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Connected TV 3Q20: Why Advertisers Continue to Shift Away From Linear TV
An article by • Published Nov 27, 2020
Shares of The Trade Desk ($TTD) and Roku ($ROKU) are trading near all time highs after both companies announced blowout 3Q results.

Connected TV

A common factor driving these results was marketers accelerating their shift out of linear TV and into ad-supported TV streaming. ROKU benefits from this shift as the most popular streaming platform in the US, whereas TTD also has a large exposure to connected TV as the largest independent Demand Side Platform (DSP).
Here's a brief overview of these companies' 3Q KPIs along with highlights from the management on what drove their third quarter results.

Roku: Active Accounts

Roku added 3.0 million active accounts last quarter to take their total count to 46.0 million. Year over year growth in active accounts
from 41% in 2Q, and has been on an upward trend since 3Q19. In addition to strong sales of Roku TVs, the increase in active accounts growth was driven by strong player sales,
year over year.

Roku: Streaming Hours

Roku streaming hours increased by 0.2 billion last quarter to 14.8 billion, up 54% year over year. This is a modest deceleration from the 66% growth in 2Q as the Covid-19 related restrictions were lifted over the summer.
Management noted that on a year over year basis, The Roku Channel grew streaming hours
top-10 channel on the platform, driven in part by the launch of the new live TV channel guide.

Roku: ARPU

ROKU reported that its ARPU on a trailing 12-month basis increased to $27.00 in the third quarter, up 20% year over year. ARPU growth increased from 18% in 2Q, but remains below the ~30% pre-covid growth levels as the impact of a soft 2Q continues to show.

The Trade Desk: Connected TV Growth

TTD reported that in 3Q20, spend on connected TV
year over year, up sharply from the
. TTD has consistently reported 100% or more year over year growth in connected TV spend (albeit off of a small base), so the fact that they're back to 100% growth after a relatively soft 2Q is encouraging.

What Drove The Results?

Management across both companies noted that marketers shifting ad dollars toward programmatic advertising in general and connected TV in particular was a key factor behind a strong third quarter. Here's a look at some of the reasons advertisers are making this shift according to the management of these two companies.

Loss of Reach in Linear TV

Before the pandemic arrived, cord-cutting was a well-established secular trend with cable companies loosing millions of subscribers each year to streaming services such as Netflix, Hulu, and more recently, Disney+.
Covid-19 appears to have clearly accelerated this trend as lockdowns gave people more time to spend on home entertainment, economic hardships on households spurred them to
, and the
preventing people from cutting the cord. According to TTD CEO Jeff Green, 2020 will
as the tipping point in TV as connected TV's reach crosses over that of linear TV:
The number of U.S. households with traditional cable TV subscriptions is dropping to below 80 million this year. According to eMarketer, 77.6 million U.S. households will have cable TV packages this year, down about 7.5% year-over-year. That is a rapid acceleration from the 3% decline that they had been predicting at the beginning of the year. In addition, CNBC recently reported that at least 3 large U.S. media companies expect the number of U.S. households that subscribe to linear TV bundles will fall to about 50 million in the next 5 years. That is about a 40% drop from here. At the same time, advertisers will be able to reach more than 80 million U.S. households via CTV on our platform this year. The crossover of household reach on our platform versus linear TV bundles is only going to widen.
Roku management had a similar story to tell, noting that advertisers accelerated their shift out of linear TV due to the drop in viewership:
In Q3, we saw clear evidence that marketers accelerated their shift out of traditional TV and into TV streaming, precipitated by a 17% year-over-year drop in linear TV viewing among adults 18-49
...for TV marketers, their primary reason to come to Roku is the loss of reach within the linear pay TV ecosystem. There are...whole classes of consumers that are simply no longer reachable through linear television ad buys. About half of TV time for adults 18 to 34 has moved to streaming.

Focus on Measurement

I have previously written about how social media companies that have focused on delivering measurable ROI for advertisers have thrived in the post-Covid world. According to TTD, the same applies to the advertising world in general, where budget-constrained advertisers are being forced to be more deliberate and focus on ROI:
Brands and agencies that advertise more effectively, who leverage data to be more nimble and agile are gaining share, period. In 2020, almost every marketer and every large brand is being asked to do more with less...CFOs are more involved in marketing and advertising decisions than they've been in years. They become a lot more focused on what business value is created by advertising. And that means that advertisers have to focus on ad opportunities that are measurable and comparable, where the business ROI can be understood and proven.
ROKU management had similar things to say on the earnings call, noting that advertisers who come to their platform following the audience end up staying with them due to enhanced measurement and targeting capabilities:
Marketers need to follow the audience into OTT, and they stay because of the enhanced capabilities....what all this transition is helping teach marketers is that there's a better way. There's a more robust toolset in OTT. And we see it in our own stats, nearly 100% retention among the advertisers who spend over $1 million. These budgets are not flowing back to television, traditional TV.
Connected TV enjoys inherent advantages over linear TV when it comes to measuring advertising ROI as the former allows advertisers to directly link household-level sales activity to TV exposure, and allows for advanced targeting and analytics.

Upfront Bonus

A large portion of linear TV ads are traditionally sold at upfronts, where advertisers buy commercial time in advance for the coming season based on presentations by networks on the upcoming content schedule. Jeff Green had previously called the tradition of upfront buying as one of the biggest hurdles in ad spend shifting to connected TV.
This year, the upfront buying—which happens in Spring—was
as the pandemic created huge uncertainty around TV scheduling and the return of sports. This meant that there was more ad inventory available to be sold on spot, and connected TV was a beneficiary.
ROKU management specifically noted the benefit from upfront disruptions:
When released from their annual TV upfront commitments, marketers took the opportunity to reallocate advertising spend more aggressively toward TV streaming.
TTD management also called out the disruption in upfronts as a major win for data-driven advertising, and noted how the disruptions this year have spurred some of the largest advertisers such as
to move away from the upfront model of TV ad buying.
advertisers to continue to skip upfronts in 2021 and beyond as the uncertainty in the media landscape continues through the next year.

Looking Forward

When talking about future guidance, both ROKU and TTD noted that they continue to face an uncertain macro environment which could potentially impact ad spend in 4Q.
ROKU said that it expects 4Q year over year revenue growth to be in the
, a sharp deceleration from the 73% growth it achieved in the third quarter but similar to the pre-Covid growth levels for the holiday quarter. ROKU attributed the apparent deceleration to the fact that they
of content distribution lifetime value in the third quarter which contributed to the strong revenue growth.
TTD expects fourth quarter year over year revenue growth of between 33% to 35%, a modest acceleration over the 32% growth in 3Q.