How video streaming services are forcing the TV industry to transform

Video streaming services are having a dramatic impact on TV advertising. Is there any hope for TV?

Video streaming services: TV’s nemesis

TV, once the unassailable king of advertising, is at risk of being toppled from its throne. Video streaming services such as Netflix, Hulu and Amazon Prime are fundamentally changing the viewing habits of consumers, particularly – but by no means exclusively – of younger users. Figures from April this year suggest that Netflix has 125 million subscribers globally– an increase of 27% versus the first quarter of 2017. In the third quarter of last year, the 56.4 million US subscribers missed about 35 commercials each per daybecause of Netflix – adding up to two billion missed ad impressions a day, according to nScreenMedia. Whether it’s on Netflix, Hulu, Amazon Prime or even Spotify, for the first time in history a generation of viewers are prepared to pay for content that is free from advertising. Consumers typically spend between $5 and $12 a month for these ad-free options. So the question is – how can we reach these consumers?

Advertisers are reacting by taking their spend to digital

Advertisers are painfully aware of the effect that subscription video on demand (SVOD) services are having on their TV spots. In 2017, TV ad sales in the US fell by 7.8% to $61.8 billion – the steepest decline in the last two decades, outside of a recession. This is being repeated across the world and, apart from cyclical events such as the Winter Olympics, the FIFA World Cup and the US midterm elections, there’s no sign of an improvement.

Advertising budgets do not just disappear – they are reallocated elsewhere. So where is the money that is leaking out of TV budgets going? And is it doing the job? The answer is obvious – it’s going into different channels within digital advertising. Behemoths Google and Facebook are creating TV-like products in order to retain users in their ad-rich ecosystems, and are ready to capture any stray TV ad dollars. Their sales pitch is the ability to target individual viewers which if achieved is a highly attractive prospect for advertisers looking to make every cent work harder. What’s more, the tech giants will start buying up the broadcasting rights to major sporting events, such as Amazon’s purchase of the rights to the UK Premier League from 2019 to 2022 – another major blow for the traditional TV channels.

All this means that TV’s dominance of advertising revenues has given way to digital: in the US, digital is expected to count for nearly half of all ad revenue in 2018.

How TV media owners are reacting

Media and content owners are having to transform their strategies in order to survive the ‘TV apocalypse’. Disney, for example, is looking to become both a content owner and a distributor, playing Netflix at its own game; in August 2017, it announced that it would stop selling content to Netflix by 2019 and instead launch two streaming services, one for sport (the ESPN network) and one for films. Meanwhile, NBCUniversal is reducing the number of commercials that it airs during its primetime TV shows in order to increase the impact and therefore value of its advertising, and stem the tide of viewers flocking to SVOD services.

In the UK, the major TV broadcasters and avowed competitors ITV, Channel 4 and Sky joined forces to defend TV’s ability to build brands and reach that crucial younger audience. They claim that a lack of trust in advertising stems from the ‘Wild West’ of the internet and not from TV, which is regulated and drives brand equity. Indeed, advertisers are starting to review their digital investment as research shows that important brand KPIs are affected when ad dollars are moved to digital.

However, the UK and some other European countries are unique in the fact that people are used to an ad-free experience thanks to state-financed broadcasters like the BBC with a high market share; SVOD services are therefore less appealing than in countries where commercial TV with a higher ad load is inescapable. This ad load is often 20-30% of every primetime hour. Within the ad-financed digital video world such as YouTube, consumers seldom find an ad load of more than 10%; furthermore, they can often skip those ads or avoid them by other means, as a load of more than 10% would have a negative effect on viewing.

The TV industry is not doomed

It’s not all doom and gloom for the TV industry. As the UK broadcasters were quick to point out, an increasing suspicion of digital media owners means that TV is still a valuable tool for brand building and driving top-of-mind awareness. What’s more, as SVOD services proliferate, consumers will find they want an increasing number of subscriptions to feel satisfied they are getting the content they want to watch, which costs money; ad-supported, free-to-use media could once again feel like an attractive option.

However, this does not let the TV industry off the hook: to survive, they will need to follow NBC’s example and transform their product offering to advertisers. Consumers who are used to ad-free content on Netflix will not tolerate the eight or nine minutes every half an hour that has become the norm on US primetime TV. Fewer, higher-impact ad spots for which advertisers pay a premium will likely be acceptable to viewers and may well become the norm. With the rising number of smart TVs, more targeted ads will be more engaging for viewers and will suffer lower levels of rejection.

The answer is to adapt and innovate

As always, the answer for the old guard is to innovate and to adapt to these rapidly changing times. With their trusted brands, their reputations and high-quality content, they are well placed to succeed if they are prepared to change and take advantage of what consumers like about commercial TV. So what do they like? Reliable entertainment at a given point in time which often appeals to the whole family (appointment to view), no-cost and advertising that can be high-quality, creative and informative – and something to talk about at work the next day. As mentioned previously, ad breaks currently represent 20-30% of the primetime product and therefore have a heavy influence on the perception of TV as a medium. Customers – particularly wealthier ones – are choosing channels that allow them to avoid intrusive, boring advertising, so there is an opportunity for the TV industry to increase the quality of ad breaks. They can do this by making ads less disruptive and more relevant – both to the consumer and to the channel. This is crucial for the ultimate survival of an industry whose days as the biggest broadcasting outlet are numbered.

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