The long term prospects for distributed content just got rather hazy

It was a bad week in the distributed content sector, where gazillions of “content views” were once touted as the new digital bonanza. On Apr. 12, FT.com reported that Buzzfeed, until now the genre’s gold standard, had halved its 2016 revenue projections from $500 million to $250 million after making $150 million in 2015—30% lower than expected. The Buzzfeed PR team issued the pro-forma, unconvincing denial, and BF’s chairman Ken Lerer (managing partner at Lerer Hippeau Ventures) offered a more optimistic picture in a Re/code chat. (Also read Ken Doctor’s column on the matter.)

That same week, we also learned that Mashable slashed most of its journalistic workforce, including Jim Roberts, its highly experienced editor—the latter move a rather strange one. While many pure players have increased their ability to produce original/exclusive contents—Buzzfeed, as an example, has one of the best investigative teams money can buy—Mashable is clearly moving away from that path, most likely drifting to oblivion, drowning in the internet background noise.

Finally, Mark Zuckerberg’s F8 keynote gave us a glimpse of Facebook’s intent to vastly expand its reach in the global digital ad market, implicitly promising nothing more than subservience to those who naively pretended to build nice businesses on the back of the dominant social network (more on that in a future Monday Note).

This string of events raises three questions about BuzzFeed, and the economics of both distributed content and video.

1. Does this impact Buzzfeed long-term survival?

The short answer is no. BF got about $300 million in funding, including a recent $200 million investment by NBC Universal at a $1.5 billion valuation.

However, adjustments might be required.

Buzzfeed is a very large operation. Between its main New York office (editorial, sales and marketing, data, tech, admin), the BuzzFeed Motion Pictures division in Los Angeles, plus about 15 outside bureaus, it has a staff of 700. Based on known P&Ls for US-based digital media, such staff translates into a payroll expense of more than $100 million. Apply a ratio of 1.3-1.5 times more for other charges, we are talking about $150 million a year in total expenses, give or take a few million. It means that, in 2015, Buzzfeed barely broke even. For a company created in 2006, that’s not so bad.

2. Is the potential of distributed content overstated?

Yes, probably.

Let’s face it: Following the “grow fast” rule of richly-funded tech companies, BuzzFeed dreamed big right from the outset. In its pursuit of television advertising dollars, it set up a 100-person studio in Los Angeles, mainly to produce video for brands, initially at a price tag of about $100,000 per campaign. At that price, the product had to be perfect. It meant endless refinement and audience testing (the latter being crucially important in BF’s promise to max out social reverberation over more than 30 different platforms).

But despite its power and talent for producing video contents and mastering the “social lift,” BuzzFeed monetizes poorly.

Let’s take the leaked $150 million in yearly revenue. When BuzzFeed CEO Jonah Peretti brags about five billion monthly content views generated by BuzzFeed on social, we have to consider that each one generates no more than $0.0025 in ad revenue—a meager $2.50 CPM equivalent; for video that’s weak. Now let’s take BF’s publisher’s perspective. In this interesting post, Dao N’Guyen states the following: “We estimate that our current comScore metric of about 80 million UVs represents less than one-fifth of our actual global reach, based on ad hoc data provided by partners. Less than one-fifth.”

That would be a staggering 400 million UVs per month… But again, based on $150 million a year in revenue, that translates into a mere four cents per unique visitor per year. To put things in perspective, The New York Times makes about $5 for the same UV—125 times more than BuzzFeed—and that is only for the NYT’s digital advertising revenue. Even if BF’s actual revenue is higher, the gap remains huge.

In coming quarters, there will be three things to watch for with BuzzFeed and the distributed branded content sector as a whole:

  1. BuzzFeed’s ability to scale in order to match its $1.5 billion valuation. Again, to compare with legacy media, we just need to remember that the New York Times’ current market cap is slightly more than $2 billion, with a 2015 revenue of… $1.6 billion, including $639 million in ad revenue, and $845 million in circulation.
  2. Valuations: to put it bluntly, based on their respective revenue figures (actual for the NYT and speculated for BF) and their respective valuation multiples, either the Times should be valued at $16 billion or BuzzFeed should be worth only $196 million. Again: even if BuzzFeed’s real figures are much higher than reported last week, a major mark-down looms.
  3. The impact on the vast cottage industry induced by BuzzFeed’s projected success. Among companies that sell social dissemination to brands—or pure copycats that don’t even have a website—many have no revenue at all. To them, the bar got suddenly much higher.

3. The problems with video in general

More broadly, there might be a problem with video monetizing. Media are attracted by video because its growth seems endless, especially among Millennials who watch hours of video on their smartphones.

But broken down to the actual revenue per video segment, for news organizations, the model looks extremely challenging.

Granted, social champions such as BuzzFeed excel at spreading contents at an amazing scale. But not all videos are created equal. The famous watermelon explosion, a poorly filmed and terribly long (45 minutes!) video, drew 10.5 million views, generated 315,000 comments, and might have cost $40 to produce (one vegetable, 700 rubber-bands, protective gear). But sending a single videographer to follow a refugee’s journey will cost thousands of dollars, or explaining Brexit issues might require more than a pair of interns. Unfortunately, both productions will generate a few thousands views, at best.

Clickbait is cheap, quality is expensive. That’s why, when it comes to monetization, video for hardcore information should be approached with great caution. In addition, it’s a crowded market in which scores of solo YouTubers produce engaging contents at costs that are impossible to match given the cost structure of large news outlets. Beyond massive clickbait production, the economics of news video might be uncertain, to say the least.

This post originally appeared at Monday Note.

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