Disney's CEO Says There Are Too Many Commercials on TV

By Adam Levy Markets Fool.com

Do you hate sitting through television commercials? Commercial breaks are just too long and come too often, right?

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Good news:Disney (NYSE: DIS) CEO Bob Iger agrees.

"I think that in general, there is probably too much commercial interruption in television," he told investors on the company's first-quarter earnings call. Disney will specifically look at lowering ad load on ABC and ESPN.

This is not a completely original thought for a television executive. In 2015, Time Warner (NYSE: TWX) started experimenting with lower ad loads during its TruTV primetime programming. Viacomand 21st Century Foxalso started experimenting with ways to reduce ads for viewers at the end of 2015.

Image source: Disney

Advertising revenue was down in Disney's first quarter for its cable networks segment and flat for its broadcasting segment. Will a shift to fewer advertisements produce a positive effect on ad sales for the company?

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What have the results been for Time Warner?

Ahead of its third-quarter 2015 earnings release, Time Warner announced plans to cut advertising during prime-time TruTV programming in half. On the earnings call, CEO Jeff Bewkes explained that the company expects a better viewing experience to increase viewership and enhance the network's value proposition.

A year later, he had this to say:

In terms of advertising, we're still in the very early stages of essentially nothing short of reinventing the ad model for TV. But the early, early examples that we have done ... we are seeing some really positive results. ... Advertiser response has been extremely positive. We are seeing improved ratings because there's less dislocation going into the advertising pot and coming out, and we have seen higher consumer satisfaction and higher brand recall.

Turner's financial results show almost no impact from the change in advertising. Granted, the biggest change was at one of Time Warner's smaller cable networks. Overall, domestic advertising revenue was flat in the fourth quarter last year because "growth at Turner's news business [was] offset by lower delivery at certain entertainment networks."

Can Disney make the same model work for ESPN and ABC?

ESPN and ABC have significantly larger audiences than TruTV and are much more valuable to Disney than TruTV is to Time Warner. But both networks are suffering from declining viewership. Disney said it experienced lower average viewership for its broadcast networks in the first quarter, and ESPN continues to bleed subscribers. Improving the viewing experience with fewer commercial interruptions may help bring back audiences.

As customers look to cut expensive channels out of their cable package, keeping the subscribers it still has will be key. First, it must reinforce the notion that they need to stay subscribed, allowing Disney to raise affiliate fees year after year. Second, it provides an opportunity to show more effective ads, if fewer ones, allowing Disney to increase its price per ad.

Welcoming the digital disruptors

Disney has aggressively pursued getting ESPN and its other cable networks into the lowest-priced tiers of digital TV packages such asAT&T's (NYSE: T) DirecTV Now, Sony's PlayStation Vue, and DISH Network's Sling TV. It may be sacrificing some affiliate pricing power to get it into the low-priced cable alternatives, but digital delivery provides Disney an opportunity to make more money off advertising.

Digital pay-TV distributors combine the broad reach of television with the ad-targeting capabilities of digital platforms. As such, Disney may be able to segment its audience and show certain ads to some viewers and different ads to others, generating even more value per ad than on its traditional distributors' services.

"There are opportunities that are new -- that will be new to us on the OTT [over-the-top] platforms because some of the technology platforms will offer dynamic ad insertion," Iger said on the company's third-quarter earnings call last year. "We think that that has got some real potential for the company, and that is a component of the DirecTV Now relationship."

Combining higher value per ad with a higher-quality viewing experience is a recipe for success. However, Disney does risk hurting itself if it doesn't get the balance right and its cuts too many or too few commercials. The early reports from Time Warner are promising but have yet to prove that fewer advertisements will help improve revenue. Considering the growth of ad-free entertainment options, though, Disney may have no other choice.

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Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.