Dear TV: We Love You. You're Perfect. Now Change. (But Not Too Much.)

Picture this: Thursday night at 9 p.m., you grab your glass of wine and sink into the couch to watch "Scandal" on ABC. But instead of an hourlong programming block interspersed with some 10 minutes of commercials for products you may never buy, you see a two-minute piece of content starring Kerry Washington as Olivia Pope. The whole thing looks a lot like the TGIT drama, with Olivia wearing her metaphorical white hat and fixing yet another White House scandal, but she is doing all of it with the help of her Samsung Galaxy. Not so coincidentally, you are actually in the market for a new smartphone. The rest of the show is commercial-free. This could be the future of TV. As more viewing takes place on ad-free platforms and marketers increase their spending on digital video, TV networks are being forced to rethink what has traditionally been an interruptive commercial experience. They are making a concerted effort to digitize TV by infusing data into the planning, buying and creative processes, automating what they can and moving toward the smaller ad loads of streaming video. Aside from reducing your chances for wine refills during commercial breaks, it sounds like a welcome model for consumers. And marketers in general are certainly eager to run more effective TV commercials. But as TV heads into its annual upfront negotiations with ad buyers this summer, the industry isn't rushing to totally replicate digital. "TV as a traditional medium is still important," said Rich Lehrfeld, senior VP-global brand marketing and communications, American Express. "When we run a heavy TV schedule, we see a lift in sales and product awareness. We need to run two weeks of digital to get the reach of one day of broadcast." There's a fear that TV will become "so fragmented and ratings will drop so much that it will be hard to generate reach and frequency," Mr. Lehrfeld admitted. New ad opportunities and approaches could mitigate that. It's no longer a debate between TV and digital, said Adam Harter, VP-cultural connections, PepsiCo. "It's how do we bring those two things together?" "Sometimes people make the mistake and think broad reach is bad," he added. "It's not. Sometimes you can get the best of both worlds." Data That's certainly the networks' pitch with data, where they aim to combine their massive reach with digital-style targeting. Each spring now brings a new bloom of data products that let marketers better find audiences with very specific characteristics, like families with a household income over $100,000 with two kids under the age of 5. Viacom, Turner and NBC Universal have several data products that offer varying degrees of targeting; Discovery Communications unveiled its own product last month; and Fox Networks Group recently formalized its data capabilities. By 2020, according to Turner ad sales chief Donna Speciale, half of the company's inventory will be sold against guarantees other than the usual Nielsen age and gender demographics. And 85% of Viacom's upfront deals this year will include data in some capacity, said Jeff Lucas, head of ad sales at Viacom. "Eventually, we are going to reach a point where we are not going to differentiate between deals done with data and deals done without data," Mr. Lucas said. Despite what seems like the inexorable rise of data, though, neither buyers nor sellers want to turn TV completely into a precision play. "There's still a need and reason to bring broad reach and gender guarantees," said Michael Strober, exec VP-client strategy and ad innovation at Turner and co-head of Turner Ignite, a data-focused unit. One problem with audience targeting is the ad repetition that marketers risk when they "slice and dice it down to a finite target," said David Morris, chief revenue officer, CBS Interactive. The more specific an audience they go after, the less they can advertise to them without hitting them over the head. "Quite frankly, in television we usually don't want to hit the same person over and over," said Chris Geraci, president-national broadcast, OMD. "A lot of the messaging is directed to as many people as possible within a broad target audience, and reach remains one key benefit of TV." Nonetheless, media buyers and their clients applaud the efforts being taken by networks to move beyond Nielsen guarantees and to improve the efficiency and provability of TV ad buys. What's especially exciting is the potential to prove return on investment and finally close the loop on TV advertising, demonstrating what marketers' TV budgets really achieved in the end, said David Campanelli, senior VP-director of national broadcast, Horizon Media. But transacting on data at the outset remains nascent. Viacom will write about 33 deals that are non-Nielsen guaranteed during the upfronts, Mr. Lucas predicted, up from about 11 last year. And by 2017, that number should grow to about 66, he said. Turner is working with only a "handful" of clients that are setting guarantees on data other than Nielsen age and sex demographics, Mr. Strober said. Last year about 1% of revenue was transacted using data, Mr. Morris said citing research. "That number will grow, but still a small number in the grand scheme of things," he said. For one thing, it isn't easy for marketers to home in on audience definitions and pinpoint specific attributes, said Krishan Bhatia, exec VP-business operations and strategy, NBCU. But it's the so-called walled gardens that seem to be frustrating the industry the most. Because each individual TV group uses different data and technology, it's difficult to activate a data play across the entire TV landscape. And media buyers, who have long used their own data and that of their clients to better plan TV buys, are hesitant to share with networks at the risk of inflating prices on new and improved ad inventory. "All of these data announcements are getting a little silly," said Rino Scanzoni, chief investment officer at WPP's GroupM, which is the world's largest ad buyer. "It is naive and irresponsible for agencies to rely on media partners' data to inform them on what they should be buying on behalf of their clients." Ad breaks While consumers might appreciate commercials that are particularly relevant, if the surge in viewing on ad-free platforms is any indication, fewer commercials will be even more exciting. Turner is bringing down the number of commercial minutes on TruTV and TNT, with a goal of about 10 minutes of ads per hour during certain shows. Viacom is reducing commercials in primetime to 14 minutes per hour from about 18. Fox has been airing its hip-hop drama "Empire" with limited commercials since its inception and is looking at other programming and nights of the week to do something similar, said Toby Byrne, president-ad sales, Fox Networks Group. And Viceland, the joint venture between A&E Networks and Vice Media, debuted in February with about half the commercial time of other cable channels. All of this is being done partly in the hopes of luring people back to TV, partly to make a new case to advertisers. The goal is to "enhance the brand effect, create better brand recall, engagement and affinity," Turner's Ms. Speciale said. "And we can do some great storytelling in the pod. The ultimate endgame is to show intent to purchase. Provable ROI is the Holy Grail." Using methods from focus groups to eye tracking, Turner research found that reducing commercial clutter gives viewers a better experience and advertisers better results, a spokeswoman said, with gains in both ad recall and purchase intent. There's still the question of just how much of this reduction in commercial time is simply a much-needed correction after years of stuffing more commercials into ad breaks to help offset lower ratings. Commercials on broadcast networks made up 17.3% of programming time in 2015, up from about 16.8% in 2012, according to Brian Wieser, analyst, Pivotal Research Group. On cable, they constituted 20.6% of programming time, up from 19.3%. "In most cases, the networks are taking the load down in originals or in primetime and bringing it up more in other dayparts," Mr. Scanzoni said. "So in aggregate, it is remaining the same." While reducing commercial loads is good for consumers, for advertisers it means further shrinking the supply of gross ratings points, which are already being squeezed due to ratings declines, driving prices up further. "From a price standpoint, it is tricky and complicated," OMD's Mr. Geraci said. "You don't want to make yourself too expensive, but you do want to make yourself more valuable." Fewer commercials surely would be nice, but Dan Lovinger, exec VP-advertising sales, NBC Universal, said commercial loads are not the real problem. "The commercial load discussion feels pervasive, but really it is TV waving the white flag of surrender," he said. "The real issue is people don't value the ads they are seeing." Native advertising Fixing that problem is about creating "more engaging ad formats" and serving "the right people the right ads," Mr. Lovinger said. That's where the possibilities get really interesting. While network executives are coy on what the actual formats might look like down the road, everything is being considered, from branded content in the style of the surrounding show to serialized ads. But for right now, it's about giving viewers more content while still creating opportunities for marketers. American Express partnered with NBCU in February to give viewers additional content from shows like "The Voice," "Blindspot" and "Late Night With Seth Meyers." The stunt replaced nearly 18 minutes of commercial time with programming that was sponsored by AmEx. Intel worked with Turner's TBS for the show "America's Greatest Makers," an eight-episode reality competition dedicated to changing Intel's perception among millennials, said Penny Baldwin, VP-global marketing and communications group and general manager of brand reputation and partner marketing, Intel. The tech company has replaced more than two hours of commercial time with native content on Turner's networks, said Dan Reiss, executive VP of content partnerships at Turner and co-head of Turner Ignite. A&E Networks is creating what it's calling "enthusiast" blocks of programming that will turn parts of the schedule typically occupied by reruns (like Saturday mornings) into homes for native content. The programming blocks will air fewer commercials. The pinnacle of all of this, so far, is Pepsi's collaboration with Fox's "Empire" this season for a meta-integration that prominently featured the soda giant in a three-episode story arc. It culminated with a music video starring character Jamal Lyon and directed by "Empire" co-creator and executive producer Lee Daniels. The video occupied an entire commercial pod. "In the new model, we are looking for partners who will bring us in early to the creative process, when shows are just being created," Pepsi's Mr. Harter said. But partnerships of this nature are few and far between, for plenty of good reasons. "The reality is that integration was a result of the stars aligning perfectly," Fox's Mr. Byrne said. "We won't force those things. We will only do it when it is great and it fits. In the case of Pepsi and 'Empire' it truly enhanced the storyline." Moving forward, creating native advertising on a large scale seems to be the biggest obstacle. "I can only deploy resources in so many ways," said Mr. Lehrfeld of American Express. The goal is to achieve a large enough scale and drive an impact that's comparable to "the sweat and time and money you put into it," he said. NBCU's Mr. Lovinger agreed. "Can we do a hundred of these American Express deals a year? The answer, to some degree, is no," he said. "But there are things we can do to make each of these work harder." That includes working with brands that can use their own reach and social influence to help provide scale. Turner is looking to expand branded content's exposure by giving marketers a home for the content they are already creating and airing on their own sites and social media accounts, Mr. Reiss said. Still, he is expecting only a small percentage of commercial pods, in the low-single digits, to be occupied by more custom content. Programmatic And then there's automating all of this, which is perhaps the most questionable and complex part. TV networks like NBC Universal and Fox Networks Group are building private exchanges to sell both traditional and digital ad inventory with greater automation and application of data. But "programmatic" on TV means something very different than in digital, where you can auction off ad inventory in less than a second. "We are using data to better prepare for and plan our upfront expenditures, but the actual transaction still needs to be person-to-person," Horizon's Mr. Campanelli said. Many of the current offerings require plenty of lead time, and inventory still needs to be manually cleared, Mr. Scanozi said. Only a very small percentage of inventory is being offered, a media buyer added, speaking not for attribution to avoid the appearance of criticizing network offerings. It is not biddable, the price is static and none of the ad time comes from the pool of desirable programming offered in the upfront. "It is as far away from programmatic as you can be," the buyer said. "You don't want to confuse smoke and fire with a lot of this stuff." Perhaps it isn't even necessary for TV networks to adopt the word "programmatic." "We don't need more automation in national TV execution. … We need more automation in data optimization applied to TV inventory," Mr. Scanzoni said. "The reality is TV is not like digital. Ads are not dynamically inserted outside of VOD. You can't do it in real time or even close to real time." "Programmatic, in quotation marks, doesn't exist in the true way it does in digital," CBS's Mr. Morris said. The near future TV sales leaders expect the future to arrive in degrees. "Near-term, age and gender will still be the currency," said Jo Ann Ross, president-network sales, CBS. "Not a lot is going to change how we are speaking to advertisers during the upfronts." "The TV ad model is going to be very recognizable," said Mel Berning, president-chief revenue officer, A&E Networks. "The model is too valuable and powerful to change overnight. What we will see is a subtle change toward continued personalization of TV." "Today 30-second, 60-second and 15-second ads are still very much the mechanism for how brands build purchase consideration and drive sales," Fox's Mr. Byrne said. "I'd be really surprised going forward if the 30-second spot will go away anytime soon. But there will be more iterations and flexibility." What is changing is the number of choices for marketers. "What new products allow us to do is be a reach player, targeted and personalized. Everything we are developing will allow the client, depending on their needs, to use us in different ways," said Peter Olsen, exec VP–national ad sales, A&E Networks. Even networks with the same parent company will operate differently. A&E, History and Lifetime in primetime will still be predominantly about broad reach, Mr. Olsen said. And then Viceland and FYI, which are much more niche brands, will offer different ad loads and more custom content. "There will be a world with multiple models," NBCU's Mr. Bhatia said. "To date, there has only been one model." ~ ~ ~CLARIFICATION: An earlier version of this article said CBS Interactive Chief Revenue Officer David Morris expects 1% of CBS ad revenue this year to come from deals pegged to nontraditional, data-driven guarantees. Mr. Morris was citing research about the overall upfront last year.

Dear TV: We Love You. You're Perfect. Now Change. (But Not Too Much.)

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