“It was not a dumb idea. It may have even been the right idea at the time.” So begins Ev Williams in arguing why ads were picked as the de facto model for monetizing digital media.
While it may have been digital media’s original sin, it was a sin that made a lot of sense in context. Ads as a print business model had worked astonishingly well. At the height of newspaper supremacy, subscriptions made only enough money to cover the cost of delivery. Media companies were empires that derived 80 percent of their tributes from advertising.
What failed in digital was a thing of beauty in analog. Advertisements for Mel’s Pizza subsidized news that covered the doldrums of city council meetings and other tedious business at the guts of a functioning democracy. One of the underappreciated assets of print as a medium is that, without granular data on individual ad performance, there was minimal tradeoff between what was good for readers and what was good for advertisers. In digital, to quote the pithy VC Paul Graham, ad-supported journalism means we get journalism targeted at people who will click on ads.
However, by the time giant checks were being written, any naïve dream that this model would copy into digital should have been long gone. When NBC was dumping its second $200 million into BuzzFeed in late 2016, the New York Times had already been behind a paywall for six years.
The most strategic investments have been made not in publishers but in the technology companies that advance the ecosystem.
In retrospect, the paradoxes that doomed Mic, Inverse, Vice, and the like feel obvious, especially to those whose core competence is internet technology. The media and technology intelligentsia gave keynotes about how 40 percent of internet traffic was fake but drooled over the total number of eyeballs for digitally native publications. Pretty much everyone found videos in their social feeds annoying as hell but somehow accepted Facebook’s claim that video was the future. Investors cooled on ad tech thanks to fraud and ad fatigue among high-value audiences but hoped publications targeting high-value millennials were going to make a bunch of money bombarding them with ads. Compounding this, investors in new media were shown overinflated statistics around audience and engagement. Shed no tear: They fell for an obvious ruse.
On the basis of total addressable market, it is easy to see why investors can still be smitten by advertising-based businesses. While media languishes, digital advertising overall continues to grow at an astonishing 20 percent per year.
But for publishers, beyond the obvious Facebook, Google, and Amazon mountains, there are more mountains. As the bull market subsides and investor patience with massive losses wears thin, even more big tech companies will turn to ads for a junkie’s high. For all of its flaws, advertising remains the best way to bring in a quick influx of high-margin revenue, especially for companies besieged by the banality of short-term thinking.
By the end of 2019, publishers will be actively competing with Uber, Lyft, and Netflix (sigh). Fancying themselves media companies now, retailers such as Walmart are also joining the fun. Add it all up and what you have is a zero-growth business with an increasing number of massive market participants who want a piece of the pie, most of whom have a fundamentally better advertising product than publishers.
More broadly, ad-based media competes for your peripheral attention, which in many ways is actually harder than directly competing for your dollars. That means ad-based media doesn’t just compete with Facebook and Google but also with Candy Crush, 2048, texts from last night, and any other way a person uses their screen time. Over time, as brilliantly posited by Derek Thompson, the whole attention economy is a Malthusian trap.
Digital media has to re-enter a period of rediscovering product-market fit. Unfortunately, the first round of VC investments has helped delay the inevitable by infusing artificially cheap capital meant to scale ad-based publications, costing the media industry precious years to rethink the fundamental revenue model. This capital flowed to undifferentiated publications with little justification other than accumulating eyeballs as if that should be the end in and of itself. Rather than helping rebuild the car, we took rocket fuel and mainlined it into a jalopy. Too many publishers were allowed to temporarily grow without producing a product that anyone was willing to pay for.
This has become a double whammy in the mergers and acquisitions blitz that is engulfing the industry. From a valuation perspective, the main problem with advertising is that it represents ephemeral revenue and is valued by the market as such. While early media acquisitions profited from the same naïveté that propelled Vice to a $5 billion valuation, the market changed its tune quickly. Mashable, once valued at $250 million, was bought by Ziff Davis for $50 million, almost an exact match of its annual revenue.
Digital media has to re-enter a period of rediscovering product-market fit.
Companies that have bucked the trends and succeeded in mergers and acquisitions are those with recurring revenue and access to unique data, a similar framework that allows software-as-a-service (SaaS) companies to often be bought at 10 or more times their annual revenue. Subscriptions represent the most obvious recurring revenue stream, but revenue derived from commerce operations is also valuable at the negotiating table.
With the unique combination of expert analysis of products and millions of monthly clicks, sites like Digital Trends and Best Reviews are arguably the best single snapshot into what people actually want to buy on the internet. That information is potentially worth good money to a lot of constituents in the retail ecosystem; brands and retailers alike pay consultancy companies like Kantar into seven figures for similar data. Quality commerce publishers with diversified merchant partners see the most data aligned to the retail zeitgeist, pushing up their acquisition price. Best Reviews was bought for $110 million while there are rumors that Digital Trends was pursued at an even higher number.
Legacy media companies tethered to ad-based models will wisely pay a pretty penny to diversify. But since VC also bet big on ads, there just aren’t a ton of media startups for them to buy.