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AMC's 'Mad Man' sees future in staying on script

Date March 22, 2012

NEW YORK (Reuters) - Late on a Monday evening in the AMC offices across from Madison Square Garden, staffers were still high-fiving each other after learning their flagship network had again broken cable network viewing records with an improbable show about zombies.

'The Walking Dead' snagged 9 million viewers in its season finale on Sunday night, surpassing anything on cable before.

It's the latest hit for AMC Networks Chief Executive Josh Sapan, and Wall Street will no doubt be wondering how he will follow it up.

All eyes now turn to the fifth season of AMC's multiple award-winning 1960s advertising drama 'Mad Men', which goes to air in the United States on Sunday night. Anticipation is running high after a 17-month hiatus following a widely reported contract dispute with creator and producer Matthew Weiner.

AMC says the delay was due to a "strategic scheduling decision" to get the show on air at the best possible time.

Sapan, 61, has led AMC Networks (formerly Rainbow Media) for almost a quarter of a century, developing four networks - AMC, IFC, Sundance Channel and WEtv - and studio business IFC Films, under the auspices of the Dolan family, who control the firm.

"What's next? More capability and, somewhat more hopefully, rational investment in original content," said Sapan.

He won plenty of praise for taking a big gamble on 'Mad Men' five years ago after HBO passed. He's built a "new" network around it with other critically acclaimed hits, notably 'Breaking Bad'. Those hits transformed AMC from a backwater channel of library movies to a home of quality original content.

The AMC channel now has five scripted original shows, including 'The Killing' and 'Hell on Wheels'.

"We may add more shows. We're certainly developing many more, though some may be replacements," said Sapan.

"It's really good to be known for having one or a couple of things on TV that people find extremely important to them on each channel. I would describe that as an ambition."

With more chances being taken on original programming, some on Wall Street are nervous the company's risk profile will change as programming costs rise.

"Josh is doing a great job overall but I worry about the costs," said Rich Tullo, an analyst at Albert Fried & Co who has a buy rating on the stock. "They beat our revenue estimates last quarter, for example, but their costs, even excluding a write-off, were higher than we or the Street expected. I'm worried that may continue to rise."

AMC Networks posted revenue of $339 million for the fourth quarter, ahead of analysts' average forecast of $328 million, according to Thomson Reuters I/B/E/S.

However, its profits missed forecasts partly due to a programming write-off, coming in at 41 cents a share versus a forecast of 59 cents.

Sapan said there was some misunderstanding about his company's cost structure, an issue that came up last quarter after AMC took an $18 million write-off on one of its rare flops, "Rubicon".

"We're clearly mindful of what these shows cost us and have a mix of shows that are editorially appropriate with different cost structures," said Sapan.

By that, he means AMC will unveil several new cheaper-to-make reality shows. It will be hoping its shows reflect AMC's programming values, with shows like 'Talking Dead' (on after 'Walking Dead') and 'Comic Book Men' with director Kevin Smith.

"We prefer to call them non-fiction," he said with a smile.

HIGH HOPES

Wall Street has high hopes on the top line for AMC and expects it to treble earnings from around 25 cents a subscriber to 75 cents over the next four to five years.

The need to raise affiliate fees for the "new" AMC popular shows as leverage brings its own challenges.

Cable operator Suddenlink pushed back this month, warning customers AMC was demanding up to a 100 percent increase in fees over the length of its current contract.

The dispute was resolved with the operator - which boasts 1 million subscribers - within a week. But it could get more complicated with larger distributors as contracts expire.

Meanwhile, Sapan is focused on developing anchor shows for the smaller networks hoping to replicate AMC's success.

On IFC it's 'Portlandia', the ironic and hip comedy with Fred Armisen, and on WEtv it's 'Braxton Family Values', a surprise hit with African American women.

On Sundance, it's a bevy of new mini-series including 'Top of the Lake', a joint production with BBC Worldwide starring Elizabeth Moss of 'Mad Men' and Holly Hunter.

Sapan's big challenge since AMC was spun off from the Dolans' Cablevision Systems Corp has been to convince investors it has a bright future as a standalone business.

In a business where scale is the Holy Grail - especially in negotiations with distributors and advertisers - there is an expectation, if not a hope, the Dolans will choose to sell the business soon at a nice premium for shareholders.

Brett Harriss, an analyst at Gabelli & Co, whose parent owns AMC shares, says a larger cable network owner like Time Warner Inc or Viacom Inc could make up to $100 million in primary cost savings almost right away.

There are also potential savings on program-making, and it can raise affiliate fees much quicker as part of a big firm.

This would help offset the already high valuation of AMC, currently at around 11 times earnings before interest, tax, depreciation and amortization. This is higher than Time Warner and Viacom, which trade around 8 times.

Sapan deflects any questions about a change in ownership to the Dolans but he argues that great TV shows and passionate viewers are just as important as scale.

That is especially so in a world where consumers have much more influence over what they watch, thanks to social media and a second life on digital outlets like Netflix Inc.

"Size matters less than in the past because what's occurred in the TV system is consumers voices are more readily heard, so it's more transparent," said Sapan. "The Internet and social media are commercial factors much more than they've ever been."

(Reporting By Yinka Adegoke; Editing by Peter Lauria and Paul Tait)

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