AT&T's recent acquisition spree is part of a plan to dominate advertising on connected TVs and devices

Key Points
  • AT&T is developing an ad tech platform where it can sell targeted advertising on content regardless of where the person is watching and if they have a cable or satellite subscription.
  • Ads could appear on AT&T's television shows and movies, as well as partner media companies' content.
  • It's a growing businesses, especially as more people switch to streaming video. 
Randall Stephenson, Chairman and CEO of AT&T
Saul Loeb | AFP | Getty Images

AT&T has a rationale behind its recent acquisition spree.

The company wants to dominate the business of selling targeted advertising on internet-connected TVs and devices, according to advertising executives who have had conversations with the company.

On the content side, AT&T acquired Time Warner for a whopping $85.4 billion, though the Department of Justice is suing to block the deal. It purchased entertainment company Otter Media for a price reported around $1 billion. It's also buying advertising tech such as the digital ad platform AppNexus, which it reportedly got for around $1.6 billion. AT&T has met with additional advertising technology companies about potential acquisitions.

The endgame for AT&T is to develop a new ad platform to sell targeted advertising on video content, regardless of where the person is watching and whether they have a cable or satellite subscription.

For instance, ads could appear on television shows and movies owned by AT&T, even if those shows run on non-AT&T distribution platforms like Apple TV or Roku. Partners could also sign up to use the platform, letting AT&T sell advertising against content owned by other companies. This ad platform could take more than a year to develop, according to sources.

It's an ambitious play for AT&T, as people are increasingly getting their entertainment from mobile devices, online sources and through streaming. By the end of last year, about 22.2 million people aged 18 and up in the U.S. no longer had a satellite or cable subscription, according to eMarketer. Almost 60 percent of Americans have at least one streaming service, according to a CNBC survey.

"This audience is called the 'unreachables' because they are tougher to reach for brand awareness and brand campaigns," said Ashwin Navin, CEO of television data analytics company Samba TV. "The assets that AT&T is putting together through acquisitions could recover that audience, which is watching TV in a different way today."

It also gives AT&T a chance to grab more of the massive budget advertisers are still allocating toward TV, which amounts to about $70 billion a year in the U.S., according to eMarketer. AT&T's platform could become the main way for brands to buy ads on streaming premium television shows and movies, a marketplace Facebook hasn't entered and Google is just starting to explore.

"YouTube wouldn't reach the cord cutters specifically, and Google and Facebook's audiences are much too narrow for what linear [scheduled] TV used to reach," Navin explained.

When contacted about its plan, AT&T pointed to its AppNexus acquisition announcement in June where it said it hoped to "strengthen its leadership in advanced TV advertising," but declined to comment further. "Advanced TV" is an industry term for streaming TV content, including programming watched on internet-connected TVs, digital media devices and mobile phones. It also includes cable/satellite and video-on-demand programming that can handle highly-targeted ads.

'Addressable advertising'

Right now, the only way to reach the streaming audience is to piece it together by buying ads from multiple sources, including streaming services from Hulu and Amazon, services from TV networks that allow brands to buy ads on their streaming content and direct from devices like Roku. While Facebook does offer Watch shows and Google has YouTube content, some marketers argue it doesn't hold your attention the same way traditional TV programming does. Google also has its TV service YouTube TV, but it only had 300,000 subscribers as of Jan. 2018, according to sources.

"With Google and Facebook, you have the ability to place the ads, but you don't have the same kind of content where users will spend 30 [minutes] to an hour undisturbed," said Raghu Kodige, chief product officer and co-founder of television data analytics firm Alphonso.

Not only will AT&T's proposed ad platform reach streaming audience, it will stand apart from traditional TV advertising by letting ad buyers target very specific audiences — an emerging model known as "addressable advertising."

Brands usually buy TV ads based on broad demographic groups, like advertising on shows that are popular among young adults 18-to-34.

Addressable ads are meant to target very specific groups of viewers based on data about them, like where they are located, what they like and what they are doing. For example, households with new parents might see more ads for baby products. In some cases, it can even target individual households. Advertisers are willing to pay more for such ads because they won't be wasted on viewers who aren't likely to buy their products.

"[Ad] personalization is going to be more of a trend as artificial intelligence gets better and new ways to communicate starts emerging," Kodige said. "We're going to expect more personal messaging overall."

AT&T currently runs an addressable ad business called AdWorks, but it's focused on DirecTV and U-verse customers, as well as AT&T mobile customers. The new ad tech platform would vastly expand the offering by allowing AT&T to sell ads on content running on other types of devices, as well as letting it add partner media companies.

The service would be similar to Comcast's Freewheel, which is used by TV networks and major video distributors to serve ads on their streaming content. Freewheel places addressable ads on NBCUniversal content (owned by Comcast), as well as partner networks like Viacom and Disney. Ads can appear on traditional (linear) television programming, on video-on-demand content accessed through cable set-top boxes, and on streaming OTT services that use a device to connect to the internet.

According to marketing agency Merkle chief analytics officer Andy Fisher, brands spend only about $1 billion a year on addressable TV, $7 billion on OTT devices and services and $13 billion on online video, although he said figures could be "a bit mushy" because certain companies categorize their spend in different ways. But because AT&T would focus on selling ads on the same programming seen on TV and other premium content, marketers may be more willing to allocate some of the $70 billion television ad budget towards its platform.

"Advertisers are absolutely willing to dip into traditional TV budgets [to advertise on connected TVs and devices]," Fisher said. "Given that the content is the same as traditional TV — long form professionally produced video where people expect advertising and are willing to pay for and seek out content — with the addition of being targetable. In many ways it's the best of both the traditional TV and digital worlds. It's also where all of the viewership growth is."

Disclosure: CNBC parent company NBCUniversal is an investor in Hulu. NBCUniversal is owned by Comcast.

Correction: Samba CEO Ashwin Navin was misquoted in a version of this story. He said Google and Facebook's audiences are more narrow compared to TV, not more broad. 

AT&T's Brian Lesser on the future of advertising
AT&T's Brian Lesser on the future of advertising