Why Comcast just bought a streaming service you’ve probably never heard of

On Tuesday, Comcast bought a crutch for its TV advertising business in the form of Xumo, a free ad-supported streaming service.

Sources told CNBC that Comcast paid $100 million for Xumo, which has about 10 million monthly active users. That’s less than the $340 million that Viacom (now ViacomCBS) spent on Pluto TV last year, though Pluto already had 12 million users at that point and is now used by more than 22 million people every month. The Wall Street Journal also reported last week that Fox is in talks to spend upwards of $500 million on Tubi, another free streaming service with more than 25 million users.

So what’s behind the latest free streaming TV acquisition? According to CNBC, Comcast was interested in the way Xumo works with TV makers to preload its service onto their sets, sometimes with the TV maker’s own branding attached. If you’ve bought a television from LG lately and have noticed it hawking free TV channels, that’s the work of Xumo. The startup also provides some content in the free Roku Channel app on Roku streaming players and smart TVs, and was behind Redbox’s recent launch of a free live TV streaming service.

The idea is that Comcast could use that reach to promote its own Xfinity services or its upcoming Peacock streaming service (which will also have a free tier). CNBC hinted at an acqui-hire element as well, saying that “Xumo’s leadership also impressed the company.”

I suggest a slightly different explanation: Buying Xumo is all about the imminent decline of TV network advertising in the age of cord-cutting.

Looking at Comcast’s most recent earnings statement, the numbers don’t look too bad. During 2019, cable network revenue for Comcast-owned NBCUniversal declined by 2.2%, and broadcast revenue fell by 10.3%, but 2018’s numbers were largely propped up by advertising during the winter Olympics, the Super Bowl, and political ads from the midterm elections. Take those away and NBCUniversal’s numbers were slightly up, 1% for cable and 0.1% for broadcast.

Here’s the problem: Comcast notes that even those gains were the result of higher pricing, “partially offset by audience ratings declines.” It’s charging more for ads, but fewer people are watching.

Comcast isn’t alone, either. A recent study by Standard Media Index found that linear TV ad revenue dropped by 5% over a two-year period, from $46.2 billion to $44.2 billion. That’s despite nearly every major network group packing in more ads per minute over the same time frame. Those trends will likely continue with pay TV subscriptions now in free fall.

As a result, traditional TV networks are looking to free streaming services to prop up their revenue and perhaps bundle ad spots from both cable and streaming into a package deal. This has already been happening with ViacomCBS and Pluto TV. As LightShed Partners analysts Rich Greenfield, Brandon Ross, and Mark Kelley wrote on Tuesday (before the Xumo acquisition was announced), Viacom now factors PlutoTV into its reported ad revenue, which rose 6% in 2019. Without PlutoTV and other targeted advertising efforts, LightShed says ViacomCBS’s ad revenue would have been roughly flat, and would likely decline in 2020.

“Legacy media companies likely all see the challenges ahead as linear TV’s reach continues to fall—they need new ways to reach consumers and sell ads and to package less compelling linear TV inventory with more exciting connected TV inventory,” the analysts wrote.

As CNBC notes, spending $100 million on Xumo will be “immaterial” for Comcast, whose broadcast and cable networks brought in nearly $22 billion last year. And keep in mind, the rise of cord-cutting hasn’t hurt Comcast as whole, with its profits still soaring through sales of internet service.

But by acquiring Xumo, Comcast gets a new source of ad revenue in a growing field, with a whitelabeling approach that is unique among free streaming services. At the very least, it beats betting the farm on Peacock.

Correction: An earlier version of this story said Vizio TVs came preloaded with free channels from Xumo. Those TVs rely on channels from Pluto TV instead.