The ‘Mad Men’ Economic Miracle

If you don’t watch sports you shouldn’t pay for cable television. An interesting corollary is that even if you’re not watching shows like ‘Mad Men’ or ‘Breaking Bad’ (it stands to reason many of you are not), you are subsidizing those shows and networks and raising the overall quality of television.

Networks have effectively entered into a quality war. Basic-cable channels have to broadcast shows that are so good that audiences will go nuts when denied them. Pay-TV channels, which kick-started this economic model, are compelled to make shows that are even better. And somehow, they all seem to be making insane amounts of money. This year, NBC Universal’s cable operations are expected to bring in around $5 billion, half of which is profit. Viacom’s revenue will be more than $8 billion, with 49 percent profit. Apple had one of its best years ever in 2012, but its profit margin is expected to be only 37 percent, which is still well above its 23 percent average over the past five years. An auto company would be thrilled with something in the high single digits.

At first, the cable industry’s ascendance into arguably America’s single-most-profitable big business makes almost no economic sense. Not long ago, three major networks controlled all of our viewing. Now dozens of channels reach a fraction of that audience. According to the basic rule of supply and demand, the revenue and profits should plummet. But those rules break down when an industry operates as a near monopoly.

It’s interesting to me that consumers are getting better quality while cable providers and channels are burning cash like it’s no big deal. Perhaps, then, I need to reevaluate my stance on cutting the cord. The reason? If the cable provider’s OPEC-like cartel collapses or is significantly disrupted by say, AppleTV, they will no longer have the huge profits or motivation to create high-quality programming.

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