Netflix and other subscription services are training an entire generation to watch television without commercials, which is ironic given that the bulk of their offering consists of TV series whose very existence was made possible by the revenue from said commercials.

Netflix’s Reed Hastings stumbled on to what appeared to be a winning formula several years back: having lost the Starz catalogue, and the current movies that came with it, he approached the various networks and studios and offered to pay millions of dollars for the rights to older seasons of their current shows, many which were sitting on the shelf waiting for the series to hit the magic 100-episode mark needed for syndication.

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What initially seemed a win-win proposition is now a dangerous trend for both parties: by weaning audiences from live viewing and teaching them to binge on their own schedule, all without commercials, Netflix is killing the goose that laid the golden egg. While audiences are watching more television than ever, they’re watching less of it live, causing ad revenue to shrink.

A big part of the problem is an ad buying system built around live viewing and the Nielsen ratings to measure it. Despite mounting evidence that viewers have been abandoning live viewing, Nielsen has not produced a viable system for counting all those non-linear views. That mistake is compounded by the ad industry’s inability to work out how to serve up a similarly robust ad load for all those VOD and streaming views, which it tends to discount by lumping them all under the catch-all term “digital”.

Even more problematic is that much non-linear viewing now takes place on PVRs, where people skip through ads. NBC’s research chief recently noted that if PVRs were their own network, they’d be four times the size of the four largest US TV networks combined. Given viewers’ strong preference for watching TV on their own schedules, PVR viewing numbers are only going to rise.

That is a problem: if viewers continue to avoid the advertising that is the television industry’s bread and butter, ad revenue is going to start to dry up and along with it, the money to fund production of new TV shows. So, what are the alternatives? How can the industry replace some of that $65bn in annual revenue?

There are several options. Branded content, either as part of the main programming schedule or as part of a second screen effort, is the most talked-about alternative. Given the ubiquity of branded content and so-called native advertising in other online media, audiences should not prove overly resistant to its introduction on TV. The trick, as always, is to make sure that the “content” part is more important than the “branded” part, so that what is produced is something people actually want to watch, not a 15- or 30-minute infomercial. Entertaining programming is entertaining programming, no matter who funds it.

Netflix leads to record drops in US TV viewing Read more

Branded promotions are another option. Shows can partner with brands to create sponsored promotional vehicles for the show that also help boost awareness for the brand – such as Channel 4 and Waitrose’s Weekend Kitchen. The “halo effect” of being associated with a viewer’s favourite programme can be valuable to brands. The bigger and more active a show’s fan base is, the more valuable it is to potential sponsors. That’s why many showrunners have started reaching out to fans on social media and providing support for fan communities.

Another way to recover the missing ad revenue is to lease the programmes to more platforms. The social networks have looked on in envy as Netflix gained millions of subscribers and, more importantly, the data associated them. It is very likely that Facebook, YouTube and even Twitter will want to license network programming, using the vast storehouse of knowledge they have about their users to match the right people to the right programming.

The larger legacy platforms such as Yahoo and AOL are also options, as both have already begun to explore creating their own original programming. The trick will be to play off the different platforms against each other so that the networks continue to get top dollar.

Finally, if interruptive advertising is to still have a place in this new ecosystem, it will need to become much less intrusive and far more targeted. That’s where personalised viewing will come into play. Just as mobile phones gave everyone their own personal phone number, and the data that went with it, OTT viewing will allow everyone to have their own personal TV account. The data collected there will allow for very targeted advertising that the networks can then charge more for. This is already becoming a reality through Sky’s AdSmart and 4oD’s targeted advertising tech. The result will be fewer but more relevant commercials, a combination that may actually convince viewers to stick around for the commercial breaks.

Will these options be enough to make up for all the advertising revenue the television industry stands to lose? It’s hard to say. But the fallout may actually be a boon for audiences: tighter budgets will force networks to produce shorter seasons of higher quality programming that attract the sort of very involved fan bases that allow for the growth of alternative revenue streams.

Stranger things have happened.

Alan Wolk is a consultant on the business and future of TV. Follow him on Twitter @awolk. He is Chairman of the 2nd Screen Society and a Senior Analyst at TDG.

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