➤ The market for subscription video on demand is saturated, opening opportunities for ad-supported video on demand.

➤ The ad-supported model is financially viable and profitable today.

➤ New 5G technology will be a major driver for online video.

With over 12,000 movies and television series, Tubi Inc. has one of the largest online video catalogs in the U.S. and offers it free to consumers on an ad-supported basis. The company on Jan. 29 announced that it intends to expand its catalog and reach in 2019, making Tubi available outside the U.S. and Canada. The company also said it reached profitability in the fourth quarter 2018 as customers viewed 4.3x the amount of content in 2018 than in 2017, and its strategy will be supported by a $25 million growth capital facility from Silicon Valley Bank.

S&P Global Market Intelligence sat down with Tubi CEO Farhad Massoudi to discuss the opportunities and challenges of ad-supported video on demand and the reasons why some companies are pivoting to ad-supported models and bucking the subscription-based trend. What follows is an edited version of that interview.

S&P Global Market Intelligence: You said 2019 is the year of ad-supported video. Why so?

Farhad Massoudi: Everybody's talking about [subscription video on demand, or SVOD], but the average household is not going to subscribe to all these services. Let's assume Disney makes it. Let's assume Amazon Prime, and, obviously, Netflix [are] going to continue to grow, then CBS and Showtime, and HBO and AT&T, all these services. There's no way on earth even in the best case scenario that these services are going to scale [due to consumer budget constraints], which means you need complementary [ad-based video on demand, or AVOD] services.

The reason I think this is the year is because the revenue generated, at least for Tubi, now justifies [competing] with cable on content licensing. We're starting to license the caliber and quality of content that is going to be meaningful to every American. When we launched four years ago it was more of an indie movie library, so it was a smaller audience. This is the year where we're going to spend a very substantial amount of money on licensing, and, as a result, I think we're going to attract a lot of viewers.

Some say AVOD is a nascent business and that the advertising revenue available isn't enough to sustain the high technology and personnel costs. Is that your experience?

We have close to 140 employees, mostly in the United States. I think we're going to announce the scale of our spending this year, which is orders of magnitude larger than the money we've raised. That speaks volumes to the viability of AVOD and how well we have done. The biggest difference between us and our competitors is that we use data to decide what to license, how much the license is worth, how to program Tubi, how to acquire users. Even on the advertising side of it, we have a programmatic real-time ad engine. We have spent eight years building tech, where other players spend time writing these licensing checks and hope the revenue comes in, and it usually doesn't.

You cannot only turn profitable, but you can turn massive profits using AVOD.

Where does that leave the future of subscription video?

I expect there to be more players entering the [AVOD] space. Viacom Inc. just acquired Pluto TV, for instance, and I bet there will be other players entering because the smart people in this space have realized that SVOD at his point is saturated. Even NBC said they'll have an AVOD service targeted for cable customers. There is a reason NBC decided not to launch an SVOD business. NBC is one of the best libraries in the world and one of the most sophisticated media companies out there. Even the giants are going to wake up and realize that AVOD is a much bigger market and they're focusing on the wrong bet.

Is Tubi looking at 5G technology as a catalyst for consumer adoption?

I think the decline of TV ratings, in general, will accelerate, and the acceleration of the decline of linear TV viewership will result in exponential increases in overall on-demand TV viewership. And [with] 5G, once it starts having meaningful traction, there's no reason why your iPhone can't replace your streaming box. So Apple Inc. embedding AirPlay into smart TVs is exactly the right move. By the time 5G has 10% to 20% market share, they're going to be in most smart TVs. So I think that's the future, but I don't know 5G is going to happen in a meaningful way in the next 12 months. It's probably a few years out, but I think 5G and 4K are both going to be huge catalysts for on-demand viewership.