Love The Walking Dead series? Well, if you are a DirecTV (NYSE:DTV.DL) subscriber it is possible you will miss shows if AMC (NASDAQ:AMCX) goes black -- at least that's what the network wants you to believe. Utilizing both commercials, and a website, the network warns viewers that they risk losing AMC's host of networks -- and, mostly, The Walking Dead -- if the company cannot finalize an agreement with DirecTV by year-end.
AMC, unhappy with the pace and scope of negotiations, decided to take the disagreement public and to its fans. DirecTV also issued a more measured response but expressed pricing concerns as a reason for the holdup:
[Subscribers] will not miss any of this year's new season of The Walking Dead or any other shows. AMC is contractually obligated to provide all of its programming for several more months and we intend to renew our AMC partnership at a price that's fair to our customers.
Although both companies appear to be confident in AMC's renewal, alerting subscribers is a clear indication that the negotiations aren't proceeding well. And for those following the industry, this is a microcosm of what ails the greater pay-TV industry.
AMC is The Walking Dead
If DirecTV tipped its hand, and the issue is price, it is easy to understand how these valuations differ. AMC has the right to boast of the enormously successful The Walking Dead show that pulled in 14.5 million viewers as of its last viewing from all pay-TV providers. For perspective, DirecTV has roughly 22 million subscribers total. Therefore, AMC's tentpole show boasts nearly two-thirds of DirecTV's total subscribers.
That said, AMC is The Walking Dead; outside of the highly rated and wildly successful show, AMC's host of networks really aren't that popular. Last year fans witnessed Walter White die, taking the critically acclaimed Breaking Bad show with him. In addition, Mad Men is ending next year, leaving AMC rather starved for highly rated and watched shows. Outside of The Walking Dead, the company will have Hell on Wheels and hopes for a prequel to Breaking Bad -- Better Call Saul -- to boost viewership.
Affiliate fees are the issue
At the heart of the dispute appears to be the amount subscribers are paying AMC. AMC mostly is paid not through advertising, but rather from distribution. Essentially, pay-TV providers charge you a cable bill, take their profit, and pass on the costs of programming to the network in what's called affiliate fees. The data is sparse, but media-research firm SNL Kagan estimates the fee at $0.35 per month per subscriber as of late last year.
Although this $0.35 number seems cheap, the median price per channel is $0.14 ... and with hundreds of channels competing to make the average cable package you can see how these numbers can add up quickly. Another report expects the average amount of programming to increase 36% by 2018, putting pay-TV providers between a rock (programmers demanding affiliate fee increases) and a hard place (subscribers tired of paying them).
So, the value proposition to DirecTV is whether or not the increased programming costs are worth the value of one wildly successful show.
AMC Networks president and CEO Josh Sapan stated, "AMC is a $0.75 per subscriber per month channel" in 2011, so it appears the company is angling for a higher per subscriber per month fee. DirecTV, in process of being acquired by AT&T is standing firm, but probably would prefer to keep this dispute quiet while AT&T's acquisition is in process.
In perhaps the highest-profile dispute over affiliate fees, The NFL Network and Comcast went to court in 2009. In the end they settled, with both sides making affiliate fee concessions. Look for that to happen here, too -- hopefully before The Walking Dead goes off the air for DirecTV subscribers.