Feb 14, 2015

The Emperor Has No Clothes

There’s a fairly clear hierarchy in the world of apps: the ad-supported version is for apps you don’t use very often or don’t like enough to care if there’s a constant flow of banners interrupting them. But if an app proves compelling enough, you’ll gladly pay the dollar or five to get the ad-free version.

At first glance, the viability of the second model seems like a no-brainer, even for the television industry. In fact, people already pay for channels like HBO because they find that the quality of the shows to be worth an extra $15 a month. The logic is quite simple.

Why, then, has the ad-free model never made it to the world of television?

The best illustration of the lopsidedness of the current system is the CBS drama Under The Dome. Episodes of the show, an adaptation of a Stephen King novel, will first air on CBS with a full commercial load and then air ad-free on Amazon Prime five days later.

But what if instead of selling rights to Amazon, CBS allowed viewers who had the CBS app to pay $2.99 an episode (or $34.99 for the entire 13-episode season) for the right to see the series ad-free five days before the ad-supported version ran online? And why not make that option available for every series?

In circulating the idea with executives at various networks, the reaction is always similar: it’s a thought-provoking idea, but advertisers would be furious and feel we were undercutting them, and the app would cannibalize the networks’ most loyal linear viewers (at minimum, the most affluent ones.)

While I see their point, that migration is already happening. Netflix is lifting high-income, high-value viewers from broadcast and cable channels. Ditto for operator DVRs and VOD. Seems their loyal viewers are not so loyal when presented with a compelling alternative. And if this is going to happen, why not keep them within the network circle, albeit OTT?

That said, legitimate barriers exist, and the greatest barrier to getting ad-free programming on TV is unfortunately the toughest to overcome. To wit, everyone involved in the television advertising ecosystem has bought into the fiction that people actually want to watch commercials. The entire system, including Nielsen ratings, is predicated on this false perception. Allowing people to pay a fee to opt out of having to watch commercials, and then rewarding them for doing so by giving them first access, would only serve to highlight this fact, to show that the emperor has no clothes.

But with linear viewing in rapid decline, an ad-free system may be the networks’ last best choice. Viewers have proven they have no problem paying to see shows they like. (It’s paying for shows they don’t like that’s the rub.) It remains to be seen which network will be the first to introduce an ad-free service on television and whether it offends advertisers such that it cuts into network revenue.

The ideal candidate would be a mini-series — — something like The Slap, the eight episode American adaptation of an Australian series that launches Thursday night on NBC. The network could easily position it as a ‘special event’ and use this as its rationale for offering an ad-free version.

The benefit to the network is two-fold: if the show turns out to be popular, it would dramatically increase the number of people who download and use the OTT app. This would then allow the network to charge higher rates for ads that ran on the app and keep the audience that would otherwise migrate to Netflix or another streaming service. Second, they’d get valuable data about the show’s audience: who they are, what shows they like to watch, what they liked on Facebook or other social apps, etc.

Networks could also establish an alternative revenue stream from their OTT apps. Viewers could pay for an individual episode (transactional) or pay a flat monthly fee for access to the entire network (subscription). Or they could offer both. The final decision would rest on which option they believed would generate the greatest profits, which would vary from network to network. Regardless, networks have a variety of ways to implement an ad-free model.

If the case for ad-free TV options is so compelling, why isn’t the model already in use? Apart from fear of driving away advertisers, networks fear driving viewers to OTT, even their own OTT. In their mind, it remains unclear how they can make the same money from OTT as they do from linear.

Unfortunately, that train has left the station and viewers are watching less linear TV and more OTT than ever before. That’s why it is in the best interest of the networks to make sure those viewers stay with them as they move to OTT rather than defect to a third party.

That said, it will take time for networks to become comfortable with the ad-free model, and it will take someone with true vision to be the first mover. However, once someone does move, the floodgates will open.

A version of this article ran as a TDG opinion piece on February 12, 2015

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