US consumers have been “cord-cutting” — or canceling their pay-TV subscriptions in favor of internet-delivered alternatives — since 2010. The number of pay-TV subscribers dropped a record 3.4% year-over-year (YoY) in 2017, and the rate of decline is expected to accelerate further in the coming years; consequently, pay-TV providers will continue to see their most important revenue stream erode. To compete in the shifting media landscape, traditional media companies' business strategies must satisfy two goals: extract as much revenue from pay-TV as possible before the opportunity to do so fizzles out, and taper reliance on pay-TV-related revenue along the way.
In a series of three notes, Business Insider Intelligence looks at how big media companies are refining their strategies to meet the aforementioned goals and mitigate the detrimental impacts of cord-cutting. In this third and final note, we will make the case for airing fewer commercials per broadcast hour, which could boost viewership for traditional media firms. The previous notes examined the ways companies are launching their own direct-to-consumer (DTC) streaming services to recuperate losses that stem from cord-cutting, and detailed the types of M&A deals that media companies are exploring to effectively compete with deep-pocketed streaming giants.
TV Commercials: Less Is More
Consumers are spending more time consuming media online. Globally, consumers spent an average of 212 minutes online per day in 2017, up 11% year-over-year (YoY), while time spent with linear TV fell 2% YoY to an average of 222 minutes per day, according to GroupM. This trend is expected to accelerate, and in 2018, time spent online will likely eclipse time spent on linear TV.
They're therefore becoming accustomed to ad-light and ad-free experiences. Netflix and Amazon Prime Video — the two leaders in SVOD — don't run ads. And YouTube — the world's largest online video site — is a pioneer in six-second pre-roll ads; it announced it would eradicateunskippable 30-second ads by 2018. Snapchat, which has been curating professionally produced, TV-like content, started running six-second unskippable ads in May.
As consumers increasingly seek uninterrupted viewing experiences, media companies are reducing their ad loads to prevent customers from fleeing to digital:
Fox announcedthat it aims to cut its broadcast network’s ad time to two minutes per hour by 2020. This is an ambitious goal — the average TV network on broadcast ran 13 minutes of commercials per hour in 2017, while cable ran 16, according to Nielsen.
NBCUniversal saidit plans to cut the number of ads it airs during original primetime programming by 20% starting in Q4 2018. The media conglomerate, which owns networks like NBC, Telemundo, USA, and E!, will cut commercial loads in over 50 primetime shows across its networks. NBCUniversal Linda Yaccarino stated TV networks “would be crazy to believe” that commercial overhaul is “anything other than inevitable,” according toVariety.
TruTV, a Turner-owned cable network, saidit plans to air only nine minutes of commercials per hour by 2021. The network calls this format "limited commercial interruption" (LCI) and, in December 2017, only 11% of its programming adhered to it.
In addition to airing fewer ads, networks are cutting down on the duration of their commercials. Fifteen-second ads represented 36% of US TV commercials in H1 2017, up seven percentage points from 2014, according to Nielsen. On the other hand, 30-second ads, the longstanding standard television commercial length, fell 12 percentage points over the same period.
It's likely that more TV networks will aim to minimize their ad loads in the coming years. Consumers' general aversion to ads, combined with the sheer growth of video streaming services — especially those that are ad-free — will push traditional networks to recognize that ad-load reduction could mean higher ratings, EY's Global Media & Entertainment Leader John Harrison told Business Insider Intelligence.
The Benefits Of Shorter Ad Loads
While it’s still early days for reducing ad loads, many industry stakeholders agree the strategy should be explored further: Ad agency execs have long advocated for a change in the number of TV ads shown, per Variety, while the ad industry generally views ad-load reduction as beneficial to marketers, according to Ad Age. There are several reasons for the consensus:
A quarter of consumers have already expressed a desire for shorter ad breaks. Of polled consumers, 25% said they believe TV and online ads should be the same length, according to a recent Kantar Millward Brown study perMarketing Dive. This cohort also indicated that online and TV ads should communicate their message more quickly. Separately, 73% of TV viewers found the number of ads during their favorite TV shows annoying, according to a March 2017 study by Google and Ipsos.
Networks can better appeal to viewers who engage with mobile devices while watching TV. By airing shorter commercial breaks, networks increase brands’ chances of getting their messages across to viewers before they divert their attention to mobile devices. Fifty-five percent of respondents indicated they “always” or “usually” use a mobile device when watching TV, up from 36% in 2016, according to a survey by PwC. Meanwhile, 44% of consumers said their activities on another device while watching traditional TV are completely or mostly unrelated to what they're watching, according to a May 2017 study by the IAB.
Lighter ad loads have already proven successful for some networks. TruTV, which began experimenting with lighter ad loads as early as fall 2016, saw an increase in the amount of time viewers tuned into its network, per Adweek. Moreover, brands in TruTV’s LCI pods (nine minutes of ads per hour) are seeing ROI lifts four times that of brands in traditional pods, per Adweek. Meanwhile, NBCU tested showing just one minute of ads during a 22-minute show to 1,700 consumers and found that the new ad format boosted a customer's purchase intent by 9%, per Variety.
BI Intelligence
The Cost Of Cutting Ad Loads
Networks' primary issue with airing fewer commercials is that they'll need to raise ad prices to sustain ad revenue. NBC’s entertainment chairman Bob Greenblatt stated the company will have to charge more for ads in shorter pods, perCNN, for example. Not being able to adequately offset fewer ads with higher commercial prices has hurt some companies’ ad revenue in the past — for example, Viacom saw a 2% YoY decline in domestic ad sales in calendar Q2 2017, attributing the fall to reducing ad spots on certain networks.
Decreased ad loads were a popular topic during this year's TV upfronts, and ad price increases were met with reservations by some brands. Many of The CW's ad clients were hesitant on the premium ad prices associated with decreased ad loads, according to Deadline. Meanwhile, an ad agency exec stated NBCU was being "very aggressive" with its pricing for some of its ad pods with lighter ad loads, according to Variety.
There are a couple of ways networks could address this challenge:
Networks could defend higher ad prices by making their shorter ad pods more contextually relevant to programming. For example, NBC recently pitched a "prime pod," which will use AI to sift through a show's script to better match commercials to it, per Ad Age. With this ad offering, NBC could recommend that a food brand run a commercial following a cooking scene in one of its shows.
Networks could opt to avoid charging a premium on reduced ad loads, and offset the ad revenue decrease in other ways. History announced that it would remove between two and two-and-a-half minutes of commercials from its premium scripted dramas and event documentaries beginning in Q4 2018, per Ad Age. However, History doesn't plan to increase its ad prices; instead, it'll focus on airing more premium programming that naturally attracts higher ad prices — in the best-case scenario, this means History's bottom line won't take a hit as the network maintains ad prices while selling fewer overall in its scripted dramas and event documentaries.
Takeaways For TV Networks
Networks should consider experimenting with shorter ad breaks, even if it's with some shows on their broadcast schedule. Consumers will become only more accustomed to the shorter digital ad experience moving forward. This is especially true as networks look to appeal to Gen Zers, those born between 1996 and 2010 and the first group to grow up wholly in the post-digital era. Networks are also more likely to lure in subscribers to their SVOD services if they succeed in attracting viewers to their linear broadcasts by reducing ad loads.
Networks that do opt to cut ad loads should err on the side of cutting more. NBC found that viewers don't notice a difference in a show's commercial load unless networks cut out half or more of the ad load, according to NBCUniversal EVP of Entertainment Advertising Sales Mark Marshall, per Variety.
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