Changes in the TV Business Are Breaking Good for AMC

Wall Street likes company's approach to content, affiliates, SVOD
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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 Dead
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 individually.


"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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