Changes in the TV Business Are Breaking Good for AMC

Wall Street likes company’s approach to content, affiliates, SVOD

The recent stream of changes that
have buffeted the TV industry have not impacted
media company stocks, many of which
are trading near their highs.

But the way one of the newest and smallest of the
publicly owned programmers, AMC Networks, has
successfully surfed the worrisome waves has made it
a darling of Wall Street.

AMC’s first-quarter earnings were off the charts, exceeding
expectations, notching a 27% increase in ad
revenue, topping rivals such as Scripps Networks and
Discovery Communications.

Though small, AMC seems to have the right answers
to the questions investors ask to see if a company has
the keys to success.

Item one is original content, and AMC has come out
of nowhere with a string of hits: acclaimed Mad Men and
Breaking Bad and the series with the highest ratings in
the 18-49 demo last season, The Walking Dead.

AMC is in the cable business, which investors favor
because of its dual revenue stream. Cable networks
drive results at media giants Walt Disney Co. and Comcast.
At the same time, AMC appears to have found a
strategy for dealing with the threats presented by online
subscription VOD players. Not only does SVOD
generate revenue for AMC, it provides a binge-watching
promotional platform that appears to have lifted the
ratings of AMC’s top shows, as opposed to Viacom,
whose kids business is being undermined by Netflix.

In a report entitled “Advertising Anything but Zombie-
Like,” analyst Anthony DiClemente of Barclays Capital
said, “we believe ratings momentum for The Walking
should be a key driver for advertising growth and
later-cycle monetization windows like international
syndication and SVOD.”

At the same time, analyst Todd Juenger of Sanford C.
Bernstein wrote that the first quarter was even better
than it looked. “We believe confusion over the growth
rate of core affiliate fees is tempering the enthusiasm.
Our enthusiasm remains un-tempered,” Juenger said.
“Future success doesn’t require replicating the phenomenal
success of AMC’s recent hits, but we believe
they have a good chance of doing so.”

Winning Ways

Over the last two weeks, AMC Networks CEO Josh
Sapan has been taking a victory lap at investor conferences,
addressing most of these issues in a way that
offers some strategic insight without disclosing financial
detail. It’s as one might expect
from someone who works for the
Dolan family, which retained voting
control of AMC after it was
spun off from Cablevision Systems
in 2011.

At the Stifel Internet, Media &
Communications Conference last
week, Sapan was asked about the
advertising market, which overall
is expected to be little better than
flat this year. Sapan confirmed
the view that the ad market was
strengthening ahead of upfront
negotiations, adding: “I’m not sure
that our experience exactly tracks
what the market was because of the
strength of our programming and
its desirability, so I’m not sure we’re
the barometer for the market.”

Sapan also said that things are looking up for AMC
on the affiliate revenue side, after making six deals
with distributors including Dish Network, which had
taken AMC’s networks off the air partly because of a
lawsuit that originated in the Cablevision days. “Our
rate of growth in affiliate revenue went from what was
historically low- to mid-single digits now on a blended
basis, to mid- to high-single digits,” he said. In the first
quarter, affiliate revenue rose only by mid-single digits,
because one distributor was out of contract. Analyst
Juenger believes that distributor is Time Warner
Cable. When that agreement happens, AMC will get
an $8 million-per-quarter bump in affiliate revenue
because its networks never went dark, Juenger said.

Analysts are also keenly watching how Netflix and
other SVOD players are affecting ratings. AMC’s big
shows have been on Netflix, and Sapan noted that
traditionally, series start to lose viewers about season
three. But season five of Breaking Bad was up over 40%,
season five of Mad Men gained 19% and season three
of The Walking Dead jumped 50%. “It’s fair to conclude
that some of that boost in audience from season to
season was a consequence of people discovering the
show on Netflix,” Sapan said of Walking Dead.

When AMC’s Sundance Channel launched its first
owned original series, Rectify, “we tried to accelerate
some of that effect for season one,” Sapan said. AMC
invited some viewers to see Rectify in movie theaters,
to generate some attention and buzz. It also put several
episodes on cable-on-demand before the premiere.
AMC also offered the show on iTunes, making it much
cheaper to buy all six episodes than to buy each episode

“I think we accomplished a bit of what we were out
to do, which is to basically take a little-known show
and use the new method of watching these serial dramas
to boost sampling and viewership,” Sapan said.

Swings of Fortune

While AMC is flying high now, things could go wrong.
The No. 1 concern would be an inability to replace current
hits. “There are inevitably ups and downs,” Sapan
said, quickly adding, “I’m not suggesting we’re heading
down.” While Breaking Bad and Mad Men wind down,
“we hope that zombies live forever, and that at a conference
here in eight years there will still be Walking Dead
or derivations of it on our air,” he said.

“We are in active development. We’ve significantly
ramped up, not only on AMC but across all of our
channels,” Sapan added. “And you’ll see reflected in
our financials our program investment so that we can
sustain and go through the process of bringing new
shows to air successfully.”

With AMC’s stock price in record territory, everyone
is winning, except maybe Sapan, whose total compensation
fell to $8.9 million in 2012 from $11.5 million
in 2011.

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