One of the traditions of the day after a Mad Men season premiere is the realization after endless hype is that few people watch the show -- last night's episode drew a paltry 3.5 million viewers -- but the way the show survives as a business is a good lesson in the changing entertainment landscape.
Costs. Mad Men is not cheap to make. After the dust settled in the latest contract standoff between creator Matt Weiner and Lionsgate (the studio that produces the film) and AMC (which then buys rights to run the show from Lionsgate), Weiner signed a deal last March that Deadline called a "mega deal" worth $25 million to $30 million over three years. That same Deadline report also put the production budget for each episode at $2.5 million. Sandra Stern, Lionsgate's chief operating officer put the number somewhere around $3 million in an August 2010 interview with Ad Age. With 13 episodes per season, it costs Lionsgate between $33 million and $39 million in production costs. The studio recoups that money primarily from AMC's licensing fee, which The Hollywood Reporter pegged at $3 million per episode.
Advertising. While advertising may be the background drama of Mad Men, advertising is not integral to the business model -- no matter what you thought about all those Chrysler ads during Sunday's premiere. The most recent figures we could find for AMC's ad revenue on the show was for 2009 (the third season), when Kanta Media estimated, also according to Ad Age, that all showings on AMC produced just $1.98 million in ad buys. That was down slightly from the $2.8 million in 2008 and $2.25 million in 2007. We have no idea how much advertising AMC has sold this go around, but with the ratings still relatively small, we doubt they've increased enough to alter the economics of the show.
Carriage fees. One of the big ways that cable networks like AMC make their money is from the cable operators who buy their channel. Since the show started in 2008, the monthly fees cable and satellite providers have increased to 24 cents from 22 cents, according to SNL Kagan. It's hard to say how much of that is due just to Mad Men (other shows like Breaking Bad, The Walking Dead, and, hey, let's throw in The Killing) have also spawned fans who would be tempted to sign up for another provider if their cable company dropped AMC. 2 cents may not sound like a lot, but it adds up quick when you multiply it across the 97 million homes (according to AMC's media kit) that get AMC: over a year, 2 cents turns into just under $24 million in added revenue.
Online video. Netflix paid Lionsgate a reported $1 million per episode to add Mad Men to its streaming service. And both iTunes and Amazon also have deals with Lionsgate to carry the show, which after AMC's license fee is probably enough to put the show fully in the black for the studio.
International. Lionsgate also sells broadcast rights to distributors around the world -- for example, HBO Latin America, BBC Four in the U.K., and Channel One in Kazakhstan. All told, Stern told Ad Age that makes "slightly north of" $500,000 per episode from foreign rights.
So, all in all, the state of the Mad Men economy is strong -- it just doesn't look anything like the typical ratings-advertising cycle that people typically associate with television. And, indeed, as the frequent clashes between Weiner, Lionsgate, and AMC have demonstrated -- though, his three-year deal means they won't likely repeat -- it's taken a while for the television people themselves to figure it all out.