Thesis

The economics of a niche streaming strategy at AMC Networks in this moment of cord-cutting reflects more risks than CEO Josh Sapan is letting on to investors.

Research

This week a public relations blitz in The Hollywood Reporter from AMC Networks offered new insight into what I have defined as “the genre wars”:

…one way to think about product channel fit in streaming is to think of the “streaming wars” more as ‘the genre wars”, which are more like focused, zero-sum conflicts around specific content genres than broader head-to-head, zero-sum conflicts between platforms for the same audience.

Two articles last week - one an interview with CEO Josh Sapan, and the other an overview of the strategy and Wall Street’s positive take on it- dove into the company’s strategy.

The term “genre wars” isn’t used1, but the logic of the term is omnipresent in both, and flesh out some new angles which Sapan and management had not discussed in previous earnings calls.

1. The portfolio strategy is an offshoot of earlier cable TV successes

Sapan makes an interesting analogy of Netflix, Disney+ and other larger streamers as “department stores”, and AMC’s portfolio of niche streaming services as “specialty boutiques that, if you were a fan of something, you would find your way to.”

The analogy sets up an important point:

We had seen this in our earlier cable TV linear lives, that one can start targeted, or niche, offerings that can actually become bigger and more vital than one expects, if you can hit a cultural nerve. And so we set out to do that with those first two that we started [Sundance Now and Shudder].

I had always assumed that the “genre wars” strategy was driven by bets on existing brands (IFC) and under-served genres (horror and the Shudder app). But Sapan’s point, if true, is that AMC’s existing and longstanding approach to content production and curation - producing shows that hit “a cultural nerve” - has always been about niche genres. Streaming enables AMC to leverage that longstanding strength to produce more niche content, and that strength will drive paying subscribers, at scale, across six apps.

So, for example, we shouldn’t focus on AMC Networks making a bet on a horror app with Shudder. Rather, we should focus on AMC Networks being unusually strong at figuring out which horror movies and shows fans of the genre will watch, and leveraging Shudder year-round to reach those audiences with that content.

I have always been focused on AMC betting on genre-focused apps, but really AMC’s strength is about leveraging its genre-focused production processes.

2. The production economics are better

Sapan makes a point about the economics of AMC’s content production processes worth highlighting:

You have said that niche streamers don’t necessarily need expensive original hit shows like your broader-based rivals. Is that a key part of the financial benefits of your approach?

It is, frankly, less expensive. You're not competing in multiple categories to get everyone. Each thing is not a moonshot.

AMC believes it can deliver AMC Networks quality content at lower production costs. I had not seen that before. This strikes me as an unusual risk for them to take given streaming demands a greater scale of original content productions across multiple genres, and there is little evidence that they have evolved their linear production model for lower production costs, and more productions than linear TV would require.

This is also implicitly a point about marketing. As I wrote for subscribers last month in “Member Mailing #253: AMC Networks, Starz & "Genre Wars" Strategies”:

Effectively, the “genre wars” model allows AMC to cost-efficiently acquire and retain audiences. A focus on genre also reduces churn and [Subscriber Acquisition Cost (SAC)] by helping to form “communities” around the content.

Sapan notably doesn’t mention “community” (or SAC) here - it was something COO Ed Carroll mentioned in last quarter’s earnings call:

Services represent not only a destination for the viewers, but they tend what we're seeing to form a community around the content.

Putting point #1 and Point #2 together, we can infer that AMC Networks’ streaming model is about mapping unusual strengths in niche content production to digital distribution models, and cost-effectively building communities around that niche content within apps.

3. But… there are weaknesses

Can they accomplish both?

We are in an era of cord-cutting where many expect total households to drop another 30% from 80MM to 55MM. Almost 100% of AMC Networks’ Operating Income comes from Domestic linear advertising and distribution revenues. Cord-cutting threatens both sources of revenue, and a growing reliance on subscription-only streaming revenues also threatens advertising revenues.2

How will AMC solve for that?

The overview article touches upon AMC’s projections (20MM-25MM) for 2025. That implies projected annual revenues ($1B-$1.25B at the current ARPU of $4.17) that are one-third of its current linear business ($3B in 2020). But, the overview does not touch upon something analysts raised in the Q4 earnings call: “the quarterly volatility in subscription fees”, or a high level of subscriber churn per quarter.

Which leaves us with a big question: there may indeed be audiences and communities for these apps and these genres of content, but what does it mean for AMC Networks to be betting on a portfolio of streaming services with “volatile” churn while 100% of its current operational income faces inevitable decline?

These two articles offer an unusually good insight into why niche strategies make sense, despite operating at a fraction of the scale of every other legacy media company. But the economics of a niche streaming strategy at AMC Networks in this moment of cord-cutting reflects more risks than Sapan lets on.