Smart Home Technology is Reshaping the Entertainment Business

With high-definition smart TV screens with 3D sound, access to the latest movies and series via streaming, free drinks and comfortable furniture (where you can put your feet up), our homes are rapidly offering an experience closer to the cinema (which is still recovering from the pandemicⁱ). Meanwhile, streaming continues to displace pay TV, but with its own set of problems. Taken together, this creates a dynamic landscape worth watching.

Up Ending Pay-TV

In a strange twist of fate, YouTube recently became the fourth largest pay-TV service in the US. With more than 8 million subscribers, it is only 3 million subscribers behind the number two (DirectTV) and the joint number ones: Charter and Comcast (both 14.1 million).ⁱⁱ

YouTube's growth comes as these big players continue to lose subscribers. Some, like Comcast, have even stopped trying to persuade customers to keep or get pay TV, shifting their attention to providing people with broadband Internet access.

Even sports - long the linchpin of pay TV - is on the verge of a major shift. Last February, Disney, Fox and Warner announced a plan to launch a new streaming service offering all of their live sports programming.ⁱⁱⁱ The high cost of sports content makes the transition to streaming particularly difficult, so it will be interesting to see how this initiative plays out.

Advertising Streaming Services

Pay-TV is not the only segment in trouble. While streaming may have started out as a low-cost alternative to pay-TV, that is no longer the case. Almost all paid streaming services have raised their prices. Combined with the cost of living crisis and the overwhelming choice of streaming options, consumers are increasingly rethinking the number of services they subscribe to.

In response, streaming services have introduced cheaper ad-based tiers, but they are treading carefully. They need to ensure that their ad-based tiers do not cannibalize too many higher-tier customers, while still reaching enough people to attract high-quality advertisers. Also, even subscribers to the lower-cost, ad-based tiers may get annoyed by too many ads. So ad loads show a mixed picture (see chart)^iv as platforms tinker with how many ads they can show per hour.

Looking for Good Omens

With all the major streaming platforms now trying to figure out advertising, investors need to consider what it takes to be a successful streamer in this changing and challenging world. With the exception of Netflix, most services - including Disney+, Peacock and Paramount+ - are still struggling to show investors a profit. So where are the bright spots?

Content is obviously a key ingredient, especially content that comes with a built-in fan base, such as Disney's Marvel and Star Wars universes. Sports is another example. Netflix, for instance, recently agreed to pay $5 billion for the rights to livestream WWE Raw. According to co-CEO Ted Sarandos, such live programming should boost the company's advertising business^v, attracting both new subscribers and advertisers eager to reach the growing number of people tuning in for live entertainment on Netflix's nascent ad tier.

Of course, the customer base remains important, as it determines not only revenue, but also attractiveness to advertisers. Measurement is another requirement, as advertisers want to be able to target specific audiences and measure the results. Netflix, for example, mentioned its work with Microsoft Advertising to enhance its ad offering and with partners such as Integral Ad Science, DoubleVerify, EDO Inc. and Nielsen ONE to improve its measurement capabilities.

Closing the Loop

An interesting development is taking place at the intersection of retail and entertainment. It may provide a solution to the old adage "half of my advertising spend is wasted. I just don't know which half”^vi. Retail media networks, like those of Amazon or Walmart, have the tools to measure it. Amazon’s ad unit, for instance, grew 27% year-over-year to nearly $15 billion^vii, running ads on its website and as of January on Prime Video (which analysts expect to become a significant revenue stream).

Walmart’s ad business might be smaller than Amazon’s at $3.4 billion, but it is growing fast (+28%)^viii. In addition to online ads on its websites, Walmart sells third-party ads on self-checkout screens and TVs in store aisles, as well as on in-store radio and demo stations, where brands can pay to have customers try their products. Additionally, Walmart is expanding its advertising capabilities. In February, it acquired smart TV maker Vizio, which will allow it to sell TV spots on the streaming services available through Vizio's smart TV operating system.

Keeping an Eye Out

The way we consume entertainment is undergoing a major transformation that is reshaping the entertainment industry in fundamental ways. The VanEck Smart Home Active UCITS ETF is keeping an eye on these developments and looking for potential investments as the story unfolds. For now, our best bets within this smart home sub-theme are Netflix, as the leading streaming company, and Liberty Media Formula One, as the owner of some of the most valuable sports competitions in the world^ix.

The value of the securities held by a Moat ETF may fall suddenly and unpredictably due to general market and economic conditions in markets in which issuers or securities held by the funds are active.