Digital media companies should stop flip-flopping on their revenue model

Playing both sides of digital models is becoming increasingly perilous. Legacy media struggle to combine ads and subscriptions, but pure players entering the game tend to be way more decisive in their choices.

The digital media sector has become unforgiving when it comes to unclear business models. Publishers of legacy media often like to play on both sides of the game. They want to imitate pure players that are natively designed to incorporate ads, while they also preserve their legacy paid-for model.

The problem is that compromise breeds weakness. No choice is often the worst choice.

This trend is rooted in memories of the ancient printing press revenue system. Twenty years ago, $8 out of every $10 came from commercial and classifieds ads; the rest was drawn from subscriptions and newsstand sales. In America, national or metro newspapers were picked up at street-corner metal boxes for just a quarter.

People who, at the time, were in sales and marketing positions have since moved up the ladder, and some now find themselves in command posts. However, attitudes have not always kept pace. Many executives are still trying to replicate the dual model. Its mystique is perpetuated by high-profile beacons—e.g. powerful media brands—though their impregnable editorial and intellectual dominance is confused with excellence on the business side. This has proven correct for the New York Times or the Financial Times, but much less so for many other digital newspapers that monetize badly on both ends: advertising and subscription (think about any market, take your pick).

In the glory days of print media, one fought for ad dollars and subscribers with the same weapon: quality, relevancy, and uniqueness. At the time, this blueprint warranted both large audiences and high average revenue per user—around a few hundred dollars per reader per year.

The digital world has devastated this comfortable model.

Today’s stars of the business—those who command staggering valuations—have quickly developed opposite models based on immense audiences, often counted in dozens of millions of unique visitors. However, they carry ultra-low ARPU, around a few dollars per user and per year.

Ways and means have shifted. Instead of high-quality content, the new drivers lie in flurries of listicles, funny or spectacular videos, clickbait items (see our previous Monday Note), and massive social propagation.

As for the subscription model, it is confined to a small group of legacy brands that face the nearly impossible task of preserving the exclusive-uniquess-quality trio, while going after the same cheap ad dollars clickbait maestros collect by the bulk. The “editorial mix” that ensues looks like an oxymoronic hybrid Hummer, or like my quintessential favorite: a designed-by-committee automobile, the infamous Pontiac Aztek.

Those—and they are many—who stubbornly go down this road expose themselves to a certain, albeit slow, death.

Some have tried to go for the free model without giving up on quality. Quartz is one such example, which supports its modern journalism endeavor with pricey bespoke ads. But the supply of ad dollars coming from “native ads” or “branded contents” is likely to be limited especially when heavyweights (NYT, WSJ, Washington Post in the US) are drilling large holes in the field (read our recent piece, “Industrial Scale Branded Content,” on the subject).

This backdrop leaves very few options when it comes to launching a high quality journalism product.

Since last August, I’ve paid a posted price of $45 a month ($32 after promotional discounts) for The Information, an exclusive tech/business website based in San Francisco. It is my most expensive subscription—I have many others. Every now and then, I nearly cancel that subscription but, so far, I have postponed the decision. Why? Because The Information publishes content that I will not find anywhere else: In-depth stories about tech companies, their failed strategies, murky finances, weird execs, etc. Quite frankly, a one-person operation like Ben Thomson’s Stratechery—to which I subscribe as well—carries a much better value (it costs $9 a month), but I expect The Information to cover more topics and countries over time.

What makes this site interesting is the radicality of its business model: A single source of revenue—$45 a month but a true estimated ARPU of $25-30; no ads, no $300 a pop research, no Re/code-like conference at $5,000 per badge.

Jessica Lessin founded The Information in 2013, with a decent amount of angel money and a few solid principles. Among those: “The news business model is broken. There is a race to the bottom. It left a big void,” she said. Her current operation in manned by 16 people, including eight journalists carefully selected for their ability to drill into their subjects and come up with scoops. (Lessin, a Harvard graduate and outstanding journalist, has spent eight years at the Wall Street Journal.) Her choice stands at the polar opposite of the chicken-factory digital newsroom model that fuels the commoditization of news. The Information’s output is relatively modest, but always well-adjusted, unique, and able to set the agenda, like in Reed Albergotti’s 4000-word piece on Tony Fadell’s “Struggle to Build Nest.”

To how many people does The Information’s peculiar uniqueness justify its hefty pricing? Lessin will not tell, of course, other than saying her business is cash-flow positive (read: we make money to cover expenses, but if we invest more, then we’re in the red). In my conversation with her last week, I floated my back-of-the envelope calculation: A current burn rate of about $2 million per year, then a break-even requiring between 5,500 and 6,000 paid-for subscribers. She suggested that I was not completely off.

On that base, a model such as The Information’s carries its shares of uncertainties. In order to justify its price, it needs to seriously expand its scope while retaining its ability to produce truly unique contents. This means growing the staff with high profile reporters, which will push the break-even point further away. As a result, the model will demand a major increase in paid subscriptions, a move that will call for a change of scale in the subscription recruitment system: the current (and cool) word-of-mouth will not suffice. Subscriber acquisition costs will spike.

Jessica Lessin believes the addressable market for The Information is comparable to the Wall Street Journal’s. For now, she has no intention of diversifying the business model by increasing the free part (to beef up traffic and product awareness), or to develop ancillary products. “You can’t have a foot in both worlds [paid & free]. If you succumb to that, you have two masters: eyeballs growth and subscribers,” she explains, “and then you loose your focus on simplicity, which is the advantage of the subscription model. It’s OK to develop free stuff, as long as it grows your subscription model. Same goes for events: the minute you think it’s a business, you lose focus.”

Focus on the purity of the business model is definitely an attribute of digital pure players. It is a crucial strength that should inspire legacy media.

This post originally appeared at Monday Note.

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