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

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
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