With the coronavirus contagion still in place as we move into the heart of a closely watched earnings season, one brief comment made during AMC Networks' (AMCX 0.03%) quarterly conference call isn't exactly a head-turner. But perhaps it should be, since it may well illustrate what the next era of television will look like and hasten the ongoing demise of the cable industry as we know it.
What was the comment? AMC's CEO Josh Sapan was discussing the company's nascent streaming video-on-demand operation and said: "We don't need tens of millions of subscribers for it to be a meaningful contributor to our business."
If that's true, then it's only a matter of time before other TV channels and studios embrace the same realization that narrowly focused niche-streaming channels are marketable enough. Indeed, Discovery (DISC.A) (DISC.B) (DISCK) has already started moving in this direction. The world can only wonder which niche channel will be next.
The big guns dominated the early days
To date, most of the success within the streaming video on demand (SVOD) arena has been enjoyed by all-purpose entertainment platforms like Netflix (NFLX 2.72%) or Walt Disney's (DIS 3.30%) Hulu. These services offer a wide range of content to satisfy the young as well as the old, fans of documentaries as well as fans of fiction, and binge-watchers as much as easily distracted viewers.
What the video media industry hasn't seen much of is subscription-based services with limited but highly focused libraries of video content. The unspoken fear in offering such a product has been a lack of scale needed to make it viable.
AMC Networks has taken the chance on the idea, though, and it seems to be paying off. Sapan said during Tuesday's conference call the company was on pace to be serving between 3.5 million and 4 million SVOD customers by the end of this year. The real number is probably closer to the upper end of the forecasted range.
It's not a lot. For perspective, Disney announced this week that Disney+ now has more than 60 million paid members. Hulu boasts 35.5 million customers. The aforementioned Netflix ended its most recently completed quarter with almost 193 million paying customers.
Comparing Netflix or Hulu to AMC Network's streaming operation, however, comes with a huge footnote.
AMC Networks is the name behind AMC, Acorn TV, Sundance TV, Shudder, UMC (Urban Movie Channel), WE, and a handful of other television channels. None of them draw the sort of crowd ESPN attracts. But they don't have to. They're still fiscally viable because most of their programming costs relatively little to produce.
Take its zombie series The Walking Dead as an example. The creation of zombie armies requires some savvy makeup and prosthetic work, but there are no space battles, jumping cars, or extravagant sets needed. Most of the series is filmed in ordinary buildings and farm fields. In fact, the company has often been criticized for keeping the show's purse strings closed so tightly, choosing to focus on the drama and storytelling rather than splashy effects. Other AMC hits include Comic Book Men, which is a completely unscripted talk show that doesn't require any real set-building. The show simply consists of five comic book fans discussing different facets of the comic book business.
Each of these programs doesn't appeal to most people, but each one appeals to enough people, given their cost.
This lower-cost content is a key part of the reason AMC was able to push through the coronavirus-created headwind with relative ease last quarter. Revenue fell 16% year over year, mostly as a result of shrinking advertising spending. The company still turned an operating profit though, as content costs normally roll in at about half of AMC's revenue. Now many of AMC Networks' already-created programming has been repurposed for streaming services. These in turn further monetize that content via five different SVOD venues and only cost consumers around $5 per month.
And it's not just AMC. Discovery is also moving in this direction. The name behind niche channels like HGTV, the Food Network, Animal Planet, Travel Channel, and others is planning stand-alone streaming services for many of its brands. CEO David Zaslav commented early this year: "We are focusing hard at aggregating our brands into an OTT [over the top] service here in the U.S.," adding to proven existing streaming services it offers overseas.
For the record, those over-the-top options aren't yet available, but the same premise still applies. That is, lower-cost content is marketable to enough people relative to costs. As fellow Motley Fool writer Billy Duberstein explained in March, lots of unscripted ("reality") programming keeps Discovery's spending to a minimum. In a normal, non-COVID environment, programming and related costs are only about one-third of the organization's revenue. Discovery estimates its content costs are about one-tenth that of competing video-content creators.
Others will follow
eMarketer estimates the U.S. cable business peaked with just over 100 million subscriber households in 2013 and will continue to fall to less than 73 million paying customers by 2023. High prices are cited as the chief reason for the wave of cord-cutting. Cable providers have continued to sell big bundles anyway because consumers' customization choices remain fairly limited.
With the advent of new, niche-streaming options, we're at something of a paradigm shift for the business. AMC Networks is finding satisfactory results with relatively modest programming lineups within its SVOD services, like Shudder and Acorn TV. It's not competing with the likes of Disney+ and Netflix but rather complementing them. During Tuesday's call, the company explained 80% of its SVOD customers also subscribe to a mainstream streaming service. There's room for more than one and more than one kind. Discovery is likely next in line to undergo this realization.
If they prove the concept pays off and other content creators start doing the same, it becomes much easier for consumers to build their own cable bundle and ditch conventional cable altogether. Again, Sapan's words on AMC's streaming business: "We don't need tens of millions of subscribers for it to be a meaningful contributor to our business."