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By Thomas Baekdal - March 2015

Profitability Must Come From Everywhere

After the sudden closure of Gigaom, we are now starting to learn the details. Specifically, there are five articles that pretty much sums it up.

First, we have Peter Kafka's excellent article "The Long Story Behind Gigaom's Sudden Demise", which tells the story of Gigaom trying to cater to their VCs by taking on more and more depth to accelerate growth. They also had a huge level of cost, nowhere near matching the performance of the company. And it was a strategy that failed quite spectacularly, which, in hindsight, doesn't sound that surprising.

That article was preceded by another brilliant article by Danny Sullivan, called "After Gigaom, The Non-VC 'SimCity' Approach To Growing A Media Business", which explain quite pointedly how VC backed media isn't necessarily a good idea.

I have been saying the same thing to my clients for a while. The 'everything must scale' approach of Silicon Valley investors is often a poor fit for media sites, especially if those media sites are defined by a vertical. It's a distraction that will probably kill you.

Then we had two article from Gigaom employees. The first one from Mathew Ingram, "Exit interview: Mathew Ingram", which illustrates beyond all other things how much in the dark Gigaom's staff really were.

To me, this was a bit of a shock, considering how well known Mathew is for his media analysis. Here we have a person writing about media, and he didn't know his own company, or how his own work influenced it.

I'm not blaming Mathew here, but as he said: "You could argue that if I was such an expert, I should've seen it coming."

There are many things that I agree with Mathew about, but one thing I don't agree with is his focus on 'scale' in so many of his articles. Scale is not really your friend when it comes to the media. If you have scale, it usually means you are trading off focus, and loyalty.

Mathew actually explains this well:

I do think Gigaom was in a strange place in the sense that we were not a niche player, but we had sort of niche aspects. I think Will Oremus mentioned this in his post at Slate-we focused on less sexy areas like clean tech and the Internet of Things or hardware in the cloud and so on. And we built a substantial expertise in those areas. But those are not the areas that are going to get you a mass readership. So to some extent we were too small to be huge and mass and successful in scale like a BuzzFeed or a Vox or Vice, but too big to be the kind of business that Danny Sullivan is describing. We were sort of caught in the middle.

Exactly. They were trying to be one type of media company, while being VC funded as if they were another. They wanted to be like BuzzFeed, Vox and Vice, but didn't want to give up their value to the readers in the process.

You can't do that in today's world. You have to choose your path.

One thing I did notice, though, was the finger pointing, when Mathew wrote this:

I would argue that the editorial side itself was not actually the problem. The problem was that research and events did not support as big a business as they were intended to. Research just didn't produce the kind of returns that were required in order to support a business the size of Gigaom.

Granted, I would probably say Mathew was one of their top performing writers. He definitely had/has a huge following. But this is the same thing I hear from so many other media companies. Our business is failing, but our editorials are fine. And it's not our role to make money, the business side is supposed to do that.

This was then followed up with another post, by Michael Wolf, former VP of Research at Gigaom called "Gigaom: The Life and Death of a Venture Funded Media Startup". He wrote:

In the press, some had pointed at research as one of the main causes of Gigaom's demise. I do think research and its cost model played a significant role. But I don't think it was the only cause. Gigaom died a premature death due to many reasons, and if there's any one overriding cause I'd point to the massive amount of VC funding and the resulting company cost model that was put in place to attempt to scale - across all of its business units - up to meet the high growth expectations that are incumbent with venture investment.

So doing research was expensive, but not in the same way as how Mathew described about. Mathew talks about research existing to support the other parts of the business, while Michael talks about Research being able to sustain itself.

It's the same with events:

Gigaom's events were profitable out of the gate. [...] But even as events were successful and helped the company diversify from ad revenue, they were not inherently scalable. A startup could only do so many events and keep a blog running. Events are hard work.

Same story. The events were doing fine on their own, but they couldn't sustain the editorial cost of the journalists.

Gigaom had these three divisions. Editorial, monetized by advertising. Research, monetized by subscribers. And Events, monetized by attendees (and sponsors?).

Each one should have been fairly easy to analyze in terms of profitability and growth. On the editorial side, you compare it to your ad sales. But we know that this wasn't going that well. The whole reason why they started Gigaom Research (Pro) was because ad sales weren't doing good enough.

Same with Gigaom Research. All they needed to do was to compare the number of paying subscribers with their cost. And, from the sounds of it, this seemed to work. As Michael points out:

Research made up 60% of the company's revenue. In the same article, revenue were estimated to be $15 million, so that translates to about a $9 million research business.

So, Gigaom Research might have been expensive and not providing the growth that the investors were demanding. Nor would it be able to sustain any other part of the business. But it could sustain itself. At least to a point.

It's the same with the events. That's a very simple ROI calculation. Just compare the money coming in from sponsors and attendees with the cost of doing it. I would be very surprised if Gigaom was actually running that at a loss.

So, it sounds to me like that only part of the business who couldn't sustain itself were the editorial division. Mixed with a massive level of debt brought on by investor demands.

Again, I come back to what Mathew said:

The problem was that research and events did not support as big a business as they were intended to.

No, the problem seems more to be that the editorial side was running up so much cost that the other parts of the business couldn't save it. Of course, I'm just speculating here. But that is what it sounds like based on the little information that we have.

This leads me to my main point. In the old days of media, every publication was defined by a package. And, in each package, you had a mix of content for which only a very small part was actually making any money.

This led many journalists to believe that the role of journalists isn't to make money, but instead to be naturally subsidized by other things.

But, we now live in the connected world where there is an abundance of everything, and where the role of the media 'as a package' has fallen apart. This means that profitability must come from anywhere.

The old mantra of journalism being something that is subsidized is simply not the way you should think anymore.

To give you an example. About four months ago I was reviewing the future strategy for a magazine publisher, and like so many others, one of their plans was to do events. They thought doing this would somehow allow them to save their decline in their editorial division.

Sounds familiar? It should. We hear this all the time.

But this doesn't work. If you have a brand with a strong enough brand value to do events, do it. Events are wonderful. But do not even for a second start to believe that your events will somehow be able to maintain the rest of your business.

That's not how it works.

Events are extras. It's something you do on top of an already successful business. It's like the icing on the cake.

It's the same with Pro services. Don't think going 'pro' will suddenly save your free site. It doesn't work that way. The role of Gigaom Pro should not have been to save Gigaom (free). It's not a way to subsidize your business.

It's a product line all of its own. And each one of your product lines must be able to sustain themselves, otherwise you are not a journalist. You are doing marketing.

When Mathew complains that Research and Events weren't able to support the business, he is basically saying they weren't capable of supporting his salary. But if that was the case, then it would have been a part of Mathew's job as a journalist to write articles that would entice and lead people to want to subscribe to Gigaom Pro.

If you are not capable of sustaining yourself, then your role is to support the other parts of the business that can.

Again, mind you, Mathew may have been able to sustain his own writing through the traffic he generated. I like Mathew for much of his writing. But the point is still the same.

I know many journalists may look at this and feel almost outraged by the audacity of this idea. They still think journalism as being something special, and should never be mixed with the business side of running a media company.

But they are wrong. We don't live in a world of scarcity anymore. You no longer have a monopoly on news. You are no longer the only channel for advertising. You are no longer the gatekeepers for the public's attention.

The package is dead.

In its place is a new world of atomized and connected media. A world where the need for stories is higher and stronger than ever, but since they are not defined as packages, each part of your business must be able to sustain itself.

In other words, everything you do is a separate product that you have to convince people to use. Your events are a separate product. Your research articles are a separate product. Each one of your editorial sections is a separate product.

And for each product, you must define a way to monetize them. And, for each, you must compare your revenue with your cost. If one part of your media business isn't doing so well anymore, don't expect your other products will just magically make up the slack. We have too much competition, too much abundance, and too many channels for that to work.

Profitability must come from everywhere. And if it doesn't, don't blame it your other products.

This is no different than with any other businesses. Coca Cola, for instance, makes 112 different types of products in the US, each one providing their share of their total revenue.

If one of their product lines goes into the red, Coca Cola will do two things. First, they will try to turn things around and return the product to profitability. If that doesn't work, they will ...discontinue it.

Coca Cola will never say, "No worries, we will just use the revenue from this other product line to cover the loss." That is an unacceptable state of affair. Every product must be able to sustain itself.

That's how it works, and that's how it must work for journalism as well, whether journalists like it or not. You cannot afford to subsidize journalism by other parts of your business in as competitive a world as the one we have today.

Profitability must come from everywhere, and each thing you do must be able to sustain its own cost. That's the new default state of running a media company.

 
 
 

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Thomas Baekdal

Founder, media analyst, author, and publisher. Follow on Twitter

"Thomas Baekdal is one of Scandinavia's most sought-after experts in the digitization of media companies. He has made ​​himself known for his analysis of how digitization has changed the way we consume media."
Swedish business magazine, Resumé

 

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