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Morningstar | AMC Continues to Create High-Quality Content; Cost Pressures Continue to Mount

AMC Networks has transformed its flagship AMC channel from a minor cable channel showing classic movies into a premier prestige platform for original scripted content. The transformation provides the smaller AMC with strong growth potential compared with larger rivals. However, this growth remains contingent on AMC’s ability to source and cultivate strong original content as well as monetize the programs internationally.The most widely distributed channel, AMC, reaches more than 90 million households in the U.S. The shift to original scripted content was spurred on by the success of shows such as Mad Men and The Walking Dead. With a reach of 85 million households, WE tv traditionally targeted a female audience with its recent success based on unscripted series. IFC reaches 73 million households and mainly shows independent films and alternative comedy series. The shift away from showing lower-rated movies to original scripted and unscripted shows attracted a larger audience for AMC’s networks. We expect this to provide management with the leverage to increase affiliate fees as the current carriage agreements continue to expire. However, AMC faces stiff competition for fees from entertainment networks that are owned by larger media peers.Creating a new basic cable network with carriage, high-quality content, and attractive affiliate fees requires not only a large up-front monetary investment but also deep industry relationships. Most pay-television distributors worldwide believe their channel offerings are deep enough and see no need to expand. A new channel could overcome this reluctance by paying for carriage, but the risk inherent in this tactic precludes small firms from employing it. These hurdles led AMC to purchase the international cable channel business Chellomedia for just over $1 billion in January 2014. The acquisition provides the firm with a larger presence outside the United States and a platform for its hit programs. As result, the AMC channel is now available in 120 countries. This also better positions AMC to benefit from increased pay-TV penetration internationally as 20% of revenue now comes from abroad versus 8% prior.