Barron's Streetwise - The Dongle Is Dead

Episode Date: September 25, 2021

Power is shifting to TV makers. Vizio's plan to take on Roku and Amazon. Learn more about your ad choices. Visit megaphone.fm/adchoices

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I invest over hundreds of millions of dollars into the software. And our monetization effort really started only around September, October of 2019. Welcome to the Barron Streetwise podcast. I'm Jack Howe. And the voice you just heard, that's William Wang. He's the founder and CEO of Vizio, the TV set maker. So why is he talking about spending hundreds of millions of dollars on software? And what's this about an operating system called Smartcast and a new push to monetize it? In a moment, we'll hear about why the streaming dongle is dead. You heard me. And how once humble TV set manufacturers suddenly hold a surprisingly strong hand with advertisers. Listening in is our audio producer, Jackson.

Hi, Jackson. Hi, Jack. Tell me about your TV set. How old of a set? How big? How much did you pay for it? It's a Costco TCL set, 43 inches. I bought a year ago.

Okay. What'd you spend? Like 170 bucks or something. Nuts. It was ridiculous, but I needed a Costco membership. So that was part of it. So you're a Roku TV guy. Yeah, it's built in, but I'll say what's more important than the TV is the sound. How's the sound? Well, the built-in speakers of any TV are going to sound pretty bad. So you might be thinking, okay, I'll get a soundbar. But in the audio producer community, soundbars are kind of frowned upon because they don't provide very good spatial separation. The, you know, the stereo, the left and right speaker. If even you just pick up a pair of like vintage bookshelf speakers and connect them to an app that literally sounds better than the soundbars. Where is this community? I want to go to the next meeting.

I got a soundbar over here and I'm doing just fine. I'm going to tell you about my new sets in a moment. I've been hearing the term smart TV for more than a decade, but I think TVs have actually been pretty dumb until just the past few years. Now, I'm not going to regale you with tales about the old boxy TV that my family had when I was a kid, and what VHF and UHF dials are for, and how there were screws on the back for rabbit ears or an Atari switch, how there were screws on the back for rabbit ears or an Atari switch, and how my job as the youngest kid was to hold the rabbit ears in precise position during key TV viewing moments.

You're going to have to wait for my gripping memoirs for all that. But just 20 years ago, the biggest flat screen TV in your neighborhood might have measured 40 inches from corner to corner and cost $4,000 and weighed as much as a refrigerator. In 2007, a company renting out movies on disc by mail called Netflix launched something new, a streaming service, and soon customers were looking for a way to stream on their TV screens without hooking up their computers. And the industry responded with smart TVs. But the earliest ones weren't super smart. For one thing, most viewers didn't want to be bothered hooking up wired internet connections to their TVs.

So there was no easy way to update the TV software. Also, TV software used to be as inviting as an Amtrak schedule. Enter the age of the dongle. I feel like we could use some dramatic music right there, Jackson. You got any timpani drums? The age of the dongle. Ah, forget it. The Amazon Fire Stick and Google Chromecast,

along with the Apple TV set-top box, brought old sets to life with sleek operating systems and access to third-party services like Netflix. But if we fast forward to today, just 7% of time spent on a Vizio set is spent outside of Vizio's own operating system. The dongle is dead. No, no, too up-tempo. That's it. So what happened? Okay, I bought three new sets earlier this year ranging from 43 to 75 inches. No, I didn't hit the lotto. All three of them together cost me about half what

one of those old 40-inchers used to cost, and that includes paying my painter to mount the two smaller ones on adjustable arms. They all connect over Wi-Fi and have smartphone-like operating systems, so my old Amazon dongle and my Apple TV box have been sitting in a bin for spare cables and connectors. I can get Amazon and Apple's video services right through my TVs, along with all the other streaming services and a bundle I subscribe to for live channels. But there's also a free bundle of hundreds of channels that came with the TV, and the TV industry has a term for services like that, with the TV, and the TV industry has a term for services like that, FAST, or Free Ad-Supported TV. Top FAST services include Viacom's Pluto TV, which it bought in 2019, and Fox's Tubi, which it bought last year, and Crackle and Zumo, and there are free tiers of paid services like Peacock.

There's also the Roku channel. Roku used to be known for set-top boxes, but it increasingly licenses its operating system to TV makers, including Jackson set maker China-based TCL, so that they can market Roku TVs. And Vizio has its own fast service called Watch Free Plus. What you get on a fast service is TV comfort food, old episodes of the Carol Burnett Show, and not quite so old episodes of The Walking Dead. There's some low-cost original programming and news clips and sports, and there's plenty of overlap. Vizio service, for example, has some Pluto shows. I have to tell you about one more acronym to explain why all of this is more important than it might seem. ACR stands for Automatic Content Recognition.

It's technology that provides what ad executives call glass-level management. It captures a few pixels, and it compares those with a database to tell what viewers are watching across any service. ACR data can also be combined with viewer internet addresses to tell which websites and apps that viewers have recently used. And users opt into providing that data when they first set up new TVs by, say, agreeing that they want more targeted show recommendations. Jackson, is any of this making you nervous? Go ahead and clean up that browser history. Oh, Lord. TV makers are suddenly in a position to sell display ads on their operating systems,

which paid streaming services love to buy, because who better to pitch a streaming service to than someone looking for something to watch? Big spenders can get the top of the homepage. The biggest get dedicated buttons for their apps right on remote controls. And set makers can sell commercials on their free TV bundles for cars or laundry detergent. And they can distribute ads across other streaming services and keep track of, say, how many times a viewer has seen an ad on one service so that that ad doesn't keep running on another service. And advertisers like all the rich ACR data. That's why TV makers are suddenly going all show business. Vizio this year made its first presentation at advertising up fronts. That's a TV term for gatherings where show owners pitch to ad buyers. And there are special up fronts for

digital players. But having a TV set maker participate is noteworthy. And Vizio secured $100 million in advertising commitments for next year. That was a four-fold increase on what it had locked in for this year. When I saw that, I wanted to talk to the person who knows Vizio best. We allow you to stream Netflix, Hulu, YouTube, Disney+, HBO Max, and because it's a broadband, we have this opportunity to give a customer more free channels. That's Vizio CEO William Wang. He moved to the U.S. from Taiwan when he was 12. And in his 20s, he started a company to build computer monitors. He founded Vizio in 2002. Today, it's a top player in the U.S. smart TV market. Samsung is the leader with

close to one third of market share. TCL, Vizio, and LG are neck and neck in a race for second place. They combine for just over one-third of market share. Suddenly, there's a lot of attention on the operating systems. Samsung and LG, like Vizio, use their own. Amazon announced last month that it's launching TVs, no doubt in response to the death of dongles and to the star turn of set makers. William doesn't sound intimidated. As a matter of fact, I walked into Costco and told them that we're going to be the next Sony. They kind of laughed at me.

And fortunately, through continued investment and a pretty good reputation in this industry, we were able to sell a lot of TVs, serve a lot of customers. And there's no difference in how we compete with Sony or Panasonic or some of the most powerful consumer electronics companies of today. William's claim that Vizio would be the next Sony might have sounded bold back then, but today Vizio is several times the size of Sony and U.S. smart TVs. Going forward, William expects TVs to become more than just entertainment devices.

He says they can act like hubs that run all kinds of home applications. And that's similar to what Wamsi Mohan recently told me. He's an analyst at B of A Global Research, part of Bank of America, and he covers both Visio and Roku and is bullish on both. The IoT functionality in a house is getting more and more prolific, whether it be for lights or doors or whatever it be. And so there's just a lot more integration. What that does eventually, I think, is that you can use some sort of hub, like today people might be using a voice activation with Alexa, but I could see a world

where a TV is not a bad place to have a central hub to control things in the house. Wamsi expects to see consolidation among TV set makers and TV operating systems. He describes the advertising opportunity for set makers as huge. What's interesting is that all these TV manufacturers have figured out that they have the tsunami of ad dollars moving from linear to streaming. And it was only a matter of time that they tried to figure out like what was the business model around this, which would work. And they're all in different stages of implementation. But by and large, they look at the TV ecosystem as sort of central to where a lot of consumption happens. And they're sitting squarely over there with a product. And the actual true sort of name brands in the TV space, like the Samsungs of the world,

have never really focused too much on this. That's been sort of probably more a function of the fact that, you know, these are huge conglomerates with businesses that matter a lot more to profitability versus a Vizio where this starts to get very material, very quickly, or even for a Roku. I mean, they sort of built around this and it took a long time for people to shed their skepticism, but I think it's definitely gotten a lot easier for TV makers to sort of rally around this business model now. Wamsi says Vizio reminds him of Roku four years ago, and that might catch the attention of investors who've been watching Roku stock. Roku went public in 2017 at $14 a share, and the stock has since soared to $334. That's a stock market value of over $44 billion. Now, Vizio went public this past March at $21 a share, and it recently traded

below $20 for a market value of $3.7 billion. That's less than one-tenth the value of Roku. The two companies aren't that far apart on revenue. The difference is that Roku has 55 million active users of its software versus 14 million for Vizio. So while most of Roku's money is made from services, Vizio makes most of its money from hardware like TV sets, and sales of those can be lumpy. Lately, they've declined because a year ago, amid lockdowns and stimulus checks, shoppers went on a TV buying spree. But Vizio has barely gotten started in advertising, so its non-hardware revenue is growing quickly. It jumped 140% last quarter versus a year earlier. Wamsi says that bodes well for Vizio's stock.

You know, now the content gross profit is going to blow past the TV gross profit just in a year's time. And so I think what's interesting here is that you've had a TV maker who's found this sort of stealth way to really monetize the dollars. And the valuation is really based like a hardware company as Roku was four years ago. And you have massive room for the valuation multiple to expand. And as they get more eyeballs, their bargaining power with these advertisers goes more and more. And then you start to add all the complexity of putting in dynamic ad insertion and other fun things that allow you to charge even higher rates to your advertiser. So I think that the

CPMs or the ARPUs have massive room to grow. I mean, they're much below where Roku operates today and that business model has been proven. So we like Vizio because we think that there is a lot of room for both the number of subs to grow as well as for the ARPU to grow. By the way, the advertising industry loves acronyms. I've already talked about FAST, or Free Ad-Supported Television, which I'm hearing more often lately than AVOD, or Ad-Supported Video On Demand. or ad-supported video on demand. Now, you just heard Wamsi say CPM, which does not stand for cost per minute,

but rather cost per 1,000, as in 1,000 impressions, impressions being views of or engagements with a piece of content. You also heard ARPU, which stands for average revenue per user. If I'm talking about good signs for Vizio and I mentioned Roku ARPU, which stands for Average Revenue Per User. If I'm talking about good signs for Vizio and I mention Roku ARPU, it might sound like I'm talking about the droid from Star Wars. But really, I just mean that Vizio's ARPU is rising quickly and that it's

not nearly as high as Roku's, which could mean there's plenty of room for growth. Now, get me out of here, Chewie. coups, which could mean there's plenty of room for growth. Now, get me out of here, Chewy. Don't tell me that was you. Was that you? I'm sorry. I was doing my best Chewbacca noise.

That's the scariest thing I've ever heard. That was really you? I was definitely in fight or flight mode and it wasn't going to be fight. Okay, back to William at Vizio. He might be a rising software maker and show business player, but for now, he also needs to produce sets, which gets me thinking about supply chain bottlenecks. I asked how things are going on that front. He says components, including integrated circuits, are becoming less of a problem, but shipping is still backed up and his cost for containers from China has tripled. The supplies are loosened up right now.

The availability of the glass, the availability of the IC is getting a lot better for our industry at this time. However, we're still dealing with supply shortages because of logistic issues. with supply shortage because of logistic issues. And currently, we all know there's 50, 60 vessels outside Long Beach Harbor waiting to get unloaded. And that's a real problem. As we all know, the container cost used to be $2,000 or $3,000 per container coming from China. Now it's over $10,000.

William says the funds raised by going public earlier this year are being used to ramp up hiring at Vizio's Irvine, California headquarters and Denver, Dallas, Seattle, all over, but that he still would like to hire even faster. He calls that one of his biggest challenges now. One last question. What does a TV manufacturer watch on TV? William says Sundays are for football and that he watches business news clips during the week and that right now he's into a show you might have heard of. I'm going to try to finish both seasons like Ted Lasso before this weekend. Ted Lasso. Ted Lasso. Ted Lasso.

Ted Lasso. Thank you, William and Wamsi, and thank all of you for listening. Jackson drives a hard TV bargain. Cantrell is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. And if you listen on Apple, write us a review. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's at Jack Howe, H-O-U-G-H. See you next week. Oh, you said it, Chewie.