De Correspondent set its sight on the US market

De Correspondent: Scale & Conquer the U.S.

The Dutch media startup faces the realities of subscription economics. And makes a big bet.

This is part 2 of my two-part mini-series on De Correspondent. Here’s the first.

Part one in a nutshell: The Dutch news startup De Correspondent gets a lot right conceptually. Their approach to building a subscription-based journalism business is fundamentally sound. This can’t be said about every company that attempted it. It’s a decent starting point.

However, building a successful online news business on subscriptions alone hasn’t been done yet. Can De Correspondent pull it of? Let’s evaluate the companies past performance and future. A huge variable in that equation: their recently announced plan to launch in the US next year. An ambitious plan, to say the least.

Addressable Market & Performance

The Dutch market is rather small at a population of 16.8 million. But at 56,000 subscribers as of March, De Correspondent still has plenty of space to grow. To get an idea of the general willingness-to-pay for journalism, one can glimpse at the competition. TMG — the media holding that runs the country’s biggest newspaper De Telegraaf — made €114 million from combi-subscription (print +digital) last year. According to their 2016 annual report, that number is primarily due to De Telegraaf subscribers, who converted from print to combi-subscriptions. (It’s apparently hard to leave the paper behind once you’re used to it.¹)

Interestingly, TMG reported only €4 million in digital-only subscription revenue. According to my (quick) estimates, De Correspondent’s subscription revenues amounted to about €3.2 million last year. Which doesn’t look too bad in comparison. But it might make you wonder if the startup is already approaching market saturation. I doubt it. A digital-only publication’s addressable market should include a fair number of people who opt for combi-subscriptions when given the option. The hard part, of course, is getting in front of those readers.

Data Source: De Correspondent Announcements (Link)

Net subscriber growth since the site’s launch in September 2013 has been relatively constant in absolut terms (in case you’re wondering: they started with 20k subscribers as a result of a crowdfunding campaign). This, of course, results in a declining growth rate which isn’t optimal, particularly in early stages. Although I should note, De Correspondent hardly spends on advertising but heavily relies on recommendations. In 2016, they only spent 2.5% of their subscription revenue on marketing. For the sake of comparison: Other subscription media companies like Netflix or Spotify spend in the 12–15% range according to MIDiA Research data.

Scale & Feedback Loops

Not investing in marketing is an interesting decision, to say the least. It’s no secret: subscription services depend on scale. In online journalism, the main cost is content creation. Writers need to be paid, research funded. The catch in case of subscription models: In order to convince people to pay, the content must be top-notch. Thus, you need to be able to hire the best writers and finance in-depth research. That’s expensive. At best, it creates a positive feedback loop:

But as a startup, in a market with established competition, you don’t operate in a vacuum. You can’t outspend the established companies nor conjure subscribers. Hence, a good strategy is to focus on a niche and create superior content for it. As I explained in the first part, De Correspondent does that to a degree. They ignore breaking news, focus on long-form journalism and allow writers to specialize.

As a result, their product is partially unbundled. But the economics are not. Every subscriber pays for the full package, not for individual writers or topics. This increases the number of subscribers you need to operate profitable.

At the end of 2016, De Correspondent reported 52,000 subscribers. 78% of those purchased the yearly subscription at €60, the rest pays €6 a month. That equates to approximately €3.2 million in subscription revenue. (At constant growth, it should arrive at €4 million by the end of 2017.)

Those numbers aren’t very telling in isolation. But when you put them into context, they illustrate why creating said positive feedback loop is difficult. A KPI that can act as a (very rough) indicator of a publisher’s ability to invest in journalism is revenue per employed journalist.

A word of caution: the number doesn’t tell you how much a publishing company can spend for its journalism with any precision. Depending on the organization, there are all kinds of costs from raw materials to overhead that need to be deducted from the revenue first. That said, it can be used as a quick-and-dirty benchmark. Just don’t read too much into it.

With that, let’s look at De Correspondent’s revenue per journalist and compare it to the New York Times’s. The latter is widely regarded as a very sound journalistic organization and therefore an interesting benchmark.

De Correspondent:

Revenue 2016 (estimate, in € million): €3.2 million

Editorial staff: 21 (source)

Revenue per employed journalist: €0.15 million

New York Times:

Revenue 2016 : $1,555.3 million ≈ €1,406.0 million*

Editorial staff: 1,300 (source)

Revenue per employed journalist: $1.2 million ≈ €1.1 million

The caveat here: The NYT has a totally different cost structure. It’s a much bigger organization. It spends on ad sales. It produces and distributes a physical newspaper. For instance, the cost for raw materials — which include cost for newsprint and outside printing — made up 5% of total revenues in 2016. So, we aren’t performing precise science here.

Still, it’s a difference of almost an order of magnitude. Even if we account for the different business models: It’s fair to assume that the NYT can invest significantly more into its journalism, even when accounting for the different cost structure. That is bad news if your business model relies on offering the best journalism.

The Big Bet

Now, the NYT isn’t your benchmark in the Netherlands. Things might look different there. However, De Correspondent is aiming for the US (btw with support from Jay Rosen). That is a two-edged sword. English content, particularly when created with international readers in mind, has a much bigger addressable market. In theory, scaling becomes a lot easier. Yet, competition increases as well — in quantity and quality. Suddenly the NYT is an actual competitor.

It takes a dedicated newsroom to establish a relevant outlet in the USA. The Correspondent intends to set up shop in New York. This requires significant investments². Hiring talent (in a crowded media market no less), marketing (relying on recommendations without a base audience likely won’t do it) and the founders’ time (don’t neglect that factor).

The US launch is a huge bet.

How you lose it: The launch puts a burden on the company at home. Instead of focusing to increase the subscriber base at home, the key management team is involved in building the business abroad. The US proofs to be a tough, crowded market with a distinct culture. Arriving almost without a reputation makes it even harder (though Rosen’s support helps a little). The company burns through a pile of cash. The struggles overseas consume leadership fully. The culture at home slowly but surely erodes. All that at a stage, when its home market would still have provided enough room to grow (and without first attempting to conquer bigger but closer markets like the German-speaking one). Alas, the company ends up in dire straits.

How you win it: Thanks to the writer-friendly business model and culture, The Correspondent manages to hire a few big names. They bring their established readership along. A few stories go viral, catalyzed by the media crowd which embraces the exotic startup. The company’s reputation grows quickly — and with it the subscriber base. Thanks to careful planning and good hiring, the co-founders manage to split their duties and export their culture successfully without sacrificing at home. While the initial expansion budget is quickly spent, a new crowdfunding campaign succeeds, with the help of US members and friends of the brand. The ongoing Trump presidency keeps the willingness to spend on journalism at a high level. The Correspondent’s critically acclaimed coverage turns it into a go-to location.

I would like to see the second scenario play out. But I regard the first one as more likely. Too many random variables have to turn out right, for the second to manifest. My key issue is with the timing: De Correspondent is still a small company and entering the US market is a big undertaking. Its home market — or geographically closer ones — would allow to grow without having to operate on different continents.

It’s the payoff, stupid

That said, you mustn’t only look at the odds when taking a bet. You need to consider the payoff structure too. Even if the chance of succeeding in the US is small, the upside is way bigger than the downside: establishing a successful content company in English turns it into a (almost) global publishing business. If you fail, you’re just another startup gone bust. Right there, we are starring at the basic conflict of entrepreneurship: How much risk do you consider worth taking?

In the case of De/The Correspondent, deciding to shoot for the US market doesn’t require the founders to consider the second scenario as highly probable. It’s a good decision if Rob Wijnberg and Ernst-Jan Pfauth regard it as fairly reasonable. And there are ways to hedge against losing the bet: setting up a legal structure that protects the business at home and making sure not to lose sight of the challenges there.

I do think the timing boarders on too early. But I might be wrong. It cuts both ways: competition for subscribers will only increase and being early comes with its own set of advantages. Plus, older organizations tend to become more risk-averse. Conquering the English-speaking market is always going to present a risk; but certainly one worth taking. So they might as well try now.

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*Converted, for ease-of-use at yearly average exchange rate, calculated based on the monthly averages by X-Rates.

¹ Or, maybe, the horrible De Telegraaf website is to blame.

² I’m curious how they will attempt to raise the money. The company was started with a successful fundraising project. But the founders lack a comparable network in the United States.