15.7 million viewers watched the fourth season finale of AMC's (NASDAQ:AMCX) The Walking Dead on Sunday, a 27% jump from the 12.4 million viewers who tuned in to the third season's finale last year.
It also attracted 10.2 million viewers from the 18-49 age group -- a 25% increase from the 8.1 million viewers from that demographic who watched the season 3 finale. That also makes the finale, "A," the third highest rated episode of the fourth season after the season premiere, which attracted 16.1 million viewers, and the midseason premiere, which drew in 15.8 million viewers. By comparison, 5 million to 6 million viewers watched the first season.
The story also ended on a cliffhanger, which guarantees that the show will return to explosive ratings this October. Looking ahead, what do all these positive signs mean for the hit show, and what questions does AMC now have to answer?
The treasure trove within the undead grove
To understand how much The Walking Dead matters to AMC, we should take a closer look at how much the company has been charging companies for ads during the show.
During the third season, AMC reportedly charged $200,000 to $260,000 for a 30-second spot, and $375,000 for "scatter" advertisers who buy the spots much closer to air time. During the fourth season, that price skyrocketed to $600,000, according to The New York Post. That's more than the $570,000 it costs to advertise during Sunday night NFL games. By comparison, CBS' (NYSE:CBS) The Big Bang Theory currently commands the highest advertising rates on network television, at $326,000 per 30-second commercial.
Considering that The Walking Dead's total viewers rose 27% between the third and fourth seasons, it wouldn't be surprising for AMC to ask for $700,000 per 30-second slot for the fifth season.
Considering that The Walking Dead has an estimated budget of $2.8 million per episode, it wouldn't take long to recoup its production costs and reap huge profits. AMC's advertising revenues, which account for 42% of the company's top line, already rose 26.7% year-over-year in fiscal 2013 to $663 million -- fueled by strong demand for original programs such as The Walking Dead, Breaking Bad, and Mad Men.
Will a spin-off dilute the brand or boost profitability?
Meanwhile, a spin-off of The Walking Dead is expected to arrive in 2015. The show will take place in a different corner of the world, possibly be a prequel, and won't feature any of the characters from the main series.
AMC obviously hopes that this will keep its top franchise alive for a long time after Mad Men concludes in 2015. AMC is also trying to keep the legacy of Breaking Bad alive with the spin-off Better Call Saul this November, but it's uncertain if it can capture the magic of the original series. Mad Men drew an average of 2.5 million viewers last season, while the audience for Breaking Bad's final season swelled from 2.9 million viewers to 10.3 million viewers for its series finale.
The Walking Dead spin-off has Robert Kirkman's blessing, but it's easy to see the idea getting out of hand as CBS did with CSI. Although the spin-off series might be just as successful as The Walking Dead, it could also dilute the brand and appeal of the main series. Time Warner's (NYSE:TWX) HBO, for example, exercises better restraint than AMC -- it ends hit series after a few seasons and only spins them off onto the big screen or other networks.
Will AMC grow complacent in introducing new shows?
This leads into another problem -- will depending on spin-off shows and add-on shows like The Talking Dead undermine AMC's reputation for producing original, high-quality shows?
AMC's top shows -- The Walking Dead, Breaking Bad, and Mad Men -- were all originally developed by high-profile writers and directors. The Walking Dead was originally developed by acclaimed director Frank Darabont, Breaking Bad was created by X-Files writer and producer Vince Gilligan, and Mad Men was created by Sopranos writer and producer Matthew Weiner. Yet with all that talent came major clashes with the network over creative and budget concerns. Darabont was eventually fired and Weiner's conflict with AMC caused Mad Men's fifth season to be delayed.
Meanwhile, other ambitious projects, such as The Killing and Low Winter Sun, never gained a following to match those three shows. The Killing only averaged between 1 million to 2 million viewers, and was canceled once after the second season and again after the third. However, the show has been revived a second time by Netflix (NASDAQ:NFLX), which will bring the show back for a final six-episode long season later this year. Low Winter Sun fared even worse, plunging from 2.5 million viewers for its premiere to 0.7 million viewers by its final episode last October.
My final take
When we combine those three factors -- rising advertising rates for The Walking Dead, the difficulties of dealing with high-end Hollywood talent, and the poor performance of its new original shows -- we get a situation where AMC could pursue surefire bets rather than create the next Breaking Bad.
AMC is certainly hoping that Turn, which features a ring of American spies during the American Revolution, could be its next hit show when it premieres next Sunday. Placing it in the same time 9 p.m. slot as The Walking Dead could help it premiere with strong ratings, but it needs to hook in a lot of viewers to avoid the fate of Low Winter Sun.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends AMC Networks and Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.