So, why the difference? I see two reasons, but there are probably many more (chime in with comments if you have some good ones):
- On Demand viewing attracts additional viewers to watch a show who would not watch it if it was only available live. On Demand does this by being more convenient, and an important dimension of this additional convenience is limited commercial interruptions. Hence, On Demand is offered with fewer commercials than live TV. This idea parallels the market expansion motive to price discrimination. Like senior discounts at the movies, this option expands the market by giving the more advertising-sensitive consumers less advertising to wade through.
- When people watch a show On Demand, they can fast forward through the commercials. This fact is obvious, but it has important implications for the incentives of advertisers. Almost surely, placing five minutes of ads at each commercial break is going to drive most people to fast forward through the commercials, reducing the exposure of those advertisements. This reduces reduces the value of the ads relative to live TV, which most people can't fast forward.* To make the most of the advertising opportunity, it is optimal for whomever sells the ads to reduce the number of commercials. With fewer commercials, fewer people will skip the ads (even though they have the opportunity), and the remaining ads have more value.
Personally, I don't fast forward through my On Demand commercials, but then again, I enjoy commercials much more than the typical person.
* To cite some advertisements, maybe Old Spice man or Dos Equis man can fast forward live television. Without using superhuman capabilities, there's TiVo and DVR. Still, not everyone has these technologies.