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Summary:

In this part of our special report on reinventing the internet, the radical changes that reinventing TV on the internet would bring to the underlying economics. AMC, the channel that’s home to Don Draper and Walter White, might lead the way.

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There’s been much speculation about the possibility that HBO could one day directly compete with Netflix by offering consumers a way to subscribe to its HBO Go service without signing up for cable. HBO executives have long said they’re not interested in such a proposition, so here’s a different thought: What if AMC took the plunge instead, became the first network to leave the traditional pay TV world and sold its service directly online?

It’s not as crazy a proposition as you might think. It’s also a thought experiment that tells us a bit about how TV on the internet could look, and that reveals why TV is what it is today.

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The status quo: What it means to be part of the (cable) system

Right now, AMC is much like most other cable networks. Most of its revenue comes from two sources: Advertising, and there are the fees that cable and satellite TV companies pay to carry the channel. Those fees are also known as retransmission, or “retrans,” fees, and they’ve been at the core of many disputes in recent years.

That’s because retransmission fees, which used to be a minor part of the business, are quickly becoming a big money-maker, and are in turn driving cable bills into the sky. Operators unwilling to pay the ever-increasing fees find themselves confronted with blackouts: Two years ago, for instance, subscribers of Dish were unable to watch Breaking Bad because the operator and the network couldn’t agree on new fees for AMC’s programming.

These retrans fights have grown increasingly fierce over the last few years, with both sides often trying to enlist the public for their cause. However, in the end, people just want their favorite shows from their TV operator, which is why networks almost always win and cable bills increase every year.

Photo by Stevano Vicigor/Thinkstock

Photo by Stevano Vicigor/Thinkstock

But retrans conflicts aren’t just about networks asking for more money for their programming while delivering no added benefits in return. Cable operators increasingly want the rights to do all kinds of things with their programming — letting users catch up on previously aired episodes through TV Everywhere apps or live stream shows on mobile devices. So why shouldn’t the networks ask for more money?

This complicated relationship between networks and operators shapes much of how TV looks like online. You increasingly have to sign in with your cable TV account credentials to catch up on shows online. There are rules about what kind of content networks can or can’t put on their own websites, and about the amount of time that content can stay online. And there’s the hard-to-understand reality that Comcast customers still can’t watch HBO Go on their Roku. And even the huge merger between Time Warner Cable and Comcast won’t change this game,

Could AMC be more like Netflix?

On the other side of the spectrum is Netflix, which shows that you can deliver a compelling service for $8 to $10 a month without forcing consumers to buy into a cable bundle. Industry insiders have long argued that TV networks can’t follow the same economics — that unbundling isn’t possible because it would raise the price of individual TV networks so much that a $100 cable bundle would look cheap in comparison.

This begs the question: How much of that $100 bill goes to each and every network? The answer is that these numbers vary widely depending on the audience a network draws as well as the leverage it has. ESPN for example is a must-have network that can ask for a premium because of the many popular sporting events it carries. It is estimated that ESPN as the most expensive network charges TV providers $6 per month for every subscriber, whether they watch sports or not (to ESPN’s defense, almost half of them do).

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Photo by Shutterstock/Twin Design

The math is starting to look a little different when you are talking about a network like AMC. Mind you, none of these contracts are public, but the analysts at SNL Kagan recently estimated that TV operators pay an average of $0.33 per subscriber for AMC, which makes it not only cheaper than the sports networks, but also puts it behind TNT ($1.33 per subscriber), the Disney channel ($1.15 per subscriber) and USA Networks ($0.71 per subscriber).

AMC is currently in 99 million U.S. households, which means that the network makes about $32.6 million per month from retransmission fees. So if 3.2 million people paid $10 a month for a Netflix-style AMC subscription, it could ditch the retransmission revenue stream entirely. Mind you, the Breaking Bad series finale was watched by 10.2 million people, and the recent Walking Dead season 4 finale attracted 15.7 million viewers.

Of course, this is extremely simplified back-of-the-envelope math, and doesn’t account for a whole bunch of factors. For instance, subscribers of such a service presumably wouldn’t want to see ads, and AMC Networks currently makes about 45 percent of its money with advertising.

There is also the issue of AMC’s other networks like IFC and SundanceTV, some of which are only carried by cable operators because they have to also take them in order get AMC. And while AMC executives haven’t said anything about unbundling, their colleagues at HBO have been expressing common industry sentiment with their firm stance against it. And developments like the merger between Comcast and Time Warner Cable and the proposed net neutrality regulations could AMC’s transition to become an online channel even more costly, since the channel may have to pay more to reach the consumer via streaming.

Leaving cable would allow AMC to innovate

Nonetheless, the exercise goes to show that an unbundled AMC channel isn’t completely out of reach, especially since it would allow the network to monetize its videos in a number of other ways. For example, AMC could strike a relationship with a consumer electronics manufacturer to exclusively make a current season of an AMC show available to anyone who owns a certain phone or TV set.

Peggy Olson (Elisabeth Moss) and Don Draper (Jon Hamm) from AMC's hit show Mad Men. Photo Credit: Frank Ockenfels/AMC

Peggy Olson (Elisabeth Moss) and Don Draper (Jon Hamm) from AMC’s hit show Mad Men. Photo Credit: Frank Ockenfels/AMC

Or it could keep the linear channel, complete with ads and weekly schedules, for those consumers who don’t want to pay for another premium service, and stream or broadcast it on any platform that wants it — whether that’s traditional TV (at a likely much lower retransmission fee rate), a new internet TV service or even a video site like YouTube. AMC could even sell superfan subscriptions to shows like the Walking Dead that include a bunch of extras, like access to a special community that puts them in touch with the show’s producers.

The possibilities would be endless, and AMC would finally have the freedom to build up a true internet-based TV network that isn’t constrained by the politics of cable contracts. Sure, it would compete with Netflix, but it already competes for eyeballs with the streaming service today. Plus AMC could chose not to renew Netflix’s licenses to its catalog titles, which some at the network feel have been given away for too little. And by being out there with a real streaming product, AMC would arguably be a much stronger competitor not only to Netflix, but also to all those other TV networks that still make you jump through endless hoops, and pay a huge cable bill, to watch their shows.

By going online, AMC wouldn’t just reinvent itself. It would also reinvent television for the internet age, and in turn change the economics of media on the internet.

Check out the rest of our special report below:

Images from Thinkstock/Stevano Vicigor, Shutterstock/Twin Design and AMC. Banner image adapted from Hong Li/Thinkstock. Logos adapted from The Noun Project: Castor and Pollux, Antsey Design, Mister Pixel and Bjorn Andersson.

  1. Where this whole experiment fails is that it really doesn’t appreciate content. Netflix doesn’t provide $120/year of value for most people through its originals. It derives value from our incessant need to watch Archer 300 times, or see what’s up with this whole Battlestar Galactica thing people were talking about. Netflix depends on content that has paid for itself in other ways (largely through the cable ecosystem, in the case of TV programming) and can now be sold for cheap and distributed through a virtual warehouse. That can’t be replicated if multiple networks pursue the same strategy.

    In addition, in a world where hot shows on a particular network run for 12 weeks every 18 months, the idea that people would subscribe to multiple independent streaming networks on an ongoing basis seems really unlikely. With the bundle, there’s generally always a few things popping up at any given time that make it a good value. People love discovery, which is cultivated and supported by having 1000 channels. My gut says that the setup in this article would actually push more people to piracy due to its complexity and the bad vibes you get by seeing a credit card charge for a subscription that’s in its fallow season.

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  2. Retransmission fees is the term for broadcast network compensation from multichannel operators. Cable networks derive revenue from carriage (or affiliate) fees in addition to advertising. Retransmission fees are a rising revenue component for broadcast networks but carriage/affiliate fees have always been an important component for cable networks (some more than others.)

    AMC Networks will not unbundle from cable because it would take an enormous hit to its advertising revenues, just at the time when its original programming strategy is finally paying huge dividends in terms of audiences and related ad revenue (e.g., The Walking Dead), rather than just critical acclaim (e.g., Mad Men).

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    1. Glad FB clarified “retrans”. Cable channels are not typically referred to as such. Carriage of local broadcast TV is a more typical meaning.

      As for OTT video, based on the announcements this last quarter and over $1 billion committed to the sector, traditional multichannel cable, telcoTV and Sat are about to be bushwhacked. Cable and TelcoTV have broadband networks to fall back on and actually flourish. Who doesn’t like competing in a high margin duopoly? As for Sat ….. well Charlie Ergan’s commitment to an OTT video play speaks for itself.

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  3. You completely miss the mark here on how AMC (or almost any other cable network with scripted programming) is fundamentally different from Netflix or HBO, and thus simply can’t “unbundle” from the status quo. AMC doesn’t own the SVOD rights to their best programming, Lionsgate (in the case of Mad Men) or Sony (breaking Bad) does. AMC only extracts value out of the window they control; and they do that exceedingly well, albeit under the current system.

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    1. Not true for all of their programming. For example, Netflix struck a licensing agreement with AMC for the Walking Dead. And they could of course strike different deals for future shows if they wanted to exploit additional windows.

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  4. Janko,
    Fees paid by distributors specifically to Broadcast Networks (ABC, NBC, CBS, Fox) are called retransmission fees. The term retrans fees does not apply to non-broadcast networks which generally call fees from distributors affiliate fees, carriage fees or distribution fees. Distribution fees have always been a major piece of network revenue models. Your comment that retrans fees used to be a minor part of the business is incorrect for networks like AMC, but has become increasingly important to the broadcast networks.
    Where your argument falls down is that you seem to gloss over the idea that 45% of AMC’s revenue according to your numbers relates to advertising. You don’t really share how that revenue would be replaced short of releasing current episodes available to a consumer electronics maker (would that mean regular new internet subscribers also have to purchase those consumer electronics as well and if not who are you appealing to?) or streaming a service with commercials and making your service available essentially a la carte which distributors would not allow you to do since they are paying for the service.
    Your argument in my mind sounds uninformed.
    .

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  5. nico Moulin-Fournier Wednesday, May 7, 2014

    There is a missing element in this demonstration: distribution cost.
    2 examples.
    – Remember the launch of the 4th season of Game of Thrones. The streaming servers were down for several hours, despite 6M viewers in front of the linear TV screen.
    – In Europe, BBC iPlayer service paid 30 M£ in streaming services (most of the cost being CDN costs) for offering a catch-up service. 12% of its distribution cost for 2% of the audience. Imagine if 100% of the audience were on OTT !!

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    1. You are the only one beginning to get the picture here Nico, but bandwidth costs are only part of the problem. If AMC did what this writer suggests, they’d take on a bunch of other costs that the operators currently bear – marketing, customer service, billing, customer acquisition, infrastructure, patent licensing, etc. As others have pointed out, they would at the same time see their ad revenue plummet.

      The economics of this suggested plan make absolutely no sense whatsoever, which is exactly why no network has done it. Revenues would plummet while costs would skyrocket, with no guarantee that AMC would ever be more profitable than they are now.

      I can hear the writer’s reply now – “if they don’t do something then they’ll face cord-cutting and competition from online video”. Well, cord-cutting is way overblown and OLV is a small fraction of TV. That threat is much further down the road than most journalists think.

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      1. Bandwidth cost is not an issue. Today WAN (wide area/internet) transit costs/voice minute = $0.0000004 anywhere in the world. Move it 2 decimals to the left for video. Netflix’ avg storage and distribution (AWS and transit) costs are 4-5 cents per hour of video consumed. These are dropping 30-40% annually due to Moore, Metcalfe and Butter Laws.

        The peering cost (10GigE) between Netflix and an edge access provider like Comcast is less than 10 cents 1x per sub. That’s right, they charge you $50 each month and still throttle your Netflix, while incremental 10GigE ports cost less than 1/4 of a cent one time; $0.0025!

        The avg MAN (metro area, last mile) transit/termination cost compared to the WAN cost above is $0.001 today due to lack of competition. Where there is competition, like GoogleFiberKC, the cost is $0.00001. And that is early days, without the benefit of scale from SMB, enterprise, wireless offload and backhaul. The point being that both absolute and relative costs between WAN and MAN are not very different (maybe 1, at most 2 decimals) when fiber enters the picture and the diversity of demand at the edge also gets scaled.

        While you are all arguing on this debate about 1-way video the new reality will be 4K video. Very quickly, and even sports. And that’s where VoD has the advantage. Add to that rapid 2-way HD collaboration developing, seamless mobile BB, and the internet of things, and you have a witches brew necessitating cloud intelligence moving to the edge to increase capacity (particularly upstream, which no one in the 1-way world considers), latency, QoS, security and redundancy.

        If these exogenous elements are not factored in you will arrive at an incomplete (and false) conclusion. Summation: bandwidth is not an issue.

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  6. Ok–beyond Mad Men and The Walking Dead and episodes of Breaking Bad people have already seen, what are you really going to watch on an AMC streaming network? Those classic reruns of great shows like Low Winter Sun and The Killing? Ohhh, what about Rubicon!

    The only way that a company can break away from cable and move to a streaming format is if they already have a long, diverse library of content they own. WWE and HBO have been extremely successful in the streaming realm thus far because of these vast libraries of their own original content.

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    1. You could make the same argument about Netflix. Sure, the catalog size is different, but until it started its original series last year, most of the content on Netflix also fell into the “stuff people have already seen” bucket. Except, many people haven’t.

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  7. “On the other side of the spectrum is Netflix, which shows that you can deliver a compelling service for $8 to $10 a month without forcing consumers to buy into a cable bundle.”

    No it doesn’t. Netflix is a bundle. You subscribe to Netflix, you get a bundle of content much larger than a single network, or even many basic cable package bundles. What Netflix shows is that you can deliver a compelling service with a cheaper bundle that, among other things, includes no live sports.

    If Netflix offered a package that involved subscribing to only produced-by-Netflix shows like Game of Thrones and Orange is the New Black, that would be an obvious parallel to AMC going online only. But right now, Netflix offers a bundle. A cheaper, better bundle (though it wouldn’t surprise me if eventually the content owners try to raise prices.) But still a bundle.

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  8. Can the author cite the source that ESPN is watched by half of the households that receive it? ESPN is in 100 million households. Their average ratings are 2.2 million. Their peak ratings (some playoff game) are somewhere around 17 million.

    2.2 million is not half of 100 million. and 17 million is not half of 100 million.

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    1. Your figures are for one specific point in time. Sure, 2.2M viewers watching a prime time event on any given evening is not half of 100M. The authors source is more than likely citing numbers for a given month or year, etc. Half of those 100M homes watch ESPN once in that given time — whatever that time is. ESPN runs five channels 24 hours a day. Using your metrics, you would need to add up all of those viewers and remove the overlaps/duplicates to arrive at a number in the 50M viewer range, which would be half of the 100M households. To sum up, that sourse is stating half of the households watch ESPN at some point, not every minute of every day. If that was the case, every show on an ESPN network would be like a Super Bowl telecast — every hour, every day.

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  9. Why should a cable company have to pay to carry free-to-air channels at all? The audience sees the ads and is included in the ratings.

    Any payment by a cable company would only make sense if it was replacing the FTA ads with its own.

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  10. Jeremy Toeman Thursday, May 8, 2014

    easy answer to the “what if” question: they’d go out of business. no need for hypotheticals, it’s pure and simple math.

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    1. Martin T. Focazio Friday, May 9, 2014

      Good stuff here – and thoughtful comments all around, refreshing to see some intelligent debate in the comments section rather than the usual herp-derp.

      Many of the conversations I hear today that say “unbundling is never going to happen” remind me very much of conversations I head in the early 2000’s where newspaper owners said, “People will never prefer news from a screen.”

      One of the bigger unsaid issues here is the effect of digital on the advertising ecosystem. I was recently at a trade event, and for the first time, people were speaking very openly – from the podium – that the whole upfronts/Nielsen model is a “sham” and that audience size and attention and value is grossly inflated. Yes, AMC might get $45MM from ads and another $32MM from distribution licensing – but that $45MM comes from having ratings points that are under considerable scrutiny. Advertisers are grumbling about the efficacy of advertising and looking more and more to pay for performance ads “digital style.” It will be the flight of ad dollars to “evidence based” digital distribution that will force the industry to enable an amalgamated approach where content comes in bundles and also is unbundled and minibundles are created for $40 a month. It’s not one or the other, it’s many at once.

      I feel that the “everyone needs ESPN” argument is specious. Sports Fans “need” ESPN. Most people don’t watch the Superbowl. (About 113MM of the US population of 313 MM, and only 125MM including the global audience watched in 2014). It’s huge, it’s not universal. If you “need” sports, you pay for sports. If ESPN “needs” the bundle then, by extension, the consumer who wants sports needs to pay.

      Also, everyone seems to be pricing what the networks could expect in an unbundled package to be identical to what they get from the MVPD, I suggest that this is not the case at all. The growing electronic Sell-through market says to me that content is valued differently – and higher – by the consumer who prefers the “on-demand” lifestyle.

      For networks like AMC/IFC or BBC America, I really don’t think there’s a huge risk for them to offer an “unbundled” package priced at $14 a network a month. Still ad supported, still carried by a cable co, but priced in a way that makes the classic bundle more attractive if you have more than a few networks you like.

      The economics tip in favor of a “classic” bundle for heavy TV viewers at about 9 networks ($126/month for 9 “unbundled” networks vs. $123 per month projected for the monthly bill for a basic package per NPD).

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