Cable Company Business Models: Your Cheat Sheet to the Ugly Economics

The post-Reality TV era has seen a swath of viewers eschew major network programming and venture brazenly through a channel surfing journey into less-trodden broadcast network channels — FX (NASDAQ:NWSA), AMC, TBS (NYSE:TWX) — in search of new forms of entertainment. This audience seems to have given rise to, or been ripe for pickings, in creating viewership for hit new shows on these networks, namely those of AMC — Mad Men (NYSE:LGF), The Walking Dead, Breaking Bad.

However, despite AMC’s rapid rise in the ratings department, attracting over five million viewers in last year’s season premiere of The Walking Dead (3x its prior audience), translating the networks’ newfound attention into newfound profit has proven more difficult than many would expect. As the fastest growing network on television from 2006-2010, questions linger over AMC’s ability to retain its newly captured audience without sacrificing some of the its core principles.

Michael Idov chronicled the networks’ struggles in a recent piece for the New Yorker, posing the business dilemma faced by AMC that emerged from its growth and popularity. According to Idov, AMC must find new ways to profit in order to sustain its popularity; as creators and producers of hit series ask for more and more money, the network will only able to renew a limited number of its current dramas, and if negotiations with the creative talents go south AMC risks losing its hit series’, and the coveted audiences that follow them, to competing channels.

Idov explains, “There are three ways to make money running a TV network: selling advertising time, charging subscription fees, and owning the content you show. Broadcast networks depend almost solely on the ad model, while premium cable channels rely mainly on the fees. Basic-cable channels generate revenue from a combination of the two, but because no one subscribes to one basic-cable channel at a time, the fees are set within the packages sold by cable providers.” Having in the past relied fully on revenues from advertising and cable fees (given by providers) AMC’s challenge is in that it needs to expand its role as a content-producer to sustain current growth.

What does this mean for the network? Likely that they will have to broaden the appeal of their offerings to attract larger and wider demographics of television audiences. For AMC this might mean lowering the standard of Emmy winning drama and dumbing it down to ensure more viewership. The risk here is that in offering a wider variety of shows, the channel could dilute the value of its brand and the strength it has created in associating itself with high quality, high brow shows like Mad Men (NYSE:LGF), and Breaking Bad, that it has churned out over the past five years.

It seems that here we reach the dilemma of the cable industry’s business model, quality at some point, must be traded for quantity. Artistic integrity must be swapped for mass popularity, and brand value exchanged for popular appeal. Ugly indeed.

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