Sunday, February 17, 2013

When does original programming make business sense? part 1 -- cable

The big PR push (and credulous coverage) of Netflix's House of Cards has got me thinking about the necessary conditions for successfully launching an original scripted series. Before we get to the business case for Netflix, here are some thoughts on the current cable landscape.

When it comes to producing original content, the big players tend to fall into three groups (with one notable exceptions):


Let's start slicing. Nick and Cartoon are certainly successful (SpongeBob is, by some standards, the most popular cable show ever) but animation and children's programming play by a very different set of rules. Production costs are extremely low and high audience turnover means that you can keep running the same few episodes for years. Furthermore, since children's programming works best in dedicated blocks, it's difficult for general interest channels to fully capitalize on this hugely profitable market. (Might throw Disney in here as well.)

Then there are the pay channels. Once again a very special business model. From a revenue standpoint, someone who watches five hours a month of Showtime counts the same as someone who watches fifty. What matters is loyalty. If you can bring in people with movies and specials, then get them sufficiently caught up in, say, Dexter, you don't have to worry about Starz stealing them away with better movies and specials. Better yet, if you can get fans of an older show like Dexter also hooked on a new show like Homeland, you can keep those monthly checks coming in for a long time.

This model does not work if your revenue comes from advertising. Having one show that a viewer never misses isn't nearly as valuable as having a bunch of shows that a viewer watches occasionally. This makes it extremely difficult for an expensive original cable show to pay for itself (particularly with a thirteen episode season). In this environment, viable shows have to add synergistic value. This brings us to the USA, FX and TNT, big flagship channels of ginormous media companies. These channels have the deep pockets, extensive synergies and long time frames that make it easier to make the business case for a Burn Notice or a Justified.

Which leaves AMC as the exception, the channel that would seem to suggest that anybody with good enough shows can make a go of original programming, but before an executive at AE points at AMC when greenlighting their next original drama, there are a couple of cautionary notes to keep in mind:

1. It's dangerous using outliers as examples

AMC got extraordinarily lucky twice, first in finding executives who could spot good shows and second in having good shows cross their desks. This is not something you can plan on in advance. In fact, it's something most companies fail at when they try.

2. (and this is the big one) It's not entirely clear that AMC is actually making money on this

It would take a good financial analyst and a lot of access to answer this definitively, but certainly looks like the network loses serious money on Mad Men and has been forced to make big and risky budget cuts to the show that is making them money, the ratings hit Walking Dead. Keep in mind, AMC has been both good and lucky. The odds against duplicating its success are slight and that success may not be all that, you know, successful.

These days, every cable channel seems to have an original scripted series in the works. From the executives' standpoint, this is easy to understand; these shows are the best way for a network to get prestige and media attention and who wouldn't want to be the VP who greenlit the next Breaking Bad? From the standpoint of the investor, though, if the channel isn't a TNT or an HBO or a Cartoon Channel, you might prefer another strategy.

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