June 9, 2016
This analysis is by Bloomberg Intelligence analyst Tal Smoller. It first appeared on the Bloomberg Terminal.
U.K. TV viewers may be seeing more advertising during The X Factor and other prime-time shows, thanks to new rules from the European Commission. This analysis explores what impact fewer restrictions on commercial time will have on TV advertising’s effectiveness.
The European Commission has eased restrictions around TV advertising, which could lead to more prime-time commercials in the U.K. Photo: Ian Gavan/Getty Images
EC mobilizing audio/visual media to create single digital market
The European Commission announced two key changes to the Audiovisual Media Services Directive in May, as part of its plan to form a single digital market. The first aims to ease restrictions on the amount of advertising permitted on TV.
More prime time ad sales may drive revenue growth, to a point, after which broadcasters risk a decline in prices and viewers. The second requires online video services to ensure 20% of their catalog is European content, which may ultimately benefit domestic content producers.
Ad-intensity rules prime broadcasters for more prime-time ads
The ability to sell more advertising spots during prime time would be positive for European broadcasters’ revenue, given prime-time ads command premium prices. But if this leads to a significant increase in advertising supply, ad prices and ultimately total ad revenue, may decline, as evidenced by a 2011 study conducted by the U.K. communications regulator, Ofcom.
An increase in ads also risks driving a decline in TV viewing, potentially spurring the take-up of ad-free online video alternatives.
More TV ads may dilute EU broadcasters’ VOD defense mechanisms
Europe’s relatively low advertising intensity is one of the commonly touted reasons why ad-free online video alternatives pose less of a threat to traditional TV, compared with the U.S.
Europe’s relatively low ad intensity is one of the reasons why video-on-demand services pose less of a threat to traditional TV. Photo: Chris Ratcliffe/Bloomberg
The European Commission’s proposal to relax regulations governing the amount of ads TV broadcasters are permitted to air from a maximum of 12 minutes per hour, to a more flexible 20% limit from 7am to 11pm, means this may no longer hold true. U.S. broadcasters, not subject to any regulations, air about 15-20 minutes of ads an hour.
“The revised Directive gives broadcasters more flexibility as to when ads can be shown… Broadcasters and on-demand providers will also have greater flexibility to use product placement and sponsorship, while keeping viewers informed,” according to the commission.
Read next: Is video advertising ready to battle TV?
Subscription video on demand penetration rates were about 11% in Germany, and 23% in the U.K. at the end of 2015, compared with 47% in the U.S., based on data provided in a presentation by German broadcaster ProSieben.
Ofcom may use opportunity to revise overtly strict TV ad rules
The EU’s move toward more lenient restrictions on the amount of advertising permitted on TV may prompt Ofcom, the U.K. communications regulator, to revisit its code on the scheduling of TV ads, which imposes even stricter limits on U.K. broadcasters in addition to EU rules.
Even if revised, it may retain a strict stance given over half of U.K. TV viewers thought there were too many ads on TV, and too frequently, in 2015. A further 35% were neither bothered by the amount nor frequency, but would not tolerate more.
– Compiled by Shannon Doubleday, June 9