Thursday, March 1, 2018, 11:39 AM ET|Posted by Will Richmond
Yesterday, NBCUniversal announced plans to reduce the number of ads in commercial pods by 20% and reduce ad time by 10% across all its networks in prime time. The move will almost certainly meet its goals of creating a better viewer and advertiser experience. But an overarching question is whether it will ultimately benefit NBCUniversal and the broader TV industry? The answer to these questions lie in whether NBCUniversal can make the math work on fewer ads and less ad time.
Obviously it’s a risky move for any business to reduce the quantity of what it sells, betting that customers will be willing to pay more for a scarcer resource. But basic laws of supply and demand are in NBCUniversal’s favor: when supply is reduced, then even at constant demand, prices should rise.
Importantly, NBCUniversal is going a step further by improving the quality of its prime time inventory in a number of ways to make it more targeted, relevant and impactful such as a new 60-second contextually-programmed “PRIME POD” that will have a maximum of 2 advertisers. New ad formats will include interactive picture in picture and social commercials and social first pods. AI will be used to analyze scripts and data to make ads more relevant.
So NBCUniversal is both reducing the quantity of its inventory and striving to improve its quality. Taken together, the company is pursuing the steps necessary to be able to raise advertisers’ rates in order to offset the fact that it will have less inventory to sell them.
But whether higher rates will actually come to fruition is clouded by a whole range of macro industry issues for both advertisers and viewers that are largely outside of NBCUniversal’s control. Advertisers are tightening their budgets and searching for ever-better returns on spending. Amazon is squeezing margins across many different product categories. Digital is soaking up ever-bigger shares of ad budgets and big players like Google and Facebook continue to enhance their efficacy (despite ongoing brand safety and accountability issues). Technology is making it more feasible to micro-target highly specific audiences.
Meanwhile viewers, especially younger ones, are dropping out of the ad-supported ecosystem entirely as they shift their consumption to SVOD services. According to Nielsen, live+DVR viewing for 18-24 year-olds dropped a staggering 17% from Q2 ’16 to Q2 ’17. Those that still watch with ads are spending more time in online-only environments, with YouTube leading the way. Spending time on social media and gaming have soared. Ad avoidance in general has become more popular through ad-blockers and ad-skipping. All of this reduces the addressable universe advertisers can expect.
TV remains an outstanding reach medium for advertisers where brand safety is guaranteed. NBCUniversal is smart to recognize that the typical TV experience is broken when overloaded with ads. And many advertisers will always have a need to efficiently reach broad audiences.
However, with so many disruptive forces swirling through the TV industry currently, it’s not clear whether NBCUniversal’s reduced quantity and improved quality will necessarily lead to higher ad rates. So, on the one hand, NBCUniversal’s move carries substantial uncertainty and risk. But on the other hand, since the status quo is simply untenable, NBCUniversal’s decision was in a sense inevitable. How this all works out will have broad implications for the TV industry as a whole.