Global Marketing Monitor: Creative Destruction

Large technology-centric companies that are endemic to the internet have become major marketers in recent years.  Over the past several years, a key factor supporting growth in the advertising economy has been the rapid growth from relatively new billion-dollar-per-year marketers, mostly companies that formed or emerged in the past two decades following the initial dot-com boom. Looking at a group that includes Amazon, Alphabet, Booking, Expedia, Netflix, Facebook, Uber, eBay, Wish and Airbnb, we can count ten global companies whose publicly reported advertising expenses for their brands exceeded $1 billion during the relatively “normal” year of 2019. They collectively spent around $35 billion on related activities.

Ten companies accounted for around 7% of spending but about 17% of growth in 2019.  With approximately 14% growth in spending in 2019 over 2018, they accounted for a disproportionate share of advertising growth in the countries they operate in. If we presume all of that spending from these companies occurred outside of China and that all of this spending classified as advertising equated to media spending, these ten companies represented around 7% of all media owners’ ad revenues outside of China and about 17% of the industry’s growth.

Spending by this group fell by around 20% in 2020.  Some of this activity went into reverse in 2020, as evidenced by the data we have seen in earnings reports in the past couple of weeks. On a combined basis, they likely reduced spending by around 20%, although most of this decline is due to many of these businesses’ travel and transportation-oriented nature. On average, global advertising spending would have fallen by much less because some categories, such as packaged goods, sustained their spending year-over-year. Among these technology-centric companies, some are merely holding the line on spending, whether because their brands are maturing or because (for Amazon and Netflix, at least) in a pandemic where everyone needs to do more of their day-to-day activities online, perhaps it’s less necessary to remind people to do so.

Aside from anticipating a likely rebound in activity for travel-related marketers in the second half of 2021, it’s hard to read much into what these trends mean for those brand owners going forward.

Creative destruction determines longer-term industry growth.  Whatever happens to those companies specifically, the general trend causing future growth in the advertising industry will primarily relate to the economy’s capacity to “creatively destruct” in a manner that produces companies who will use paid media to drive awareness and differentiation. We can see a window into this trend through disclosures made of earlier-stage companies pursuing initial public offerings, especially as recent weeks and months have brought us a significant number of IPOs providing data on a wide range of emerging companies. Many of them are large advertisers despite their relatively modest sizes.

Many new already-large advertisers became larger in 2020.  For example, in the past week dating app business Bumble, whose primary brand was only launched in 2014, completed its public offering. That company spent $130 million on advertising with a revenue base of $489 million in 2019. The aforementioned Wish, which began operating in 2010 and went public late last year, spent $1.4 billion on advertising with $1.9 billion of GAAP revenue (although gross merchandising volumes were much higher). Another company that completed an IPO in 2020, Doordash, spent $446 million in advertising in 2019 on $885 million of revenue during the same period. Revenues and advertising expenses for all of these companies are likely to increase in 2020 over 2019 levels.

With a myriad of other relatively new companies of similar sizes who are not yet public and whose scale is generally not yet knowable with much precision, we can have a sense that there are many other marketers positioned to grow their advertising budgets to a significant degree in years ahead. Whether or not overall industry-level growth outpaces or underperforms versus historical norms will largely depend on the degree to which companies who allocate greater shares of their revenues to advertising displace companies who allocate smaller shares of revenues to advertising. This was likely occurring before the pandemic in markets, including the U.S., the U.K. and China in particular, and may continue in many other countries worldwide once economic normalcy returns.

Video services are a real-time example of creative destruction.  A great example of creative destruction in media can be seen in the rise of SVOD and vMVPDs as replacements for traditional pay T.V. services. Historically, cable operators incurred only modest costs as a percentage of their video revenues. Looking at a world where streaming wasn’t much of a factor and traditional services were peaking (in 2010, for example), we could point to US-based Charter spent 4% of revenues on advertising expenditures. Meanwhile, during the same year in the U.K., Virgin Media spent around 3% of its revenues on advertising. By contrast, last year, Netflix’s spending on advertising amounted to 6% of revenue following many years with much higher levels (often above 10% of revenue) while it was establishing itself around the world. vMVPD Fubo, although small and still emerging with 455,000 subscribers at present, is a more extreme example, spending 20% of its revenue on advertising year-to-date. To the extent that emerging services from Disney, Warner Media and others grow rapidly and take video services revenue share from traditional distributors, spending on the broadly-defined category will most likely grow above the pace of the industry’s revenue growth as well.

Disney reported earnings results this past week.  Overall, Disney had a very favorable calendar fourth quarter, despite declines at the theme parks and related businesses, many of which were not operating through most of 2020. Focusing on the streaming services, during the quarter, the combined operations of Disney+, Hulu and ESPN+ produced $3.5 billion in revenue, representing just under 22% of company-wide revenue. Growth amounted to 73% in the quarter as these businesses generated $2.0 billion in the year-ago quarter.

Disney+ now has 95 million subscribers, although 30% are low-fee subscribers associated with Hotstar.  Disney+ growth slowed as the quarter progressed on a like-for-like basis, with the bulk of sub gains from rebranded the India-based Hotstar.  Disney+ alone ended the quarter with 94.9 million subscribers. However, 30% of these, or around 28 million, were subscribers associated with the legacy Hotstar service in India and Indonesia (where ARPUs – average revenue per subscriber – are significantly lower than the average price in North America or European markets. ARPUs fell to $4.03 vs. $5.56 in the year-ago quarter (at which time this metric only captured Disney+ in its initial launch markets) and would mean the service generated $1 billion in revenue over the most recent reporting period. Subscriber gains amounted to 21.2 million as reported; however, excluding the gains at Hotstar – where IPL cricket drove new subscriptions – the company likely only added around 10 million subscribers during a quarter that included launches in Latin American markets. As the company noted in early December that it had 86.8 million subscribers globally (including 20 million at Hotstar at that time), this indicates that the company would have added around two million net new subscribers aside from Hotstar throughout December. This suggests a slowing pace of growth in older markets, unsurprisingly. It also indicates that the company would have added around 8 million at Hotstar over the same period, which likely represents an acceleration.

Hulu grew subscriber and advertising revenues by 32% to end 2020 with $7.4 billion in revenue. Over at Hulu, that business ended the quarter with 35.4 million paid subscribers to the SVOD product, a 30% year-over-year gain. The company noted a lower mix of wholesale subscribers vs. retail ones and more subscribers in bundles with lower allocated revenues. Still, they also stated that it saw an increase in per-subscriber premium and feature add-on revenue. The virtual MVPD cable replacement service also grew meaningfully, adding 25% more subscribers to end the quarter with 4.0 million subscribers. Hulu is now one of the biggest pay T.V. services in the United States and one of the biggest globally, similar in size to YouTube’s equivalent offering, but only smaller than Comcast, Charter, DirecTV, DISH and Cox in the U.S. With most of the company’s direct-to-consumer services advertising at Hulu, related advertising was also strong, rising by 47% to $882 million in revenue for the quarter. All revenue streams at Hulu combined accounted for $7.4 billion during 2020, up around 32% year-over-year.

This scale of revenue is worth noting in the context of Disney’s financial obligation with Comcast.  Hulu and Netflix are not entirely comparable, but they are more similar than almost any other scaled business for which public data is available. We can note that Netflix had $25 billion in revenue during 2020, up by 24%. With that reference point, we can observe that Hulu is now 30% of Netflix’s size but growing slightly faster. This comparison becomes relevant to the extent that Hulu’s valuation might be benchmarked against Netflix’s $270 billion enterprise value. This could present some potentially significant considerations for Disney, Comcast and the industry more generally because Disney and Comcast – a 33% owner of Hulu – have a put/call option that, beginning in January 2024, gives Disney the option to require Comcast to sell its stake in Hulu. It also gives Comcast the option to require Disney to buy Comcast’s stake in Hulu at a “fair value” but with a floor of a valuation of Hulu’s entire business of $27.5 billion. Whatever the appropriate valuation, Comcast is on track to receive substantially more than that floor value from Disney for Hulu when the partnership is eventually dissolved, with potential implications to follow from the industry, depending on how those proceeds are deployed.