The 'Mad Men' Lesson: Buzz Lights Up a Network

Pricey prestige cable series are getting even hotter, even if they don’t quickly bring in cold, hard cash

By Jon Lafayette -- Broadcasting & Cable, 7/19/2010 12:01:00 AM

Along with being TV’s definitive sleek and determined advertising guy, add this to the portfolio of Mad Men’s Don Draper: He’d make one hell of a cable programmer. Take this bit of advice he passed along in a season two episode: “Success comes from standing out, not fitting in.”

That philosophy has worked well the past few years, as advertising-supported cable has been rich with shows that both stand out and earn Emmy gold, from FX’s The Shield to AMC’s Mad Men and Breaking Bad.

In the short run, networks are losing money by paying a steep price for production and promotion, dollars that aren’t being recouped even by the higher advertising revenues commanded by original programming. But over the long run, such series create a brand aura for a network—as they did for HBO—that can lead to big-picture gains. In addition to generating higher ad rates, spending on original programming is one way cable networks can create value for their cable, satellite and telco distributors at a time when subscriber fees are coming under pressure because of the retransmission cash being paid to broadcasters.

For all of those reasons, more cable networks are investing more money in originals. Earlier this month, TV Land, a channel built on reruns, renewed its original comedy Hot in Cleveland. The series, starring the indomitable Betty White, improved the ratings in its time slot by about 500%.

And that kind of caché goes a long way toward explaining the equation. Networks, slightly tweaking Draper’s dictum, are doing their best to stand out and not sit still, especially when it comes to creating and keeping the kind of buzz that ingratiates programmers with advertisers and distributors. There may have been a time—even recently—when cable networks hesitated to throw cash at a new show that might not quickly earn it back. That time, however, isn’t now.

“When a network like AMC or FX or Turner and USA invests in programming, it generates increased audiences, and that’s going to be a natural place where advertisers are going to look to put some of their money,” says Todd Gordon, senior VP and director of national broadcast at media agency Initiative.

Original programming offers other benefits. It has more engaged and loyal viewers than reruns. And because the network is involved in production, there are better sponsorship opportunities.

“There are more opportunities for brand integration, or for custom content or Web extensions,” Gordon says. “Originally produced programming opens up a lot more advertising and marketing opportunities than stuff that’s off the shelf.”

According to the Cabletelevision Advertising Bureau (CAB), national cable ad revenues have been rising, hitting $18.7 billion last year when growth was limited to 1.8% by the recession. Meanwhile, networks spent $21.5 billion on programming in 2009. With no signs that the wave of originals is over, the CAB expects that number to increase to a whopping $28.2 billion in 2012.

Still smoking-hot
Mad Men, which returns for season four on July 25, is the new exemplar of original cable programming. It has won back-to-back Emmy Awards as Best Drama and earned the most nominations of any drama this year. That’s helped put AMC, which was a sleepy channel running old movies, on the map with ad buyers and cable operators.

For all its acclaim, however, Mad Men drew an average of 1.8 million viewers last year, far fewer than more popular cable fare such as TNT’s The Closer and Burn Notice on USA Network.

Commercials on first-run episodes of Mad Men cost about $20,000-$25,000 per 30 seconds, according to one buyer. (AMC gets $10,000-$15,000 for Mad Men rerun ads.) That compares with the $5,000 spots in AMC’s primetime movies. Still, even at those rates, it seems highly unlikely that commercials cover the cost of producing the show, which, in an interview last year, creator Matthew Wiener put at $2.3 million per episode.

“They are spending some big bucks over there,” says Derek Baine, analyst at SNL Kagan. That said, the network has benefited from the buzz bump the show provides. Kagan estimates that since Mad Men had its debut in 2007, AMC’s ad revenues have risen 23% to $204.6 million.

According to Nielsen, revenue from Mad Men accounts for only 1.5% of AMC’s ad dollars, but ad buyers say that to advertise on Mad Men and other originals, the network encourages sponsors to buy other programming, pushing up prices for its movies as well.

But expenses, including marketing, grew at 18%, and while the network’s cash flow has risen, hitting $268 million in 2009, its cash flow margin has dropped every year since 2007. It remains extremely high, however, at 57%, according to Kagan.

AMC President Charlie Collier, while declining to discuss financial details, insists that the network’s strategy of creating premium programming has been validated not only by awards won, but also by an increase in the value of the channel. “What you’re doing is serving your constituents, the viewer, the advertiser, the affiliate,” Collier says. “You can see how our perception has changed in those marketplaces favorably over the last three or four years.”

“If movies are getting a decent rating, it’s not going to get the same kind of attention from our clients, the advertisers, as original shows,” adds Initiative’s Gordon. “I think [AMC has] done a great job with that network, and hopefully they’ll be doing more of the same.”

Collier says AMC puts only 10 minutes’ worth of commercials in Mad Men episodes, and they always sell out. “The challenge is making sure that we’re good to all the partners that are interested,” he says. “It’s one of the most uncluttered hours of television. We’re creating an environment that’s premium television on basic cable. We really do it that seriously.” Collier adds that AMC is launching its biggest marketing campaign ever to boost season four.

While AMC picks up about 65%-75% of the cost of making Mad Men, Lionsgate covers up the rest. Lionsgate Television President Kevin Beggs thinks producing original programming for cable is worth the risk, especially compared to making shows for broadcast.

“There’s a better shot of getting shows on, and when they get on, those shows stay on and get more expansive support,” Beggs says. “As a studio supplier, you’re the beneficiary of that kind of tender loving care.”

Nevertheless, Mad Men is running at a deficit for Lionsgate, and will continue to do so until it has a few more seasons under its belt, making it able to earn syndication revenue, according to Beggs. “This is a boutique series with a large, loud reach that is far bigger than its actual viewer base on television,” he says.

Shows like Mad Men and Breaking Bad aren’t profitable from ad revenue alone, says Baine of SNL Kagan, “but if they are critically acclaimed, this helps at renewal time with operators, so you could make it up from increased license fees.”

But license fees may be under pressure because operators’ programming costs, already their biggest expense, will be rising thanks to new retransmission agreements with broadcasters that call for per-sub cash payments. That means operators may consider off-net shows to be programming they’ve already paid for. As a result, to prove their value, networks may plow even more dollars into producing originals.

In another part of the model, Beggs expects Mad Men to generate higher DVD sales and other ancillary revenues than most series. “It’s a real collector’s and television lover’s kind of thing,” he points out. “These things are No. 1 on Amazon weeks in advance of the street date and all over iTunes in huge ways; sales are very consistent week after week year-round, not just around the show premiere.”

For those revenues to push the show into the black someday, Lionsgate has to be vigilant about costs. “It is a long road,” Beggs says, “and the only way to make that more palatable is to try to be as efficient on the production side up front so that the spread between now and profitability is as short as possible.”

Beggs says he doesn’t know AMC’s economics to figure out if the network is making money off the series: “But even as an armchair quarterback, I can deduce that Mad Men has been a big benefit to the AMC brand.”

It’s hard to see how AMC makes money on originals like Mad Men when FX, one of the first cable networks to build a brand with edgy, award-winning original programming, can’t. “We don’t even come close to break-even,” says John Landgraf, president of FX Networks.

Despite the red ink, FX is in the originalprogramming game because it helps other facets of the channel’s business. “I’m not sure what FX’s identity would be if it didn’t have any original programming,” Landgraf says. “I don’t think it would be a brand that both advertisers and viewers would know very much about. So, even though we could make more money theoretically if we didn’t make original programming, we would have a weaker channel from a branding, ratings and ad sales standpoint, and a far weaker channel from an affiliate sales standpoint.”

FX plans to air 11 original series with 141 episodes in News Corp.’s fi scal 2011. Landgraf thinks that’s just about the optimum amount. (Even with that many shows, original programming represents just 8%-9% of FX’s primetime ratings and less than 20% of its primetime revenue, he says.) Part of his job now is to manage the cost of that programming by keeping a balance between expensive hour-long dramas and cheaper half-hour comedies.

The network has also been taking ownership positions in its series to benefit from new revenue streams. Comedies It’s Always Sunny in Philadelphia, Louie, The League and Archer are produced and owned through FX Productions. So are this year’s comedy pilots. FX also owns half of the dramas Justified, Terriers and Lights Out. That gives the network DVD revenues and foreign revenues from the shows.

With Sunny, Landgraf says the network is getting a “substantial amount of revenue” from syndication. “We’re not a behemoth in terms of revenue like the Turner networks or USA, but we’re a very substantial business from a revenue standpoint, and that allows us to make a good profit and still make quite a substantial investment in original programming.

Playing catch-up
“I think it’s going to be a lot harder for channels that are behind that curve to catch up now,” he adds. They might be able to get to four or fi ve or six [shows], but it’s an expensive proposition. There’s no question about it.”

When deciding to invest in original programming, a network ought to first determine what its goals are, according to Dave Kenin, former head of programming for Hallmark Channel. “If you are profitable but one of the things that you are missing is higher CPMs [ad rates] because you’re perceived as older or non-original, it’s worth taking the risk to move to that next plateau,” Kenin says.

It’s a sound bit of advice—at least for the present. AMC is already on that next plateau. And as it looks down from its perch through all the Mad Men smoke, it likes the view.

E-mail comments to jlafayette@nbmedia.com and follow him on Twitter: @jlafayette