Here's the headline from an article in The Wall Street Journal that had to put a smile on Netflix (NASDAQ:NFLX) executives' faces:
"Cable TV Shows Are Sped Up to Squeeze in More Ads"
You read that right. TV shows are literally shrinking so that networks can broadcast more commercials in their time slots. The Journal article spotlighted a growing practice of broadcasters using video compression to shorten TV shows by chopping out certain frames. The payoff for cable companies is more commercials delivered per hour, which helps them keep advertising revenue rising in the face of flat subscriber growth.
Time Warner's TBS and TNT were singled out for using the process on reruns including "Seinfeld" and "Friends." For their trouble, those channels recently achieved (golf clap) 18 minutes of commercials per hour of programming, according to Nielsen ratings. That's ahead of cable TV's overall average of almost 16 minutes per hour. As you've probably noticed, that number keeps climbing higher every year. In 2009, cable TV averaged 14.5 minutes of commercials per hour.
Where Netflix wins
Netflix is an obvious winner as traditional TV becomes more about delivering commercials than content. The streaming video giant, which shows zero ads on its billion-plus hours of viewing per month, attracted 13 million new subscribers last year and expects to hit 60 million paid members by the end of March.
And cable TV's aggressive advertising risks are offending more than just TV viewers. In fact, marketers aren't happy that their ad effectiveness is threatened by an overload of commercials. At some point, TV watchers will just tune out their messages.
Ditto for content owners, who are upset that broadcasters keep tinkering with their creations. Friends co-creator Marta Kauffman told the Journal, "It feels wrong. It is not how it was shot, written, or imagined. It wasn't meant to be that way so don't make it that way."
It can only help in content negotiations for Netflix to point out that on its service, your show will stream exactly the way you conceived and shot it. Maybe that's one reason why Friends is running on Netflix right now.
Netflix's business model doesn't have the same tension against its customers' preferences that cable TV's does. Unlike most broadcast and cable channels, Netflix isn't pressured to compromise the quality of its content delivery to squeeze out higher revenue.
Netflix is actually moving the opposite direction. Because it doesn't have broadcast windows to neatly fill, the company can allow shows to run as long as they need to. Binge watchers won't mind.
And Netflix has nine original shows and movies slated to launch in 4K resolution, or ultra high definition, this year. That list includes February's release of the third season of House of Cards and Marvel's Daredevil show in April. Upgrading to 4K streaming will cost a Netflix member a few extra dollars each month, and it's a good example of how the company can raise its average revenue per user by delivering more of what viewers want, as opposed to less.
Internet TV will be big
Netflix CEO Reed Hastings said in a recent conference call with investors that he was confident traditional TV will eventually get swamped by streaming services like his. "If you step back and say 'Is Internet video going to be in every home in America in 10 years?' That's a pretty clear yes," he said.
Hastings' forecast looks more likely with every extra minute of ads that cable companies have to stuff into their average programming hour.
Demitrios Kalogeropoulos owns shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.