AMC’s The Walking Dead, Mad Men, and Breaking Bad.

Over the last few months, AMC’s golden-child image has taken a beating in the press: In rapid succession, the ascendant cable network’s higher-ups have been battered by allegations that they wanted to cut costs (and cast!) from Mad Men; that they dumped Frank Darabont, the soul behind the soulless zombies on The Walking Dead, when he wouldn’t agree to budget changes; and that they were seeking a speedy and unsatisfactory end to Breaking Bad. Having transformed itself from a sleepy channel that aired old movies to a programming powerhouse virtually overnight, the network suddenly seemed unable to deal with its success, particularly the high costs often associated with hit shows. “They were doing so much right, and then they seemed to blow it by doing the little things wrong,” one Hollywood vet says. So has the place that claims only “story matters” turned into the place where only the bottom line matters? Or was all this drama the by-product of a relatively young network desperately trying to make the increasingly impossible economics of high-quality scripted TV make sense? Vulture decided to investigate just what in the name of Sterling Cooper is going on.

Size Matters in Hollywood

Since most of AMC’s battles seem to be over cost-cutting, it’s important to look at its economic fundamentals. Despite having launched so many successful shows in such a short time, AMC — while profitable — is not exactly a deep-pocketed behemoth. For one thing, it doesn’t have the scale of other networks, and thus doesn’t have as much flexibility when making deals. It’s part of a newly spun-off company called AMC Networks whose only other TV assets are IFC, Sundance Channel, and WE; the new company is controlled by the Dolan family, owners of Cablevision and the New York Knicks. By contrast, rivals such as FX, TNT, and USA Network are all units of multi-billion-dollar entertainment conglomerates such as News Corp. and Time Warner; when they have a bad quarter or make a dumb programming move, it’s usually buried in the corporation’s larger quarterly earning reports. AMC’s independence also hurts it when it comes to collecting subscriber fees from cable systems. Thanks in part to siblings like NBC and Fox, USA gets nearly 70 cents per cable home and FX 40 cents; tiny AMC barely makes 25 cents, according to Kagan SNL figures cited by the Los Angeles Times.

Finally, most of AMC’s rivals have sister studios that can help shoulder the costs of production, or international distribution arms that can dramatically boost a show’s profitability. For example, consider the case of a gritty, critically acclaimed but relatively low-rated series, TNT’s Southland, which is produced and aired by Warner Bros.–owned properties. “Nobody in Brazil is interested in watching [Southland],” says an agent well-versed in back-end TV economics. “But that show makes money internationally because Warner Bros. tells [international] broadcasters, ‘Look, if you want the rights to Harry Potter or The Dark Knight, you have to take [Southland].’ The shows may never even air in those countries, but Warners will get paid. AMC can’t do that.” As if this all weren’t enough pressure, the decision to spin off AMC from Cablevision now means execs at the network are under even greater pressure than before to make the network’s economics work, and to maximize profits. (Some analysts even believe the Dolans are tidying up AMC Networks in order to sell it to a bigger conglomerate.)

A Business Model With Little Margin for Error

AMC has built its identity on a tricky proposition. “They’re trying to do HBO-quality shows at USA [Network] prices,” explains David Madden, president of Fox TV Studios (The Killing). While AMC seems to have gotten the first part of the equation right — Emmys and critical acclaim have deemed Mad and Bad among the best shows on TV — keeping prices in the same league as USA shows has proven trickier. While HBO-like dark themes, unconventional pacing, and (in the case of Mad Men and the upcoming Hell on Wheels) period settings make for great TV, they also add big bucks to a show’s production cost, while at the same time limiting its profit potential. For example, while Mad Men fetches a premium ad rate for its very upscale audience, it’s still a relatively low-rated series whose overall ad income is tiny compared to most network (and many cable) shows. CNBC recently estimated that 30-second ads were fetching around $40,000 each; the network drama The Good Wife, on the other hand, gets over $100,000. Industry insiders tell Vulture that Mad pulls in around $20 million per year in ad revenue, once product placement and other premium deals are accounted for (it splits DVD profits with producer Lionsgate).

Until recently at least, AMC and its studio partners (Lionsgate for Mad and Sony for Bad) have been able to keep their shows looking good in a relatively frugal way: AMC has been paying both studios under $3 million an episode, while an HBO signature series such as Boardwalk Empire costs that net a reported $5 million per episode. However, as both Mad and Bad became more established, those involved in the production — the studios, showrunners and stars — have begun to expect bigger compensation.

This probably should not have taken AMC by surprise. Standard operating procedure in TV dictates that networks pay a smaller share of production costs early in a show’s life. But if a series stays on for more than four seasons, the price tag for the network often dramatically increases because the creator and cast demand more money, while studios — which produce shows at a financial deficit early in their runs — no longer feel the need to subsidize established hits. (This is why Warner Bros. TV was able to hold NBC hostage over ER in the nineties or why the stars of series from Seinfeld to Desperate Housewives have been able to snag big pay bumps.) It is also why Weiner demanded big bucks to stay with Mad Men, and why Sony and AMC went to war over Breaking Bad, with Sony trying to get AMC to produce as many episodes of the show as possible and the network initially suggesting wrapping up the show with as little as six to eight more hours.

The Hollywood Game Has Rules

AMC has tried to make the case that this established model of escalating costs shouldn’t necessarily apply to them. The network green-lit both Mad and Bad when no other networks, including HBO and FX, would: AMC’s theory is that if it’s going to be the home for shows that nobody else will do, it needs to be given room to change the traditional payout structure. That may seem rational to them, but Hollywood insiders argue that it’s naive to try to impose such logic on an industry that’s traditionally much more about ego and leverage than what’s “fair” or “reasonable.” Even though AMC had made Matthew Weiner one of the highest-paid showrunners in TV with a $30 million, three-year deal, the network infuriated him by asking him to trim two minutes per episode and beef up product placements; he claimed they also wanted him to cut cast members (something AMC insiders have denied). And in the middle of Breaking Bad’s fourth season, in which it had just shown that its audience continues to grow, AMC’s decision to even float the idea of forcing creator Vince Gilligan to wrap up his show in five to seven fewer episodes than he wanted remains a head-scratcher. Hollywood vets wonder why AMC couldn’t have found a way to propose different business models without sending showrunners and studios into a rage. “The key to negotiating is knowing how not to get into a war,” one industry vet says, arguing that AMC all but invited those on the other side of the table to leak details of negotiations. “If you’re talking to someone who wants a Rolls Royce but you think you’ll end up giving them a Mercedes, don’t start out by offering them a pair of roller skates.”

Several industry insiders Vulture interviewed about AMC’s woes theorized that the network’s problems stem, at least to a degree, from the fact that its leadership is largely new to the world of big money TV deals, and as a result may have made some beginner mistakes. AMC chief Charlie Collier was running ad sales for CourtTV (now truTV) before he took over the network in 2006; programming head Joel Stillerman came to his gig from the world of film production (though he did spend many years in production at MTV). Despite having fans in Hollywood — Fox TV Studio’s Madden, for one, says he admired the way both men took the hit when outrage erupted over the season finale of The Killing — their greenness may have prevented them from seeing how their negotiations were all going to play out.

After all, Hollywood deal-making is all about leverage, and the media is often used as a weapon in high-profile talks: When actors are looking for huge pay bumps, their demands often magically appear in print long before a deal is done in part because network and studio execs are hoping they’ll be shamed by press accounts painting them as “greedy.” The Darabont dust-up didn’t involve any contract negotiations — it was all about budgeting, but there, too, AMC was at a disadvantage: On paper, its reported request that Dead reduce its budget from $3.4 million in season one (a number inflated by the high costs of the pilot and start-up costs) to around $2.8 million per episode in season two doesn’t seem wholly unreasonable. (A report in the Los Angeles Times says the figure was even less: just $250,000 per hour.) But, as one exec notes, “It’s a bitter pill to ask someone to swallow when you ask them to cut their budget and they’re the No. 1 show among adults 18 to 49 ever in basic cable history.” It doesn’t matter that $2.8 million is a figure that would make most basic cable showrunners green with envy; to a creator like Darabont, it was a slap in the face, and his reps made sure post-dismissal stories painted him as a victim of bean counters.

Bottom line: AMC’s execs have gotten several black eyes in this process, something more experienced Hollywood hands seem able to avoid. By contrast, neither HBO nor FX has ever had a showrunner wage media jihad against them. HBO has canceled two David Milch series, Deadwood and John From Cincinnati, yet the writer returns to the network in January with the horse-track drama Luck. Then there’s FX: Even when the network decided to cancel Damages after three seasons (producer Sony took the show to DirecTV), or pulled the plug on one of last season’s most critically beloved new shows (Terriers), the media and industry reaction was pretty much, “Oh, those nice kids at FX try so hard!” Network chief John Landgraf’s Hollywood citizenship was key, insiders say. “He’s been a producer, he’s been a studio executive, and now he’s run a network for many years; he knows how it’s done,” says one studio exec. “He’s just a part of the creative community and knows how the business works.” On the flip side, seasoned development execs at HBO and FX passed on the chance to make both Mad and Bad, thinking they simply weren’t sustainable; perhaps there’s something to be said for an outsider’s eye.



Where Does AMC Go Now?

AMC still has an impressive story to tell. For one thing, it has rocketed to the top tier of cable networks in less than a half-decade with virtually no failures (and many, many Emmys). Three of its shows are success stories (Mad, Bad, and Dead); as for The Killing , for all the grumbling (and shouting) that peaked in its controversial season finale, overall the series had better freshman year ratings than either Mad or Bad. Only Rubicon and 2009 mini-series The Prisoner flat-out flopped. Not only is this a virtually unheard of batting average for a network, what’s particularly impressive is how little AMC spent in development compared to other networks in order to establish its brand. The network has picked up all of its pilots to series, which means it’s never wasted money filming prototypes that didn’t get to air (see: Wonder Woman). It did spend a modest amount of cash earlier this year purchasing a half-dozen pilot scripts, but in May, AMC opted not to give any of the projects green lights. “Their return on investment is actually incredible,” one agent says.

Still, finding success and keeping it are two separate battles. The undercurrents that led to AMC’s testy negotiations with its partners are not going away, and the state of television now means things are only going to become more difficult. Competition for eyeballs is fierce, with nearly 100 scripted series scheduled to air on cable this year and even broadcast nets trying to pull off cablelike dramas (The Good Wife, this fall’s The Playboy Club). And commercial-skipping DVRs have, by some estimates, cut the monetizable viewership for cable’s biggest hits — i.e., the portion of the audience advertisers are willing to pay for — by as much as 30 percent over the past five years. “So if I’m trying to launch a new show in 2012, I need to have it be 30 percent bigger than a show I launched in 2007 in order for it to be considered as large of a success,” one longtime network programmer laments.

And how long can AMC keep its winning streak going? No TV network has continued one indefinitely (NBC ruled TV for much of the eighties and nineties, and now look at it), so there’s always the “what’s next?” factor, especially since Mad Men and Breaking Bad both have expiration dates: three more seasons of Mad; sixteen more episodes of Bad, likely split over two years. This ticking clock only increases the pressure on AMC’s youngest shows, particularly the high-rated Walking Dead; AMC produces the drama itself, making it a key profit driver since it can keep all the revenue and can contain costs on its own (as Darabont discovered). “AMC really needs to get five, six or seven really good seasons out of that show,” one network insider days. “They need to transition from this generation of hits to the next generation.”

AMC also needs to get better at balancing financial reality with its aura as the place for quality showrunners. While one top TV agent says the network has “gone down a notch, because until this happened, everyone wanted to go there first,” he — along with many other industry sources, including those at rival networks — says that writers still want to bring their challenging work there. The key for AMC is to learn how to come up with a sustainable financial model and more diplomatically work it out with its creative partners. To help it move forward, AMC could take a portfolio approach to programming: limit its dramas and balance them out with cheaper, potentially more lucrative comedies or maybe add some upscale reality shows (the network actually has a few in the works). And while fans might howl, AMC could try to reduce season orders to as few as six to eight episodes, using the British-TV model, and take bigger breaks between seasons to maximize the brand value of hit shows while minimizing annual costs.

Although the network has come under scrutiny for its financial imbroglios, the fact is that its problems are not unique to AMC. Industry soothsayers say every cable network that is attempting scripted programming will be experimenting with new business models and fresh ways of offering up TV shows. HBO runs some series in shorter seasons (the first season of Game of Thrones was only ten episodes instead of the usual twelve or thirteen), and FX balances the costs of its pricier dramas with cheap comedies like Louie and It’s Always Sunny in Philadelphia. “It’s easy to just blame this on idiot network executives,” one veteran studio insider says. “But it’s become so competitive out there and so hard to monetize these shows. All of us are struggling to make the economics work.”