TV Original Equipment Manufacturers (OEMs) have found a gold mine where the world of technology and content is clashing: connected TV advertising.
With the adoption of smart TVs, OEMs had to be creative. The advent of streaming through those Internet-connected TVs, and the subsequent inventory fragmentation, has opened the door for OEMs to take a break from advertising.
LG, Samsung and VIZIO are all TV hardware businesses that have grown their advertising business in recent years.
Brian Weiser, Global President of GroupM’s Business Intelligence, said ad sales are “high-margin activity, compared to low-margin hardware businesses.”
The reason for the low margin of hardware biz is not only because of the aggressive competition but also because, like any business, it needs to grow and improve profits. “The thing that you did last year needs to be a few percent cheaper and a few percent better,” Weiser said.
With the limitations of how much a physical TV screen can change, with the exception of another massive technological advancement, “the profitability of the legacy business does not necessarily improve,” he said. The next logical advancement is the monetization that TVs can achieve as a premium “content portal”: advertising.
That’s why TV makers like LG and VIZIO are growing far more revenue from advertising sales than hardware. Roku, which makes devices like smart remotes (even without TVs) and an operating system that runs on many TVs, attributed most of its 2021 growth to advertising, it has completely switched from a device-driven to an ad-driven business.
Advertising is interesting because the potential for advertising is literally limitless – “You sell a TV once, but you can sell ads on it indefinitely,” said Jim Speth, partner at Media Consultancy Sequential Partners. “It’s a steady stream of revenue.”
The split in the legacy TV business ad makes it perfectly understandable. But what about the way around?
Advantages of hardware
The combination of TV hardware and an advertising business is so winning, it is even forcing advertising agencies to go for the hardware.
Amazon went into TV hardware with its Fire TV, which was launched last year. Roku recently ran a focus group on the idea of polling users going into manufacturing (although it told investors not to read too much into its research).
Advertising with built-in software is more profitable than hardware.
But while hardware sales may not be as lucrative, the two parts of the business together can have the most control over inventory, which means higher ROI. The less a company has to rely on intermediaries for physical TV models or operating systems that share inventory and data together, the more profit a company can pocket for itself.
When the content is created on the device itself, companies can collect much more user data, which can be sold or used for more successful media campaigns. Automated Content Recognition (ACR) data, in particular, can track everything a person sees on TV, giving companies a rare, holistic picture of viewing behavior.
Raghu Kodige, CEO of LG Ads Solutions, called VGO a good “case study” to look at. VIZIO first attempted an IPO in 2015, the same year it created a business division around the use and sale of ACR data. Now, most of its revenue comes from ACR data and ad sales, rather than hardware margins. This may be the reason why the company merged VIZIO Ads and Inscape’s ACR subsidiary into the same business unit in 2020.
While it does not sell its ACR data, LG Ads claims to be the best in both worlds. Because it is pre-loaded with content created on its device, it can parcel the audience segments available to advertisers across all apps, optimizing its inventory. Not to mention the owner of a smart TV’s home screen marketing gold mine.
TV makers can also optimize the consumer experience. Centralizing inventory can give companies insight into campaign performance, which in turn can soothe streaming listeners, especially overfrequency-ridden pets. From a more technical point of view, Codiz further noted that third-party hardware may not have the right specs for a given OS, creating a subpar viewing experience.
Hardware beats software on TV: “Software is commodified,” says GroupM’s Wizard. Everyone knows their TV is Samsung or VGO, but chances are they couldn’t name the OS behind the screen.
Will content aggregators and software-first companies (such as Roku) benefit from tackling proprietary TV models in their business strategy? Although Codys acknowledges that hardware is a “loss leader”, Weiser says that with sufficient investment it can happen. “The best way to make a billion dollars is to spend two billion,” he said.
But the path is not so straight.
Making a TV is not difficult. It is difficult to make a profitable TV.
Compared to software, content and ad sales, hardware introduces completely different capital costs and retail relationships – not to mention a new batch of competition.
Both Spath and Weisser agree that if Roku starts making TV, for example, it could compete with new hardware-plus-advertising competitors like LG and Samsung. According to Codys, LG would welcome new competition with open arms, but the claim paints a picture of holding hands with brass knuckles. (Just look at all the alternative TV measurement providers to run in the market.)
For a company to sell advertising and hardware, it must have a combined commitment of profitability and a good customer experience, or it is not worth it. When pushed, a good go-to-market strategy will crush better technology every time, Weiser said. It’s like getting married – if you’re not 100% sure it will work, clean up.
If a content or software company considers TV hardware as an ancillary business strategy, it will have to consider many new questions: How fast can TVs be delivered to consumers? Will the hardware produce a wall garden? Will Scale buy sets for limited families? Will it stop investing too much from other efforts? Does this move strengthen or disrupt the company’s core vision?
Companies know how to answer these questions better than investors, Wieser added. The move could work for an organization that is centered around device manufacturing and quality (and has access to large capital), Spath said. But for software-first companies like Roku that are primarily content providers, “honestly, I don’t see it,” he said.
Wieser noted that due to its scale and ability to monetize inventory, Roku’s OS, combined with its core content, already gives the company a full throttle on “a good portion” of its inventory. For a software-centric company like Roku, the “ideal world” would be “no hardware,” he said.
That may be the reason, even after its Firestick rival Amazon went into TV production last year, Roku denied a rumor earlier this year that it was considering TV production, most likely because it has reached the same conclusion to those questions.