Hollywood's Broke: AMC Network In No-Win Situation

The dust-up behind the scenes of AMC’s The Walking Dead, in which showrunner Frank Darabont was apparently fired, is evidence of a big struggle behind the scenes at the cable network. It’s instructive for BigHollywood readers to learn about the politics and commerce going on at AMC because of how it relates to how Hollywood does business. Flawed business models lead to flawed content for popular culture, and as we know, politics is downstream from culture.

At its core, AMC’s problems can be traced to the misguided decision to spin-off the company (which includes AMC, IFC, Sundance Channel, WE tv, and in-house production) from its parent, Cablevision. Well, I say “misguided” in that it’s a sucker’s bet for AMC shareholders but probably a lateral or marginally beneficial move for Cablevision.

AMC makes its money in two ways: by charging advertisers to run commercials (37% of income), and affiliate fees (57% of income). These are the fees that your cable or satellite company pays to each channel for the privilege of having them in the lineup. The better or “must-have” a channel’s programming is, the higher the affiliate fee that can be negotiated and, in the case of commercial channels, the higher ad rates.

Affiliate fees thus depend on content quality. That’s something AMC can control. Advertising fees depend both on content quality and the economy. AMC can control the former but not the latter. However, as I’ve written before, you can have the best content in the world, but that does not guarantee success. Success is random. Thus, AMC may control content quality, has no control whatsoever over its revenues.

And everyone working at AMC knows it. Fear is what drives Hollywood. As if this weren’t enough pressure for the poor folks over there, add to that the pressure that the company has just gone public — no longer is it buried in Cablevision’s massive quarterly reports. Now it stands naked before the world, and its success can be tracked minute-by-minute by a thing called “the stock price”. Still not enough pressure? AMC is not actually controlled by the shareholders. 71% of the company is controlled by the Dolan family, the same folks who control Cablevision and who have generated enormous controversy for what many believe to be wholesale mismanagement of their empire. How would you like to work at a company where, despite even your best efforts, your boss may make decisions that torpedo everything you’ve built?

Quality Control Can Be A Bad Thing

There’s good news and bad news about the content that AMC has created. The good news is that the content has been outstanding. Mad Men, Breaking Bad, The Killing, Rubicon are all terrific, unique shows. The executives who have developed these programs along with their creators deserve kudos for their strong storytelling sensibilities. The bad news is that the network is a victim of its own success because while it has been able to extract good affiliate fees (what cable/satellite provider doesn’t want to provide Mad Men?), Hollywood talent and their agents will always try to maximize their cut of the pie by holding producers hostage.

Now, there’s no doubt that Mad Men creator and showrunner Matthew Weiner is one hell of a talent, has a vision for the show, and has executed it with aplomb. And, if the show were on HBO or a major network, Mr. Weiner’s agents would be able to reach into some mighty deep pockets. Indeed, given that Mr. Weiner was a senior producer on The Sopranos, he likely wanted the mega-zillions that creator David Chase was repeatedly awarded. But AMC is a basic cable network whose pockets are not that deep. Nevertheless, Mr. Weiner’s agents negotiated an outstanding $30 million deal for him, as they should.

The problem with this approach is that, as Sons of Anarchy creator Kurt Sutter tweeted, “…it was bad business…[Mad Men] held AMC hostage, broke their bank, budgets were slashed, shit rolled downhill to Gilligan and [Darabont]”. The problem with the Mad Men deal is that Mr. Weiner’s deal would have been a blip on the income statement if AMC were still wrapped up inside Cablevision. Instead, a chunk of that deal will appear as a large expense on AMC’s own income statement, which means it flows directly to the bottom line earnings per share. So instead of a bug on a melon, it appears as a large slice cut off from a pie.

The result? Panic. Understandable panic, but panic nonetheless. And the press has been hard on AMC Head of Original Programming, Joel Stillerman. Frankly, I think Mr. Stillerman is in a no-win situation, and was put there by the Dolans and the stupid IPO deal. Panic is also evident in the story reported at aintitcool.com by Eric Vespe.

Mr. Stillerman had to offset these huge new Mad Men expenses because the pressure is on him to get that net income number up (especially if he owns shares!). He did so by adding additional commercials to the show to generate more revenue (also something Mr. Weiner reportedly fought). He cut the budget of the one show AMC actually owns (it licenses the others), The Walking Dead. That show, which was already expensive by even network standards at $3.4 million per episode, had to get by on less. Now, in the hands of a very experienced TV producer, the show could be done for less. However, Mr. Darabont is primarily a feature film writer/director, so he is used to larger budgets, and his vision for the show is an expensive one. If Mr. Sutter is to be believed, Mr. Darabont made mistakes and was fired. He was likely taken out of his comfort zone. As Mr. Sutter also suggests, will other talent be scared off from AMC because of its recent behavior?

Those looking to assign blame should only look to the Dolans. Everyone else involved at AMC or its shows have been put in a no-win situation. There are too many people whose interests are not aligned for everyone to come out a winner. In the real business world, everyone’s interests are aligned for the betterment of the corporation (see Southwest Airlines).

The Takeaway

So what is the takeaway for BigHollywood readers? Normally, I rant about how content quality appears to be the primary culprit for the increasing rejection of Hollywood by middle America. Content quality is directly related the Bizarro-World business practices within the industry that are literally the reverse of how things are done everywhere else.

Here we have a situation where the content quality is strong, but the business practices are so loony that they literally undermine the ability of the content provider to continue providing that content for a reasonable price. Once again, quality content is undermined, alienating audiences. One must call into question the ability of AMC to sustain itself as a separate spun-off entity given that 1) its affiliate and advertising revenues cannot be controlled, 2) success actually breeds higher expenses alongside any potentially higher revenues, and 3) the potential alienation of quality talent.

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