BuzzFeed to FeedStock: 2 Milestone Learnings for New Media Pros
I love BuzzFeed. But when a digital media darling misses financial projections by 50% (HOLY SHIT!), everyone in the media business needs to stop sharing LOLs/WTFs and understand what’s happening.
We can extract two major learnings from this milestone data point…
1. New Business Models Can Never Transcend Business Fundamentals
The Rule
Three of the best business scientists to ever live — Charlie Munger, Warren Buffett, and Jeff Bezos — developed a law of business science:
The best business strategies are built on things stable over time.
(Why? Because you don’t have a sustainable business if your customers are a moving target, your products lose demand, your distribution channels dry up, or your costs supercede your revenues.)
Application of the Rule
BuzzFeed’s business strategy was to be an expert in Facebook Reach (the product) AND sell this skill to brand advertisers (the monetization).
However, making money as a middle man on Facebook has been a very unstable foundation for business builders. If you haven’t seen the movie Zynga, here’s a thousand words worth:
“But Damien,” you say, “BuzzFeed is like f*cking awesome and they have like a quadzillion distributed media video views and have repeated the process of making memes go mega-vi…and they actually make money!”
True dat.*
But BuzzFeed has two malignant cancers in their business strategy:
- The longer-term results are starting to trickle in and advertisers are no longer huffing the hype about native advertising; and,
- A little company called Facebook would like to reapportion ‘Facebook Reach Expertise’ revenues of ~$170–250M onto something called “Facebook’s balance sheet.” (More about this in the next section.)
(First, let’s quickly address the elephant in the room: yes, “native ads” or “branded content” or “branded studio content” or “content marketing” or “branded content marketing” are all facades for what good ol’ Mad Men called advertorials. Now you can read the remainder of this post with confidence you’re not a complete moron for not knowing what the new, fancier, smoke-and-mirrors vernacular means.)
…Back to Madison Avenue, where Lean Startup experiments in social media advertorials are yielding customer development feedback such as:
“While brands are still in love with BuzzFeed’s distribution model, they don’t have the same blind faith in BuzzFeed from a branded content creation standpoint,” he said. “BuzzFeed has been skating on the ‘Dear Kitten’ example, but I can name like five of them from The New York Times. [The Times] is more able to deliver high-quality things that you remember.” (See BuzzFeed Business Challenges.)
In short, the hypothesis — ‘social media advertorials are the saintly salve to completely heal us from the 9th circle of ad banner hell’ — might be, well, invalid. Oof.
Turns out media might simply be stuck with this systemic problem: advertisers are hard pressed to receive Awareness at the top of the funnel when consumers are not aware of the advertisers’ messages (this is also true for DVRing and skipping commercials, fast-forwarding through podcast ads with a few taps of the ‘forward-15-seconds button’, etc)…
…and while LOLs and WTFs trigger emotional responses in a media consumer’s neural jungle, they simply might not create a statistically significant brand association. This, my friends, is the Trillion Dollar problem ;)
Conclusion #1
Have no fear: even if BuzzFeed whiffs on their financial projections and makes their investors lose massive amounts of paper wealth in the short-term, BuzzFeed still has enough resources and financial subsidies (thanks A16Z & NBC!) to keep pivoting until they discover a sustainable model. Believe it or not, I believe their brilliant team will probably Win.
In the meantime, we can still learn from their first big Fail. (Just for context from the side of the world that actually cares about Business Model Fit as much as Product Market Fit, if BuzzFeed was a public company and missed projections with a delta anywhere near this, it would be an #EpicFail.)
If you’ve read this far, you are my target audience (i.e., savvy media professionals) and have earned your minimum effective dose of quotable pithy wisdom:
The universe is in perpetual flux; so, we can build sustainably profitable businesses only where the stream flows slowly.
In the next section, I’ll explain why building a business on top of a public company exhibits a few standard deviations of risk…
2. Don’t Build a House Near a Fracking Field
The Rule
I am a “Blade for business nerds” — a Wall Street-Silicon Valley hybrid Day Walker trying to protect genuine entrpreneurs from a world full of vampires. Here is a law of business science from my Wall Street DNA:
Public companies will always eat the largest leaches.
(Why? Because public companies are Jabba the Hutts who must consume more food year-over-year in perpetuity…and large leaches have already done the costly and risky work of finding large foodstuffs for growth.)
Application of the Rule
BuzzFeed has built a business earning ~$170–250M selling Facebook Reach. However, a fine gentleman called Mark Zuckerberg is tasked with delivering his employees and shareholders the most possible growth and monetization of Facebook’s platform.
IMHO, Mark is in a three-way tie with Steve Jobs and Jeff Bezos for greatest entrepreneurs of our era. Therefore, I predict Mark and his FB Braintrust are thinking just like any street-smart hustler in NYC: “How can we directly sell Facebook Reach to advertisers and reapportion this large tranche of value into our company? We should be the experts of our own platform, right?”
OMG: How is this once-per-century genius prodigy ever going to figure this out!? Easy. Facebook is already scaling media content inputs and reproducing BuzzFeed’s tools.
As media content on Facebook has scaled, BuzzFeed content has transitioned from a scarce resource for Facebook (i.e., mass-scale media supplier of high-reach content) to that fun category all product inventors despise: a commodity (i.e., one of many media suppliers, and, as of F8, soon one of an ocean of media suppliers).
Now that the underlying product (i.e., shareable content) is a commodity at scale, BuzzFeed’s remaining outsized value is in their direct sales relationships with brand advertisers and their content performance monitoring software.
First, Facebook already has the best relationships with brand advertisers (who already want to throw them monopoly-size portions of their ad spends). So, BuzzFeed has no competitive advantage on that front.
Second, the content performance monitoring software, BuzzFeed’s “secret sauce,” is already being built into Facebook’s suite of tools for advertisers and now publishers (via Instant Articles). And, unless you think Mark doesn’t know his ass from his elbow, Facebook’s suite of tools will soon outperform BuzzFeed’s first-mover tools. (See the legendary steve blank’s Why Pioneers Have Arrows in Their Backs.)
Therefore, the scarcity from which BuzzFeed formerly extracted profits is evaporating faster than piss kissing the Sahara desert. (If you are a super-geek, see Alex Danco’s excellent and new Emergent Layers Framework.)
“But Damien,” you say, “why wouldn’t Facebook just buy BuzzFeed and save the day?”
Well, maybe the other Marc (Marc Andreessen) can make that happen. But that would be an exception to the rule because when deciding whether to buy or build, Facebook is constrained by the platform model.
And while some platforms do buy commoditized input producers, most don’t because remaining agnostic (in appearance or reality) maintains the highest capacity of optionality and the highest core product value proposition to customers. (In other words, why would Facebook want to hold the risk of fickle users suddenly hating BuzzFeed content? Hint: They don’t.)
Conclusion #2
A famous legal maxim states:
When the facts are on your side, pound the facts. When the law is on your side, pound the law. When neither is on you side, pound the table.
BuzzFeed is currently pounding the table with a new round of PR for…wait for it…BuzzFeed Pound like the magician in 100 Years of Solitude wowing everyone with original eye candy:
The new hyped pitch? BuzzFeed is not selling Facebook Reach (silly rabbits!), they are selling Distributed Media Reach.
In other words, BuzzFeed is now just a pure ad agency specializing in advertorials for any container that will publish them. Unfortunately, that model doesn’t solve three critical problems:
- “Social Media Advertorials for the Win!” might be an invalid hypothesis about which advertising format will ultimately replace banner ads as the lion’s share of online advertising spend (and make no mistake: the moonshot bets on BuzzFeed communicate a belief that BuzzFeed will dominate the new paradigm);
- A collapsing revenue stream from Facebook Reach sucks because at the moment a) “Distributed Media Reach” means [80-90% Facebook Reach + 10–20% Miscellaneous Shit (e.g., Snapchat, YouTube, Pinterest, Twitter (is Twitter still a thing?)], and b) any Miscellaneous platform which gets large enough will also endgame by eating the largest leaches; and,
- BuzzFeed’s financial miss and pivots evidence the company has not yet discovered Business Model Fit…and that means their fate is still overly dependent on the welfare of finaciers and strategic investors.
It’s like building a house only to have frackers extract your geological underpinnings and leave you in a sink hole.
As I bid you adieu, my savvy media friends, I leave you with these tragic OMG parting thoughts:
Ben Thompson proclaims “The only alternative [to having a strong, differentiated POV] is to be a low-cost content feeder for Facebook.” (I would expand this beyond FB to include “low-cost content feeder” for large platforms — AKA, a Distributed Media Producer.)
Therefore, now that Facebook has scaled the supply of media content inputs and reproduced BuzzFeed’s tools, BuzzFeed is fast becoming FeedStock for Facebook like the rest of us.
Lastly, Click here to follow me on Medium to discover more media industry insights in my next post for savvy media professionals.
* For the record, I am not a BuzzFeed hater. I love BuzzFeed News and no longer see a reason to pay for NYT or WaPo — a FYI that the undercutting has officially been driven to $0 for substitute premium news content. I also believe BuzzFeed is awesome at creating entertaining content. I am simply offering a perspective on business strategy (AKA chess for business nerds) during these interesting times. Lastly, I will delete any argumentum ad hominem comments. I have nothing but the highest admiration for Jonah Peretti and his Braintrust. They have definitely built a bigger business than I. It’s not anyone’s personal fault that the business battlefield is nasty, brutish, and agnostic over the long-term. And I am still rooting for them to pull a #Villanova over the long-term!
