business models

Brace For The Corporate Journalism Wave

 

 [Updated with fresh data]

Corporations are tempted to take over journalism with increasingly better contents. For the profession, this carries both dangers and hopes for new revenue streams. 

Those who fear Native Advertising or Branded Content will dread the unavoidable rise of Corporate Journalism. At first glance, associating the two words sounds like of an oxymoron of the worst possible taste, an offense punishable by tarring and feathering. But, as I will now explain, the idea deserves a careful look.

First, consider the chart below, lifted form an Economist article titled Slime-slinging Flacks vastly outnumber hacks these days. Caveat lector, published in 2011. The numbers are a bit old (I tried to update them without success), but the trend was obvious and is likely to have continued:

336_PRvsJ_516px

Update:
As several readers pointed out, I failed to mention a Pew Research story by Alex T. Williams that contains recent data that further confirm the trend: (emphasis mine)

There were 4.6 public relations specialists for every reporter in 2013, according to the [Bureau of Labor Statistics] data. That is down slightly from the 5.3 to 1 ratio in 2009 but is considerably higher than the 3.2 to 1 margin that existed a decade ago, in 2004.

[Over the last 10 years], the number of reporters decreased from 52,550 to 43,630, a 17% loss according to the BLS data. In contrast, the number of public relations specialists during this timeframe grew by 22%, from 166,210 to 202,530.

 Williams also exposes the salary gap between PR people and news reporters:

In 2013, according to BLS data, public relations specialists earned a median annual income of $54,940 compared with $35,600 for reporters.

And I should also mention this excellent piece in this Weekend FT, on The invasion of Corporate News. –

In short, while the journalistic staffing is shrinking dramatically in every mature market (US, Europe), the public relation crowd is rising in a spectacular fashion. It grows in two dimensions: the spinning aspect, with more highly capable people, most often former seasoned writers willing to become spin-surgeons. These are both disappointed by the evolution of their noble trade and attracted by higher compensation. The second dimension is the growing inclination for PR firms, communication agencies and corporations themselves to build fully-staffed newsrooms with editor-in-chief, writers, photo and video editors.

That’s the first issue.

The second trend is the evolution of corporate communication. Slowly but steadily, it departs from the traditional advertising codes that ruled the profession for decades. It shifts toward a more subtle and mature approach based on storytelling. Like it or not, that’s exactly what branded content is about: telling great stories about a company in a more intelligent way versus simply extolling a product’s merits.

I’m not saying that one will disappear at the other’s expense. Communication agencies will continue to plan, conceive and produce scores of plain, product-oriented campaigns. This is first because brands need it, but also because there are often no other ways to promote a product than showing it in the most effective (and sometimes aesthetic) fashion. But fact is, whether it is to stage the manufacturing process of a luxury watch, or the engineering behind a new medical imagery device, more and more companies are getting into a full-blown storytelling. To do so, they (or their surrogates) are hiring talent — which happens to be in rather large supply these days.

The rise of digital media is no stranger to this trend. In the print era, for practical reasons, it would have been inconceivable to intertwine classic journalism with editorial treatments. In the digital world things are completely different. Endless space, the ability to link, insert expandable formats all open new possibilities when it comes to accommodating large, rich, multimedia contents.

This evolution carries both serious hazards for traditional journalism as well as tangible economic opportunities. Let’s start with the business side.

Branded content (or native advertising) has achieved significant traction in the modern media business — even if the quality of its implementation varies widely. Some companies (that I will refrain from naming) screwed up big time by failing to properly identify what was paid-content as opposed to genuine journalistic production. And a misled reader is a lost reader (especially if there is a pattern). But for those who pull out good execution, both in terms of ethics and products, native ads carry a much better value than banners, billboards, pushdowns, interstitials, or other pathetic “creations” massively rejected by readers. I know of several media selling dumb IAB formats that find out they can achieve rates 5x to 8x higher by relying on high quality, bespoke branded contents. These more parsimonious and non invasive products achieve a much better audience acceptance than traditional formats.

For media companies, going decisively for branded content is also a way to regain control on their own business. Instead of getting avalanches of ready-to-eat campaigns from media buying agencies, they retain more control on the creation of advertising elements by dealing with the creative agencies or even with the brand themselves. Such a move goes with some constraints, though. Entering branded content at a credible scale requires investments. To serve its advertising clients, BuzzFeed maintains 50 people in its own design studio. Relative to the size of their entire staff, many other new media companies decided from the outset to build fairly large creative teams (including Quartz). That’s precisely why I believe most legacy media will miss this train (again). Focused on short-term cost control, also under pressure from conservative newsrooms who see branded content as the Antichrist, they will delay the move. In the meantime, pure players will jump on the opportunity.

Newsrooms have reasons to fear Corporate Journalism — in the sense of the ultimate form of branded content entirely packaged by the advertiser — but not for the reasons editors usually put forward. Dealing with the visual segregation of native ads vs. editorial is not utterly complicated; it depends mostly on the mutual understanding between the head of sales (or the publisher) and the editor; the latter needs to be credible enough among his peers to impose his/er choices without yielding to corporatism-induced demagoguery.

But the juxtaposition of articles (or multimedia contents) produced on one side by the newsroom and on another hand by a sponsor willing to build its storytelling at any cost might trigger another kind of conflict, around means and sources.

In the end, journalism is all about access. Beat reporters from a news media will do their best to circumvent the PR fence to get access to sources, while at the same time the PR team will order a bespoke story from its own staff writers. Both teams might actually find themselves in competition. Let’s say a media wants to write a piece on the strategy shift of major energy conglomerate with respect to global warming; the news team will talk to scores of specialists outside the company, financial analysts who challenge management’s choices, shareholders who object to expensive diversification, advocacy group who monitor operations in sensitive areas, unions, etc. They will also try to gain access to those who decide the fate of the company, i.e. top management, strategic committees, etc. Needless to say, such access will be tightly controlled.

On the corporate journalism side, the story will be told differently: strategist and managers will talk openly and in a very interesting way (remember, they are interviewed by pros). At the same time, a well-crafted on-site video shot in an oil-field in Borneo, or on a solar farm in Africa will reinforce the message, in a 60 Minutes way. The whole package won’t carry silly corporate messages, it will be rich, carefully balanced for credibility and well-staged. Click-wise, it is also likely to be quite attractive with its glowing, sleek videos and great text that will have the breadth (but not the substance) of professional reporting.

I’m painting this in broad strokes. But you get my point: Authentic news reporting and corporate journalism are bound to compete as audience could increasingly enjoy informative, well-design corporate production over drier journalistic work — even though it is labelled as such. Of course, corporate journalism will remain small compared to the editorial content produced by a newsroom, but it could be quite effective on the long run.

frederic.filloux@mondaynote.com

The Ripple Effects of Disruptive Models

 

Last week, we discussed the impact of services such as Uber or Airbnb. More broadly, no sectors is immune to major overhauls. Today, we’ll have a look at the impact of Disruptors. 

Nested in Paris’ Le Marais neighborhood, a clever incubator/think-thank called TheFamily, made its mission to chronicle the digital transformation of our society. Largely inspired by the iconic Ycombinator incubator, TheFamily funds and provides all sorts of services to a hundred plus startups. But it also wants to rattle the establishment with an activist posture. Paraphrasing the “Barbarians at the Gate” book title, the incubator hosts a conference series titled Les Barbares Attaquent (Barbarians On The Attack) that examines all the sectors to be impacted by the digital tidal wave.

The latest event (#18) featured the book industry. Prior to that, human resources, retail, luxury, housing & construction, health, transportation, education, garment industry, consulting, insurance, finance and other sectors were dissected by TheFamily partners and guest speakers. Each time with a larger attendance.

One of the founders, Nicolas Colin, recently made headlines when his blog post (fr) denounced the notoriously archaic parisian taxi lobby (see previous Monday Note), triggering a lawsuit from Nicolas Rousselet, the owner of the main French taxi company G7. (Nicolas is the son of André Rousselet, himself one of former president François Mitterrand’s favorite oligarchs, anointed TV mogul in the late Eighties). By suing the blogger, Rousselet Jr. wanted to shut down any criticism of his company’s unrelenting conservatism. In fact, he completely underestimated the reaction of the French digital multitude that rallied en masse to support the blogger (and the media La Tribune, that republished the infamous post.)

This little Gallic tale illustrates the split between the old and the new economy. It could have happened in Brussels, Berlin or San Francisco where lobbies furiously oppose the rise of Disruptors that threaten transportation or short-term rental housing — among other things.

Before we go further, let’s look at the engine of the Disruptors’ phenomenal growth. It can be summed up to one phrase: unprecedented access to capital.

When it comes to technology, Uber or Airbnb are not rocket science. The platform and the algorithm needed to efficiently match supply & demand have been indeed brilliantly implemented, but there is no need beyond off-the-shelf technologies to set up the whole thing. By contrast, when Google started in 1998, it did stretch the limits of the technology of the day (networking and computing power); as for Facebook, despite the relative crudeness of the original concept, it had to deal very early with scalability issues. Actually on its very first day, Mark Zuckerberg’s hottest girl matching system (how nice) crashed Harvard’s network. No such headache for Uber or Airbnb who rely on proven technologies: cellular network, mapping, databases, LAMP-based softwares. As shown in the following three graphs, funding has been equally abundant for these areas:

319-google 319 facebook 319 uber 319 Airbnb

Not only have investors poured big money in Uber and Airbnb but they did so extremely fast, boosting the valuation of these two companies to staggering levels. Since there is very little technology involved, where did the money go? Mostly to market share acquisitions, the only way to leave the competition in the dust for good. Take Airbnb: in just one year, its number of listed spaces grew more than doubled to 500,000 listings in 33,000 cities and 192 countries. Its $10bn valuation puts it head-to-head with the giant group Accor that operates 3500 brick-and-mortar hotels and 450,000 rooms.

In these new models, the American venture capital ecosystem is acting as a weapon of mass domination. When Uber collects more than $300 million in VC money to expand in 100 cities worldwide, its London-based competitor HailO got “only” $77m and when it comes to the French LeCab, it only raised €11m ($15m). It shows how anemic the French system is when it comes to funding its startups; instead of patting the registered cabs sector in the back with demagogic promises, the successive digital economy ministers would have been better advised to act decisively to stimulate access to capital.

Still, the European way of resisting these new models won’t last for long. To be sure, in Brussels, the ill-named “ministry of mobility” decided to simply forbid Uber-like system; in France, the resistance is more messy when hundreds of yelling taxi divers blocked main streets and airport accesses. But grass-root movements are likely to morph into a more anglo-saxon-like lobbying, with highly paid professional hired to defend special interests.

Consider this: between 1998 and 2013, the amount spent in Washington DC alone by various lobbies has grown x16 in constant dollars to a staggering $3.23bn. Today, tech firms are the fourth contributor after pharmaceuticals, insurance and oil & gas: when a big pharma spend $1.00 to influence lawmakers, tech companies now spend $0.63 and the gap is closing.

Why am I mentioning this? It’s because the capital raised by Disruptors will inevitably find its way to effective lobbyism in Brussels (at the European Commission), and eventually in Paris or Berlin.

Disruptors’ lobbyists will argue that new urban transportations system and peer-to-peer housing rental do more good than harm in the community. And for the most part, they might be right. Sharing cars in congested cities via system such as RelayRides definitely makes sense from a environment standpoint when any individual car stays idle 95% of the time. A survey conducted by UC Berkeley (pdf here) on a 6,000 San Francisco residents participating on car-sharing system revealed a drop of 50% in the personal car ownership (the auto industry might not like it, but our lungs will.)

On the economic side, there is no shortage or arguments either. Terminating the paid-for license system (the so-called Medallion) would free €3 billion in Paris, and $10 billion in New York, sums now immobilized and promised to an inexorable deflation. In times of raising inequality, maybe it is not such a bad idea to let people make extra money by renting their apartment or their car — with limitations, of course. To put some figures on the idea: an Airbnb host in San Francisco is making $9,300 per year on average by renting his/er property 58 nights. As for those who makes their personal car available for sharing though RelayRides, they make on average $250 a month.

As for the hotel industry, evidence shows Airbnb’s growth to have very little impact. According to the Boston University School of Management, in the state of Texas, a growth of 1% in Airbnb supply translated into only a 0,05% decrease in the revenue of 4,000 hotels surveyed, while a single percentage point of increase in the supply of regular hotels rooms translated into a 0.29% decrease — 20 times more — in Texas hotel revenues. Of course, cheap hotels are more impacted than the local Hyatt.

Between consumers who are voting with their smartphones, enjoying Uber or Airbnb, and the fact that Disruptors are undoubtedly beneficial to the community, regulators and lawmakers will have hard time defending the status quo.

In fact, they are left with two levers: making sure that the consumer is properly protected form any abuse (that’s already the case, basically) and dealing smartly with the tax issue. The digital economy has a long track-record of linking success to hubris — in practical terms, it means a strong disregard for local tax systems. Here in Europe, the first thing Uber and Airbnb did was setting most of their operations in tax-friendly places such as Luxembourg or Ireland — like Apple or Google before them. On the long run, that’s obviously a mistake as politicians will seize on the opportunity to further single out these new models. In fact, Disruptors would be well-advised to play by the rules in order to insure the sustainability of their services.

frederic.filloux@mondaynote.com

Religion is a safer bet than Facebook

 

Facebook’s incredible global reach and success appear to forestall challenges. In the long run, though, the social network’s growth and its frantic quest for new revenue sources raise questions. (First of two articles)    

Casting doubt on Facebook’s future is like going to Rome and questioning the existence of God. It’s not the right venue to do so. First, you can’t argue with figures, they’re overwhelming. Each institution features about the same number of devotees: 1.2 billion across the world. As for financials, Facebook’s annual report shows strong growth and wealth: $7.8bn in revenue for 2013 (+ 55% vs 2012), net income at $1.5bn and a $11bn cash pile. As for the Catholic Church, since it doesn’t not issue financial statements, we are left to guesstimates. Two years ago, a story in the Economist provided a back-of-the-envelope calculation putting the operating budget of the American Catholic Church alone to $170bn, the bulk being health and educational institutions, with $11bn for parishes where hardcore users are – which, for that part, is much better than Facebook.

Why, then, question Facebook’s future? Mainly for two reasons: ARPU evolution and diversification.

Let’s look at a few metrics. The most spectacular is the Monthly Active Users (MAUs) base: 1.23 billion people for the entire world. An interesting way to look at that number is to break down the global MAUs into geographic zones and combine those with ARPU numbers (calculated from the quarterly figures stated in the annual report). The results look like this:

316_facebook_arpu

Facebook’s long term challenge comes from these two factors: North American growth will be flat this year, and the rest of the world doesn’t bring much. The company is heavily and increasingly dependent on advertising: from 85% of its revenue in 2012 to 89% last year. Logically, its only option is to squeeze more money per user — which it steadily managed to do thus far. But, in the Facebook ecosystem, making more money from ads means milking more cash from users’ data. This, in turn, will lead to a greater invasion of privacy. It certainly doesn’t seem to bother Mark Zuckerberg, who is a transparency apologist.

Actually: Is he or was he?

As author David Kirkpatrick pointed out in his excellent opus, The Facebook Effect, Zuckerberg once said that “Having two identities for yourself is an example of a lack of integrity” (and judging by FB’s content policy, anyone can wonder if putting a breast-feeding pictures a sign of depravation?)

That was then.

Now, to address privacy concerns, Facebook is said to consider anonymous logins. It’s probably a good idea to back off a bit on the totalitarian pitch quoted above, but since the extensive data-mining performed by the network is made much more valuable by its use of real user names, anonymous logins are sure to impact the ARPU in the more mature markets. Along that line of thought, in Europe, Facebook’s ARPU is less than half of what it is in the US & Canada: $8.04 vs. $18.70. This significantly lower number stems from privacy concerns that are much more developed in European countries. There, the 20-25 segment seems especially worried about the consequences of spending too much time on Facebook.

A remaining lever is what I’ll call the Big Tobacco strategy: Do elsewhere what you can no longer do on your home playing field. Facebook might not be as cynical as Philip Morris (reborn as Altria as an attempt to erase the stain), but it is undoubtedly bound to try and replicate its successful collect-and-milk consumer data mechanism.

This might take a while to achieve.

First because of the ultra-slim ARPU generated by emerging markets users. You might object that the Indian market, as an example, currently enjoys growth along two dimensions: more users, with growing incomes. Granted. But the more sophisticated the India market becomes, the more inclined it will be to create a social network much more attuned to its own culture than a Menlo Park-based system manned by geeks in hoodies. Never underestimate the power, nor the determination of locals. And, let’s not dream too much about a huge Chinese version of Facebook.

Also, for Facebook, the cost of operating its service will make the ARPU question one of growing urgency. Again, based on the 2013 annual report, FB’s Cost of Revenue — mostly infrastructure –  amounts to $1.9bn. Divided by the 757 million DAUs, it costs $2.5 per year to serve a single daily user, that is connecting to his/er pals, hosting photos, videos, etc. If we aggregate all the cost structure components (networking, giant data centers and also R&D, sales & marketing, administrative), the cost of taking care of a single daily user rise to $6.69 per year and $4.12 for a monthly user. It’s still fine for an American and a European, much less so for an Asian who brings a yearly ARPU of $3.15, or an African who brings a mere $2.64 (in theory, the strain on the infrastructure is roughly the same, regardless of user location).

But some will argue Facebook is doing quite well on mobile. Out of its 1.23 billion monthly users, FB says 945 million reach its service via a mobile each month and 556 million do so on a daily basis. And, as stated in its 10-K, mobile is at the core of Facebook’s future:

There are more than 1.5 billion internet users on personal computers, and more than three billion mobile users worldwide according to GSMA Wireless Intelligence, and we aspire to someday connect all of these people. 

Fine, but once again, the ARPU weakens the ambition. While a mobile subscriber in the US and Europe brings respectively $69 and $38 each year (source: GSMA), according to the Cellular Operator Association of India, a Indian mobile subscriber yields only $1.72 per year. This makes advertising projections a tricky exercise.

As it expands, Facebook’s current model will inevitably yield less and less money per user. Hence, its frenetic quest for diversification and service extensions — a topic we’ll address in a future Monday Note.

As for the Church, it certainly is a safer bet than Facebook: The user base is less volatile, the interface blends much better into local cultures, barriers to competitive entries are stronger (and much older), and believers have long sacrificed their privacy to articles of faith.

frederic.filloux@mondaynote.com

 

On Marc Andreessen’s optimistic view of news

 

A strongly-worded column by venture capitalist Marc Andreessen triggered an intense debate on the future of news. Andreessen might be right places, but his views can also be dangerously simplistic. 

For starters, it is always great to have an outsider’s view. Marc Andreessen’s witty, and fast-paced dithyramb on the future of news is undoubtedly welcome. But, as always, regardless of the depth and breath of the big picture he paints, the devil lies in the details. In no particular order, here are my thoughts on his manifesto.

As a European, I found his piece extraordinary US-centric or, slightly more broadly, Anglophone-centric.

Andreessen wrote :

[T]he market size is dramatically expanding—many more people consume news now vs. 10 or 20 years ago. Many more still will consume news in the next 10 to 20 years. Volume is being driven up, and that is a big, big deal.
Right now everyone is obsessed with slumping prices, but ultimately, the most important dynamic is No. 3 – increasing volume. Here’s why: Market size equals destiny. The big opportunity for the news industry in the next five to 10 years is to increase its market size 100x AND drop prices 10X. Become larger and much more important in the process.

By saying this, Andreessen makes two good faith mistakes.

First, he mixes up global reach and monetizable audience. Evidently, a growing number of people will enjoy access to news (maybe not all the 5 billion cellphone users he mentions), but the proportion of those able to generate a measurable ARPU is likely to be very small.

The Scalability that works for Google Maps or WhatsApp doesn’t work as well for the notion of relevant information, one that is more tightly connected to language, proximity and culture.

Second, he overestimates the addressable news market’s fragmentation. I live in France, a 66 million people country with a high standard of living and good fixed and mobile internet access. In spite of these factors, it remains a small market for the super-low-yield digital news business that brings few euros per year and per user (except for a minuscule subscriber base.) I remained stunned by the inability of good journalistic products, created by smart people, to find a sustainable business models after years of trying.

And the huge, globalized English speaking market does not warrant financial success. The Guardian is one such example. It operates one of the finest digital news system in the world but keeps bleeding money. The Guardian brings a mere $60m in digital ad revenue per year — to be compared to a kitten-rigged, listicles-saturated aggregator generating a multiple of this amount. Journalism has become almost impossible to monetize by itself (I’ll come back to that topic).

Andreessen also vastly underestimates the cost of good journalism when he writes:

[T]he total global expense budget of all investigative journalism is tiny —  in the neighborhood of tens of millions of dollars annually.”

Fact is, journalism is inherently expensive because it is by laborious and unpredictable: An investigation can take months, and yield nothing; or the journalistic outcome can be great, lifting the reputation of the media, but with zero impact on the revenue side (no identifiable growth in subscriptions or advertising). The same goes for ambitious coverage of people or events. No one has ever translated a Pulitzer Prize in hard dollars.

This is also the case for what Andreessen calls the “Baghdad Bureau problem”. It was said to cost $3m/year for the New York Times. In fact, on an annual basis, the Times spends about $200m for its news operations, including $70m for foreign coverage alone. The NYT is likely to stay afloat when it goes entirely digital (which might happen before the end of the decade), but one of the nastiest features of digital news is the unforgiving Winner Takes All mechanism.

As far as philanthropy is considered, I won’t spend too much time on the issue except to say this: Relying on philanthropy to cure malaria or to support ill-understood artists bears witness to an absence of sustainable economic system. (Until, perhaps, the artist dies; as for malaria, there is indeed a very long term benefit for society, but not for those who supply the treatment, hence the mandatory call to generosity.) Saying investigative or public-interest journalism could/should rely on philanthropy is the same as admitting it’s economically unsustainable. Luckily, American society has produced scores of philanthropists free from any agenda (political, ideological, religious) — such as the Sandler Foundation with ProPublica. That’s not the case in France — not to mention Russia and many other countries.

There are plenty of areas in which I completely support Marc Andreessen’s view. For example: A media company “should be run like a business“, i.e. seek the profitability that will warrant its independence (from every economic agent: shareholders, advertisers, political pressure, etc.) This brings us to the size and shape of a modern news factory (I use the term on purpose). We have to deal with an unpleasant reality: Good journalism is no longer sustainable as a standalone activity. But — and that’s the good news — it remains the best and indispensable core around which to develop multiple activities (see my recent column about The News Media Revenue Matrix).You can’t develop services, conferences, publishing, etc. around a depreciated journalistic asset. On the other hand, this asset has to be drastically streamlined: In many cases, less people, better-paid (simply for the ability to retain talent) and with sufficient means to do their job (don’t go for the press junkets because the travel budget has been slashed, you’ll lose on three counts: credibility of your brand, self-esteem of your team, quality of the reporting.)

Unfortunately, as Andreessen noted, there are plenty of hurdles to overcome. In fact, most existing news companies do not fathom the depth of the transformation required to survive and thrive. Nor do they understand the urgency to set this massive overhaul in motion. Such moves require strength, strong leadership, creativity, a fresh approach, unabated confidence, and a systemic vision — all of the above in short supply at legacy media. Note that when Marc Andreessen prides himself to be an investor in media ventures (for instance Business Insider– no conflict of interest), all are digital natives and bear none of the burdens of traditional media. His bullishness on news is selective, personal.

frederic.filloux@mondaynote.com

News Media Revenue Matrix: The Bird’s Eye View

 

Publishers struggle with newer and more complex business models. Some appear stronger than others but, above all, a broad palette is a must. It is a means to capture emerging opportunities and to compensate for the drying up of older revenue sources.

Today, I submit the following revenue matrix for a modern, content-rich news outlet. As I see it, in the news business “modernity” mean this:

A proven ability to produce original content in abundance and under multiple forms: news reporting, investigation, analysis, data journalism, long form (for ebook publishing), enterprise-like journalism, live feeds; all of the above in the form of text, images, graphics and videos.

A cultural mindset to produce contents for the platform with the best fit: a news story for a newspaper, an interactive piece on the web, live coverage for mobile. The collective publishing mindset should no longer allow first- and second-class news products. Every piece of newsroom output must be designed as a contribution to a cascading revenue system in which each element empowers every other one.

– A newsroom equipped with the best tools money can buy or — even better — build. These include a powerful Content Management System (CMS) aimed at dispatching production to every platform. The CMS must be connected to a semantic analysis system that makes all pieces of information — from a feature story to the transcript of a video — compatible with the semantic web’s standardized grammar. In order to extract more value from a piece of content, the CMS must also connect to multiple databases. For example, the name of an obscure city must be able to generate a map – through the Geonames base; a Board Director must be tied to a high value database of business leaders such as The Official Board; the name of a company must lead to open-source corporations listings.

Mastering the semantic web is indissociable from acquiring information gathering capabilities such as aggregation and filtering (see a previous Monday Note: Building a business news aggrefilter ). Such feature is a prerequisite to building high-margin products as well as exploiting the social media echo chamber. After collecting contents through RSS feeds, the combination of semantic news analysis matched against the taxonomy of, say, Twitter, will yield a trove of information on what audiences like or dislike — not only for a news media but also for its competitors. It is a complex and expensive endeavor but, in the long run, it will be worth every penny.

– And more importantly, a global editorial thinking. Too often, newsroom management suffers form what l’ll call “mono-product bias”, focusing on what is seen as noble — namely print. At a very minimum, modern editorship must embrace a widespread digital strategy. But it also must envision a sustainable game plan for a complete lineup of ancillary products that also deserve editorial coherence and strength.

Having said that, let’s have a look at the following matrix. No rocket science here, I simply made a list of 14 products that many news outlets already operate. I then tried to assess the outlook for each revenue stream. (My original idea was to assign a estimated ARPU for each cell, but there are too many parameters to be taken into account).
Click to enlarge the table:

310 table revenue

Now, let’s focus on specific products and revenue streams.

Daily Print Edition. I’m very bearish on print. Granted, it still brings the most substantial chunk of revenue – but also most of the losses. And prospects are bleak: copy sales, subscriptions, even ad sales deteriorate fast. Some light can come from ads – when they are components of customized campaigns. Daily newspapers need to be vastly simplified in order to free up resources for the wide array of other revenue streams — especially digital. I’m a big supporter of Financial Times’ Lionel Barber “Memo on reshaping the newspaper for digital age“.

Weekend editions will do better than dailies for several reasons. First, their function — long formats, portfolios, reading habits — makes them better armed against the digital tsunami that devoured news. Second, they remain a great vector for pricey advertising: on some anglo-saxon markets, weekend editions accounts for half of the print ad revenue. The New York Times understood that well as its full digital access + weekend edition bundle is a hit among customers.

Advertising revenue stream. Let’s face it, traditional ads ormats, print or digital, are dying. The conjunction of programmatic buying and ad saturation/tracking/targeting will seal their fate for good. The best outlook seems to be for customized operations and brand contents (or combinations of the two). They can spread on every platforms, including on mobile where, so far, users massively reject ads. In addition, these customized operations carry high value (huge CPMs or hefty flat fees.)

Event & Conferences. The segment is crowded and success depends on a subtile combination of attendance fees vs sponsorship, but also of editorial content. A conference is indeed a full editorial vector that needs to be treated with the same care as any other publication, i.e, with a precise angle, great casting and first class moderation that favors intellectual density over speakers flogging cheap sales pitches. News media are well positioned to deploy an efficient promotion for a content-rich, sustainable, conference system.

Intelligence & Surveys. Attractive as they might sound, these products require a great deal of expertise to make a difference. Very few media can fulfill the promise and justify the high price that goes along with such offerings.

Training and MOOCs represent an interesting potential diversification for some business publications. They carry several advantages: by addressing a young readership, MOOCs can create an early attachment to the brand; the level of risk is low as long as the media company limits itself to being a distributor (quality MOOCs production is very expensive). For a business publication, such activities represent a great way to increase its penetration in the corporate world where the need for training is limitless.

Premium Subscriptions. Some large, diversified media companies are already considering complex subscription packages for a small number of high-yield clients. In addition to print and full digital access, such packages could include access to conferences & events, MOOCs, market intelligence, and other publications. Testing the concept is a low-risk proposition.

The Business to Business segment remains the province of specialized publications. But the potential is there for general-audience media: corporations are hungry for information. The era of the bulky corporate intranet that no one watches is gone; today, for their staff, companies want apps for mobile and tablets that will save time while being precisely targeted and well-designed. Not an easy market – but  a very solvent one.

Sketchy and questionable as it is, the above matrix also illustrates the complexity of designing and selling such a wide range of products to individuals or corporations. Only a small number of news organizations will have the staff, skills and resolve to address such a broad range of opportunities.

frederic.filloux@mondaynote.com

@filloux

What to do with $250m in digital journalism? (II)

 

In a previous Monday Note, we looked at an ideal newsroom, profusely funded by Pierre Omidyar and managed by whistleblowing facilitator Glenn Greenwald, a structure that combines the agility of a tech startup with the highest of journalistic standards. Today, we look at the product and the business model.   

Profit or non-profit? Definitely for-profit! First, because the eBay founder’s track record (see this The New Inquiry article) shows a fierce appetite for profitable ventures. And second, because there no such thing as a free and independent media press without a strong business side: financial vulnerability is journalism’s worst enemy while profit breeds scalability. How to make money, then, with a narrow niche such as investigative journalism? Can Omidyar’s venture move beyond the cross-subsidy system that powered legacy media for decades? This weekend, in a FT.com interview, Henry Blodget justified the deluge of eye-grabbing headlines spread over Business Insider by saying “The dining and motoring sections pay for the Iraq bureau”. . .

For this, Omidyar can look at a wide set of choices: he could devise click-driven contents built on the proven high volume / cheap ads equation. Or he could opt for what I’ll call the Porsche Model, one in which the most visible activity (in this case sports car manufacturing) brings only a marginal contribution to the P&L when compared to its financial activities: in 2009, Porsche made $1bn in profit from car sales and almost $7bn betting on Volkswagen stock. More realistically, an endowment-like model sounds natural for a deep-pocketed investor like Pierre Omidyar. Most US universities are doing fine with that model: a large sum of money, the endowment, is invested and produces enough interest to run operations. One sure thing: If he really wants to go against big corporations and finance, to shield it from pressure, Omidyar should keep its business model disconnected from its editorial operation.

Investigative journalism is a field in which the subscription model can work. In France, the web site Mediapart offers a credible example. Known for, among many others feats, its investigation of the Budget Minister’s hidden Swiss bank account that led to its resignation, Mediapart maintains a newsroom of seasoned reporters working on hot topics. In five years, it collected close to 80,000 subscribers paying €9.90 per month; the web site intends to make €6m ($8m) in revenue and a profit of €0.4m ($0.5m) this year. Small amounts indeed, but not so bad for a market one fifth the size of the US. Scaling up to the huge English-speaking market, and assuming that it will go for a global scope rather than a US-centric coverage, the Omidyar-Greenwald venture could shoot for 500,000 to 800,000 subscribers within a few years, achieving $40m to $60m in yearly revenue.

On the product side, the motto should be Try Everything – on multiple segments and platforms.

Here is possible product-line structure:

298 graph

Mobile should primarily be a news updating vector. In a developing story, say hearings on the NSA scandal, readers want quotes, live blogging, snapshots – all easy to grab while on the go. Addiction must be the goal.

Newsletters deserve particular attention. They remain an excellent vector to distribute news and a powerful traffic driver. But this requires two conditions: First, they must be carefully designed, written by human beings and not by robots. Second, they must be run like an e-commerce operation: a combination of mass emailing and heavy personalization based on collected navigation data. For an editorial product, this means mapping out granular “semantic profiles” in order to serve users with tailored contents. If the Omidyar-Greenwald project lives up to its promise, it will deliver a regular stream of exclusive stuff. A cleverly engineered email system (both editorially and technically) stands good chances  to become a must-read.

User profiling must allow the creation of several verticals. Judging who will join the venture from the first bylines (see article in CNet), the coverage intends te be broad: from national security to White House politics, sports issues (a sure click-bait), civil liberties, military affairs, etc. This justifies working on audience segmentation, as not everyone will be interested in the same subject. The same goes for social web extensions: the more segmented, the better.

Web TV. If you want to go beyond kittens or Nascar crashes, providing TV contents on the web is more difficult that it appears. But “programs” available in Scandinavia show that, for developing stories, Web TV can be a great substitute for conventional TV as it allows simultaneous coverage of multiple events. Nordic viewers love that.

Fact-checking. Since the Omidyar-Greenwald project is built. t on trust and transparency, it should consider launching the equivalent of politifact.com, a fact-checking web site operated by the Tampa Bay Times, which landed a Pulitzer Prize in 2009. A vertical fact-checking site on national security, privacy and data protection issue would definitely be a hit.

Other languages. Going after the Chinese market could be hard to resist. According to Internet World Stats, it is by far the largest single market in the world with 538 million people connected to the web in 2012. For a media venture aimed at lifting the veil on corruption, China offers strong potential in itself. As far as evading censorship, it should be an appealing challenge for the squad of hackers hired by Omidyar-Greenwald.

A print version? Yes. It sounds weird, but I strongly believe that a well-designed weekly, large format (tabloid or Berliner), distributed on selected, affluent markets, would complete the product line. Print remains a vector of choice for specific, long-form readings, ambitious news scenographies with high impact photographs, for an in-depth profile or a public interest story.

Global Thinking. Its potential for worldwide reach is one of this venture’s most interesting factors. It will be of limited interest if it doesn’t embrace a global approach to public interest journalism in large democracies but also in countries that are deprived of a free press (a long list). Creating a high standard, worldwide affiliation system to promote investigative journalism everywhere, regardless of the economic and political constraints, should definitely be on the founders’ roadmap.

frederic.filloux@mondaynote.com

Amazon and Apple Business Models

 

Amazon “loses” money, Apple makes tons if it. And yet, Wall Street prefers Jeff Bezos’s losses to Tim Cook’s. A look at the two very different cash machines will help dispel the false paradox.

The words above were spoken by an old friend and Amazon veteran, as three French émigrés talked shop at a Palo Alto watering hole. The riposte would fit as the epigraph for The Amazon Money Pump For Dummies, an explanation of Amazon’s ever-ascending stock price while the company keeps “losing money”.

(I don’t like the term Business Model, and Bizmodel even less so. I prefer Money Pump with its lively evocations: attach the hose, adjust the valves, prime the mechanism, and then watch the flow of money from the customer’s pocket to the investor’s purse).

Last quarter, Amazon’s revenue grew by 24% year-on-year, and lost about 1% of its net sales of $17B. This strong but profitless revenue growth follows an established pattern:

AMZN No Profit Growth copy
Despite the company’s flat-lined profits, Wall Street loves Amazon and keeps sending its shares to new heights. Since its 1997 IP0, AMZN has gone from $23 to $369/share:

298 share 21x
How come?

[Professional accountants: Avert your eyes; the following simplification could hurt.

Profit isn't cash, it's merely an increase in the value of your assets. Such increase can be illiquid. Profit is an accountant's opinion. Cash is a fact.]

Amazon uses its e-commerce genius to prime the money pump. The company seduces customers through low prices, prompt delivery, an ever-expanding array of services and products, and exemplary customer attention. What keeps the pump going is the lag between the moment they ding my credit card and the time that they pay Samsung for the Galaxy Note tablet I ordered. Last quarter, Amazon’s daily revenue was about $200M ($17B divided by 90 days). If it waits just 24 hours to pay its suppliers, the company has $200M to play with. If it delays payment for a month, that’s $6B it can use to invest in developing the business. Delay an entire quarter…the numbers become dizzying.

But, you’ll say, there’s nothing profoundly original there. All businesses play this game, retail chains depend on it. Definitely — but what sets Amazon apart is what it does with that flow of free cash. The company is relentless in building the best services and logistics machine on Earth. Just this week, we read that Amazon has hired the US Post Office to deliver Amazon packages (only) on Sundays.

Amazon uses cash to build a better Amazon that keeps bringing in more cash.

Why do suppliers “loan” Amazon such enormous amounts of cash? Why do they let the company grow on their backs? Because, just like Wall Street, they trust that the company will keep growing and give them ever more business. Amazon might be a hard taskmaster, but it can be trusted to pay its bills (eventually) — the same cannot be said of some other retail organizations.

Amazon doesn’t care that it doesn’t make a “profit” on the sale of a box of Uni-Ball pens that it ships for free. Rather, it focuses on pumping enormous amounts of cash into the virtuous spiral of an ever-expanding business. Wall Street rewards the company with an equally expanding market cap.

How long can Amazon’s expansion last? Will the tree grow to the sky? If we consider a single line of business — books, for example — saturation will inevitably set in. But one of the many facets of Bezos’ genius is that he’s always been able to find new territories. Amazon Web Services is one area where the company is now larger than all of its competitors combined, and shows no sign of slowing down or of approaching saturation.

In the end, we mustn’t be fooled by the simplicity of Amazon’s money pump. Bezos’ genius is in the implementation, in the details. Like a chef who’s not afraid to disclose his recipes, Bezos writes to his shareholders every year — his missives are all here — And he always appends his first 1997 letter, thus reminding everyone that he’s not about to lose the plot.

The other friend in this conversation, an old Apple hand, happily nodded along as our ex-Amazon compatriot told stories from his years in the Seattle trenches. When asked about the Apple money pump and why Wall Street didn’t seem to respect Apple’s huge profits, he started with an epigraph of his own:

The simplest encapsulation of Apple’s business model is the iPod.

To paraphrase: The iPod is the movie star, it brings the audience flocking to the theatre; iTunes is the supporting cast.

iTunes was initially perceived as a money-losing operation, but without it the iPod would have been a good-looking but not terribly useful piece of hardware. iTunes propelled iPod volumes and margin by providing an ecosystem that comprised two innovations: “music by the slice” (vs. albums,) and a truly new micro-payment system (99 cents charged to a credit card).

That model is what powers the Apple money pump today. The company’s personal computers — smartphones, tablets, and laptops/desktops — are the movie stars. Everything else exists to make these lead products more useful and pleasant. Operating systems, applications, stores, Apple TV, the putative iWatch…they’re all part of the supporting cast.

Our Apple friend offered another thought: The iPod marked the beginning of the Post-PC era. By 2006 — a year before the introduction of the iPhone — iPod sales had exceeded Mac revenue.

Speaking of cash, Apple doesn’t need to play Amazon’s timing games. Product margins range from 20-25% for desktops and laptops (compared to HP’s 3-5%), to 65% or more for iPhones. With cash reserves reaching $147B at the end of September 2013, Apple has had to buy shares back and pay dividends to bleed off the excess.

Far from needing a “loan” from its suppliers, Apple heads in exactly the opposite direction. On page 37 of the company’s 2013 10-K (annual) filing, you’ll find a note referring to “third-party manufacturing commitments and component purchase commitments of $18.6 billion“. This is a serious cash outlay, an advance to suppliers to secure components and manufacturing capacity that works out to $50 for every person in the US…

Wall Street’s cautious regard for Apple seems ill-advised given Apple’s ability to generate cash in embarrassing amounts. As the graph below shows, after following a trajectory superficially similar to Amazon’s, Apple apparently “fell from grace” in 2012:

298 fall from grace
I can think of two explanations, the first one local, the other global.

During Fiscal 2012, ending in September of that year, Apple’s Gross Margins reached an unprecedented high of 43.9%. By all standards, this was extremely unusual for a hardware company and, as it turned out, it was unsustainable. In 2013, Apple Gross Margin dropped by more than 6 percentage points (630 basis points in McKinsey-speak), an enormous amount. Wall Street felt the feast was over.

Also, Fiscal 2013 was seen as a drought year. There were no substantial new products beyond the iPhone 5 and the iPad mini announced in September and October 2012, and there was trouble getting the new iMacs into customers’ hands during the Holiday season.

More globally important is the feeling that Apple has become a “hits” business. iPhones now represent 53% of Apple’s revenue, and much more (70%?) of its profits. They sell well, everything looks rosy…until the next season, or the next round of competitive announcements.

This is what makes Wall Street nervous: To some, Apple now looks like a movie studio that’s too dependent on the popularity of its small stable of stars.

We hear that history will repeat itself, that the iPhone/iPad will lose the battle to Android, just as the Mac “lost” to Windows in the last century.

Our ex-Apple friend prefers an automotive analogy. Audi, Tim Cook’s preferred brand, owns a small portion of the luxury car market (about 7.5%), but it constantly posts increasing profits — and shows no sign of slacking off. Similarly, today’s $21B Mac business holds a mere 10% of the PC market, but Apple “uses” that small share to command 45% of market profits. The formula is no secret but, as with Amazon’s logistics and service, the payoff is in the implementation, how the chef combines the ingredients. It’s the “mere matter of implementation” that eluded Steve Ballmer’s comprehension when he called the MacBook an Intel laptop with an Apple logo slapped on it. Why wouldn’t the Mac recipe also work for smartphones and tablets?

JLG@mondaynote.com