Just as new content ideas seemed to be in question at AMC Networks (NASDAQ:AMCX), management for the cable television leader recently announced a companion/spin-off series for the monster hit The Walking Dead. While much is still unknown about the drama series at this point, the potential implications for investors are huge and should not be ignored.
In order to fully digest the impact that a new series based on The Walking Dead universe could have on AMC Networks, investors first need to understand the massive success of the original zombie hit. To put it bluntly, The Walking Dead is the most watched show in the history of cable television, as the last episode aired to a record-breaking 12.4 million viewers in April. The only drama series that recorded higher viewing numbers was Time Warner's (NYSE:TWX.DL) HBO program The Sopranos, which generated in excess of 13 million viewers on stand-alone episodes. However, it is important to recognize that HBO is considered a premium cable and satellite television network while AMC is considered basic cable.
The success of The Walking Dead has been extremely beneficial to AMC Networks. The series, along with current favorites Breaking Bad and Mad Men, has increased the popularity of the AMC channel significantly and made it a go-to destination for original, scripted drama. This is important mainly because it gives AMC Networks leverage when negotiating with cable/satellite providers, essentially allowing the company to bundle its weaker channels like IFC and Sundance with its much stronger channels AMC and WE tv.
The importance of this leverage cannot be overstated, as the company's dispute with pay-television provider DISH Network (NASDAQ:DISH), which represents approximately 13% of AMC's total subscriber base, illustrated last year. Although the companies did reach an agreement, the blackout of channels took several months to resolve and affected millions of customers across the nation, all while pressuring shares of AMCX and creating a great deal of uncertainty for investors. The fact that the settlement ended up costing DISH $700 million likely means another blackout will try to be avoided going forward.
However, the dispute demonstrates just how much power the cable/satellite providers wield over content-creators like AMC Networks and Time Warner. Therefore, any strengthening of the company's premium network brands means added protection for investors and extra ammunition for management in the event of any future legal disputes.
New content, same effect
While spinning off a popular series in hopes of duplicating its success may seem like a creative sell-out to some, the move should be celebrated by investors. The new show will compound the success of the original series, expand the zombie universe to include new viewers and reduce the company's dependence on the original show.
The series spin-off is being produced by Robert Kirkman, who wrote the comic that inspired The Walking Dead and has been behind the scenes of the show ever since. His involvement should help AMC develop another successful zombie-based series and also help incorporate the new show with the original in unique and inventive ways. Additionally, a new set of characters and a change in location will undoubtedly allow the series to appeal to new viewers. However, an equally important aspect of a new entry into The Walking Dead universe is that it would take some of the pressure off of the original show. Despite managing to still perform incredibly, the show is also entering its fourth season and could be getting a bit long in the tooth.
The announcement of a spin-off to the zombie-infested series comes just in time too. Management at AMC Networks has notably struggled to create new and compelling content that resonates with critics and viewers like its more popular shows currently do. The recently premiered drama Low Winter Sun has been met with lukewarm reviews and rapidly declining viewer ratings. AMC also recently cancelled the series The Killing, which also struggled to retain high viewership totals. Add in the fact that Breaking Bad and Mad Men are close to ending and The Walking Dead spin-off seems to make even more sense. The show, which is tentatively slated for a 2015 release, will bolster AMC's content lineup when the company needs it most.
Fans and investors who have been paying attention must surely realize that AMC Networks has announced two spin-offs within the last week or so. The first was a new series based on Breaking Bad supporting character Saul Goodman. Not surprisingly, the two spin-offs are based on two of the company's most successful franchises. Will management try to go three for three by announcing a spin-off of Mad Men? I think the possibility is certainly there and this will remain yet another potential catalyst to propel the company's future growth higher.
Even though AMC Networks is already projected to grow revenue much faster than larger peers like Time Warner, which is expected to grow revenue at only 4% in the next two years, the company's growth may still be underestimated. In light of recent developments, current analyst estimates for AMC Networks that call for only 11.65% in revenue growth in 2013-2014 seem too low, indicating that further upside is likely.
Philip Saglimbeni has no position in any stocks mentioned. The Motley Fool recommends AMC Networks. 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.