Comment by michaelochurch | Hacker News Reader

Comment by michaelochurch | Hacker News Reader

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There's something fundamental that's changing in business.

    Profit = Revenue - Cost

(That's not what's changing, of course.) This admits two strategies: increase revenue, or cut cost.

What's changing? Traditional MBA-style business is about cost reduction. Provide some static service, drive costs to zero or as close as you can get it, and hope like hell you're better at this than any of the other players. That's rapidly becoming obsolete.

Everything becomes a commodity, under this view. "We need 24 hours of programming. Get it together." Excellence (which might increase revenue faster than cost, but goes against every principle of cost-cutting) gets killed off. It's not important. Also, excellence is a bitchy problem from an MBA (polymorphic management) viewpoint because you actually need to know something fairly deep about the work and the problem domain to achieve it; whereas executive-level cost-cutting is a skill that can be applied (if to mediocre results) anywhere.

AMC has been taking the other tack: a long-term revenue-oriented approach that seems to be working quite well. Why? If you're in an oligopoly providing a commodity product or service, cost reduction often spells the difference between survival and failure. However, in this "long tail" world where there are hundreds of players competing for visibility, what you have instead is a world where almost no one gets a large proportional "slice of the pie", but the pie's much bigger. The payoff curve (between investment/quality and results) becomes convex and that favors risk, but it also favors let's-do-this excellence instead of traditional MBA-style cost-cutting.

The problem with the excellence strategy is that cost is predictable but excellence is not.

AMC didn't invent the strategy of going for the high end, HBO did, and lots of networks have tried the same strategy since. AMC has done well by it, but others have not -- see Showtime and Starz for examples. This despite the quality of their programming; Showtime's Dexter is well-regarded, for instance, but has failed to give a "halo" to the rest of the network. Starz has been trying to move up-market with shows like Boss and Magic City, but for whatever reason none of those shows ever really found an audience. (Even AMC's efforts have been fitful -- for every Mad Men or Breaking Bad there's a Rubicon and Hell on Wheels.)

So betting on "excellence" is a tough thing to do, because you have to spend a ton of money without any guarantees that the public will like the results. But the results of cost-cutting are very predictable, in the near term at least; it takes a long time for a run of really bad programming to tarnish a network so much that people stop tuning in. So for the bean-counters the "logical" choice is obvious.

When people tell the story of great content they tend to focus on the very high points. "Breaking Bad" is much better than "Dexter". Even "Mad Men" which isn't as good as "Breaking Bad" is much better than "Dexter", which is arguable the best show on Showtime. Aiming for decent content isn't as meaningful as actually getting that content. Starz and Showtime have failed to get anything approaching HBO or AMC.

You can change your approach but you can't change your taste and if whoever is making content decisions at Starz or Showtime continues to have their jobs then it will not get them very far.

You see it now with the results of Microsoft copying Apple's strategy. Microsoft is doing the same thing that Apple did but since they're out of their element it's not going well. They would have been better off just being a boring company that made a great Office product and an increasingly 3rd party hardware partner friendly operating system. In the same way it would have been better for Showtime to just show movies that no one wants to see but pay for the opportunity to not watch.

You don't have to spend a ton of money. Many of the top shows such as Breaking Bad are not that expensive, and after the pilot you can always walk away and cut your losses if it's an obvious failure. There are many stakeholders in the show to share your risk too. Every show is basically a little startup. People check out the script, say fine, and then do whatever is needed. They can own shares, they can get external funding, they can even finance it themselves (it's always sunny in philadelphia).

Dexter's inability to provide a halo to the Showtime network is mostly due to the sharp drop off in quality in the middle of its run and Showtime's unwillingness to kill it there after.

Homeland might be able to achieve what Dexter failed to, but that'll be contingent on how the fix the serious missteps they made last season.

You have a very strong point. Also, excellence can't be conjured into being just by throwing money at people and hoping they have the talent to do something useful for it. (Look at the VC-funded world; if the VCs could find a thousand people like me instead of the hucksters who currently run the show, they would. But it's just fundamentally hard to find great people.) The risks and especially the search costs involved in an excellence-based strategy are high and might be intolerable from an executive standpoint.

The good news is that what I said above is almost certainly right for a single actor. When you have this legacy oligopoly that has been treating some X as a commodity-- cutting costs, letting quality fall to the most manageable level (usually mediocrity)-- then, as that oligopoly loses hold due to technological change, a single player that takes an excellence strategy will have a good chance of making a big win, because the costs of excellence are not that much higher (a lot of the best shows, e.g. The Wire, started with no-name but talented actors) and the revenue potential is 10-100x (as with programming).

The bad news is that there may be a game-theoretic limit on the rewards of excellence. The fact that it works for one or a few players (e.g. AMC, HBO) might not mean that it scales. It might be that 5 players on an excellence-strategy dilute the benefits but pay the same costs. If that's the case, then this phenomenon is no better or worse than the 20th-century market's reward for branding. (While we associate the corporate-- McDonalds hamburgers, Hershey chocolate, Starbucks coffee-- withe mediocrity the truth is that most of these products were in the upper-middle tier of quality when introduced. They decline in relative terms because cheap, available, upper-middle-tier products kill everything below them and leave themselves at the bottom.) It may not be, at least specifically to TV, that an excellence strategy works for more than a small number of players (who'd become a new oligopoly).

However, I'm optimistic because the trend for software and technology is that the rewards for excellence strategies are nearly limitless (the scarcity of excellent people and ideas, not the "room" for them, is the limiting factor) and everything, including TV, is becoming a lot more technological over time.

I am pretty sure a MBA told them they were doomed if they stayed the way they were. What happened next is very much typical business. They got lucky. One good hit and they were off and running. Now what they have to avoid is the SyFy debacle of turning into cheese. Sadly they have started reality TV shows and that seems to be a staple of far too many channels.

They could have equally floundered in their choice of scripted shows. The difference is that compared to network TV they don't have a dearth of "original" programming to fall back on and hide the fails

Syfy determined that the same number of people would watch a movie no matter how much money they spent on it. Now all of their movies have a budget of only $1 million each, and they're still pretty popular. https://en.wikipedia.org/wiki/Sharknado#Production

Sharknado is also ridiculous enough to get free advertising on Reddit, so they have that as well. I'd be interested if the "Snakes on a Plane" effect makes an appreciable difference in revenue.

Notably AMC makes a lot of money by bundling 48 hours of unwanted programming alongside its flagship station.

to get AMC on your network, you also have to accept some of AMC Networks other products, such as WeTV and IFC. They can lose a little money on AMC itself as long as advertising on their other channels makes it.

> Notably AMC makes a lot of money by bundling 48 hours of unwanted programming alongside its flagship station.

How does "unwanted programming" make money?

> to get AMC on your network, you also have to accept some of AMC Networks other products, such as WeTV and IFC. They can lose a little money on AMC itself as long as advertising on their other channels makes it.

If WeTV and IFC are "unwanted channels" by viewers, how would they make money on advertising?

"How does "unwanted programming" make money?"

In the 80s/90s before Steam there was an arms race to ship smaller and smaller floppy disks/cdroms/manuals into ever larger cardboard boxes to "software stores" (The original "app store" I guess). In the old days you'd get something like Turbo Pascal or whatever in a fancy box with binders and manuals and stacks of floppy disks in cases shoehorned in like sardines, and by the end of the battle before retail software died, you'd have a giant empty box four times as big with a CD in a paper slipcover and a single sheet of paper. The idea was your competitor can't sell if there's no space for your competitor...

Because of drunks, sleeping people, crazy people, senile people, high people, you make a certain small fixed amount off every channel. You could broadcast a blank black screen or an infomercial and about 1% of the population would "watch", or at least you can bill the advertiser for that.

Old story in retail. Food stores are the worst. Quarter century or so ago I just about saw reps in near fist fights at shelf resets because another rep was encroaching on "their" space.

It's called bundling. AMC knows that their AMC network is very popular. People love Breaking Bad & Mad Men & The Walking Dead. So AMC says to DirecTV: We will give you AMC and charge you $0.75 per subscriber. But wait there's more! If you want AMC (and you do because your customers demand it) then you also are required to carry WeTV and Sundance and IFC and pay us $0.25 per subscriber for each of those networks!

So now, with the $0.25 per subscriber subsidy, those networks have lower viewership numbers they need to hit to be profitable.

I chose DirecTV for my example because they got into a very public fight with AMC last summer and AMC was pulled from DirecTV. Basically DirecTV didn't want to pay as much as AMC was asking. In the end AMC won a pretty decisive victory and got almost everything they were asking for.

Because many (most?) of the channels you have are subsidized by the popular channels. Of course, they still sell advertising time.

Okay, now you've got a circular reference of subsidy: you can't argue that WeTV and IFC are both subsidized by AMC proper, and allow AMC to lose money on AMC proper and make it up on WeTV and IFC advertising.

Either, (1) WeTV and IFC have sufficient viewership-to-cost to be profitable advertising venues and can help offset losses from AMC proper (in which case, they aren't "unwanted channels" by any meaningful definition), or (2) WeTV and IFC are net money-losing channels without sufficient interested viewership for advertising to pay the bills that are subsidized by AMC, in which case they can't possibly offset losses from AMC proper.

Either of these can be true, or neither of them, but not both.

You're thinking that the money to be made in cable is in advertising, which couldn't be further from the truth. Advertising dollars are a supplement to subscription dollars. AMC Networks requires that cable providers (Comcast, RCN, Time Warner, DirecTV etc) carry WeTV and IFC at $0.25/subscriber, even though they are unpopular, and carry AMC at $0.75/subscriber.

Cable providers pretty much have to comply, so they can get AMC. As a result, AMC Networks makes up losses on AMC proper with subscription revenues from the unwanted channels.

> You're thinking that the money to be made in cable is in advertising

No, I'm thinking that the specific claim I was responding to upthread was that AMC lost money on AMC proper, but could afford to make it up because it required cable carriers to carry WeTV and IFC, which were "unwanted programming", but nevertheless made up for AMC proper's losses by advertising sales.

I am arguing that that claim is not sound. I am not arguing one way or the other on where the money comes from.

> AMC Networks requires that cable providers (Comcast, RCN, Time Warner, DirecTV etc) carry WeTV and IFC at $0.25/subscriber, even though they are unpopular, and carry AMC at $0.75/subscriber.

> Cable providers pretty much have to comply, so they can get AMC. As a result, AMC Networks makes up losses on AMC proper with subscription revenues from the unwanted channels.

Assuming that that is basically true, then if WeTV and IFC are losing money (before considering subscription fees), then AMC is really just charging $1.25/subscriber for AMC proper (the thing cable cos want) making a profit, and subsidizing WeTV and IFC with it.

If the subsidy works the other way, then the bundling works around the fact that what to consumers is actually desirable enough to be profitable isn't what cable cos want for some reason, which is possible if what viewers actually watch and what viewers look for in selecting cable providers are not aligned, but a counterintuitive enough claim that some evidence should be provided for it.

I think the change in this business is distribution, not necessarily cost vs revenue. Surely MBAs are running AMC as well. Revenue/Cost ratio is perhaps is more important - wider digital distribution leads to increased revenue over a fixed cost

I wonder what would be a good big company CEO that is as close to general purpose (in the sense of the legacy MBAs) as possible.

Why are you calling it MBA-style?

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