How AMC Explains the Brutal Economics of Cable Television

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On Halloween 2010, AMC, the cable auteur behind Mad Men and The Killing, debuted a new series about zombies called The Walking Dead. With more than 5 million viewers tuning in, the channel's ratings suddenly tripled. But like a character from Mad Men, AMC is finding that financial success wields a double-edged sword.

Michael Idov's wonderful New York magazine piece on AMC's complicated ascendancy is worth a full read, but it's a nugget of TV economics toward the end that caught my eye. There are three ways to make money as a TV network, Idov writes: selling ads, owning your own content, and charging subscription fees within cable packages sold by providers like Comcast.

Broadcast networks like NBC have tens of millions of viewers, so they rely on ads. Premium cable channels like AMC do not have tens of millions of viewers, so they rely mainly on subscription fees set by cable providers.

So, this is the economics of television in a nutshell. If you are a broadcast network, your goal is to make as many popular shows as possible and sell ads with them. But if you are an unestablished premium cable channel, your goal is to make one or two hit shows that put you "on the map" and qualify you to demand fees from cable providers.

"The hits make you a 'must have' for any cable or satellite carrier - granting you the right to ask for fees," Bill Gurley explains. "Too many hits drive up costs. This is why you will see more and more hit shows on the less well-known cable channels. Mad Men on AMC is a perfect example. How can a cable company not offer Mad Men?" Before Mad Men, AMC earned 20 cents per subscriber. Now it earns 40 cents.

To get on the map, AMC had to appeal to the right people: the taste makers, the bougie commentariat, the media. But to grow, AMC has to appeal to more people. And there's the rub. Going mass market almost always means going downmarket. Less brainy dialogue, more eating brains.

The other option, Idov suggests, is to become a content producer. Another lesson in Cablenomics 101:

This April, while AMC sank $30 million into getting [Mad Men creator Matthew] Weiner to continue Mad Men, Lionsgate made over $75 million selling the show's streaming rights to Netflix. HBO owns most of its original programming, which entails a greater degree of upfront risk but lets the network amortize its production costs if a show gets syndicated, resold to foreign markets, or comes out on DVD. Producing The Walking Dead is viewed as a positive step for AMC, but it's one show, in just its second season, and syndication is still far off.

Mass-market success can't be highbrow or lowbrow, Idov concludes. "It's got to be ... unibrow."

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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