which means that businesses that have relied on TV advertising so far should start exploring new emerging marketing channels, formats, and perhaps new business models to keep up with the ongoing shift in media consumption.

Lastly, the rise of AVOD services will further push the “media have and have-nots” phenomenon that we outlined in our Outlook report last year to the forefront of the media landscape: high-HHI viewers who can afford to pay for content will be retreating further behind the paywall, leaving the more cost-conscious, typically less affluent audiences to pick and choose from a variety of ad-supported free services. If your brand wishes to reach the high-HHI audiences that are become less and less exposed to traditional advertising, it is time to look into creating branded content, such as the many so-called “documercial” series on Netflix and HBO, or curated playlists (like the ones that HBO Max will reportedly feature), that will reach audiences behind the paywall.

IPG Media Lab

The media futures agency of IPG Mediabrands

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