How do media companies make money? Across media formats (writing, videos, music, podcast, games, etc), there are 5 overarching business models to generate revenue from the content your company creates: 1) transactions, 2) subscriptions, 3) licensing, 4) content marketing, and 5) advertising. Let’s review.
Transactional business models are the simplest way to make money off content: slap a price tag on whatever you create and charge for it…just like you would when selling a pair of shoes. This works best when you have larger, clearly defined pieces of content that people are likely to want as one-time purchases separate from other content you have created. We are talking about books, films, albums, games, online courses, research reports, etc.
Transactions can be for content to own or for content to get temporary access to. In the former, the customer buys a copy of the content that they can download or walk away with (i.e. they own a copy forever); in the latter, the customer buys access to content that remains hosted on the distributor’s platform so they can end access after a period of time.
Buy to Own/Download to Own
Historically (pre-Internet), people have bought physical copies of content: a book from Barnes & Noble, a record album from Virgin Megastore, a DVD from Best Buy, a video game from GameStop, etc. As content consumption moved online, this type of transaction went with it: in iTunes, you buy content, download it, and can send the file around to other devices. In a business context, you might buy a report from a market research firm and receive it as a PDF to download. Buying to own is still widespread online.
The alternative – and the increasingly common model – is to buy temporary access to content that remains hosted elsewhere so you can’t take a copy to do whatever you want with. For example, a pay-per-view boxing match that costs $100 to see on TV or a movie available for 48-hour rental on Youtube at a price of $2.99. Renting individual movies or TV shows to watch online is referred to as TVOD (Transactional Video-On-Demand). The period of time you get access to content for could be indefinite, but without having a copy of the file itself, you don’t own the content.
From a media company perspective, the pay-to-unlock approach reduces the threat of piracy, which is common with download-to-own content since consumers can send the file to friends or upload it for free on another site. Moreover, a media company collects tons of data about how people are interacting with content they’re hosting; they don’t get data from people interacting with downloaded files.
A newer innovation is pay-as-you-go content consumption through micro-transactions. The Dutch startup Blendle, for example, created a platform for reading articles from a wide range of publishers that charges you a few cents per article you read. Each piece of content is a new transaction, but because you have pre-loaded your Blendle account, you don’t have to go through a new payment process every time. There are many efforts to use blockchain technology to do micro-transactions on an even smaller scale (i.e. less than $0.01 per article) as well. This micro-transactions model hasn’t taken off in a big way though.
In video games and some other interactive forms of media (like VR and AR experiences), you can charge your users money to access tools or other benefits within the experience. Like in a video game, players can spend money to buy a more powerful fighting sword or get more virtual coins. These in-app purchases (IAP) or in-game purchases have become the core of the games industry. The release of the iPhone in 2007 created a boom in mobile games, who found that they make the most money by being free to play (F2P) and then incentivizing players to spend money on optional purchases within the game.
In media, subscriptions are based on access to content for a period of time that’s recurring (typically monthly cycles). It locks in an ongoing relationship with the customer, who has to opt-out of the recurring payments if they want to stop being a customer. Usually, the subscriber gets access to a pool of content that they can consume at will, rather than only getting access to one piece of content.
Because subscribers continue to pay on an ongoing basis, they also expect new value to be provided on an ongoing basis. You typically don’t pay a subscription to consume the same unchanging piece(s) of content again and again; you pay a subscription for ongoing access to a flow of content that’s regularly refreshed with something new. That could be daily news articles, monthly refreshing of movies on Netflix, etc.
Newspapers and magazines tend to operate on subscriptions because they are comprised of many small articles people consume a high volume of. Similarly, SVOD (Subscription Video-On-Demand) platforms – like Netflix, Amazon Prime, Hulu, VRV, fuboTV, etc. – have gained traction because people watch enough content on them that they prefer an all-you-can-watch subscription rather than having to consider each film or TV episode as a new purchase.
Because the relationship with a subscription customer is not tied to one specific piece of content but rather the broader offering available to them, the value they measure is their overall experience…the quality of content they’ve consumed, the affinity they feel for the media company’s brand, the “fear of missing out” if they unsubscribed. In this dynamic, subscribers are like members of a club…winning and retaining their business is about a relationship rather than a one-time transaction. It also means that you’ve locked in recurring revenue just by gaining one new subscriber; in a transactional model, you have to fight for every purchase you want a potential customer to make, regardless of whether they’ve shopped with you before (i.e. you have a new “Customer Acquisition Cost” or CAC for every sale).
(Subscriptions don’t have to be only for exclusive content. Sometimes there are other benefits that the audience is willing to pay a subscription for; for example, in mobile games there are often subscriptions that remove annoying ads so you are aren’t interrupted by ads while playing.)
Many creatives want to stay out of the direct-to-consumer business…they just want to create the content they want, then license the rights to another media company that handles marketing and distribution. This is the classic way Hollywood and other creative industries operated; pre-Internet, it was incredibly difficult for creative teams to also distribute their content. Much of that traditional infrastructure is still in place. There are lots of structures for licensing; sometimes it’s one upfront payment, sometimes there’s a revenue share on the sales (aka royalties).
Films follow this path: a production company sells the film to a studio that markets it and negotiates with exhibitors (i.e. cinemas) and online streaming platforms to distribute it. Television shows are created by production companies, bought by networks, and distributed through networks’ partnerships with cable companies. Music, books, and games are more direct-to-consumer nowadays than they once were, but the traditional distributors still remain important (i.e. record labels and streaming platforms; publishing houses and e-book platforms; game publishers).
This route makes sense when you work on a small number of big productions, each of which might be unrelated to the others in terms of theme, target audience, etc. It would be inefficient to launch every new film as its own standalone media company that has to build an audience from scratch, for example.
The downside of licensing is that the fate of your content is dependent on middlemen, and you collect little-to-no data on who your audience is and how they’re consuming your content. Without that data and without direct interaction (getting their email addresses, etc.), it is tougher to build ongoing relationships with fans and engage them with new offerings.
4. Content Marketing
Content marketing is, simply put, using content as a tool to market some other product or service from which you make money. (Content marketing is also done by individuals to market their personal brand, with the ROI coming from the benefits the notability brings to their career.)
Brands using media as marketing
Content marketing has exploded in recent years within the marketing departments of companies across every industry. Companies that are bad at it plug their product offerings extensively so there’s no mistake you’re reading/watching promotional material; companies that excel at it focus on creating high-quality, engaging content that develops a relationship between their brand and the audience like a media brand would.
Airbnb, VC firm Andreessen Horowitz, Coinbase, Hubspot, United Airlines, and tons of other non-media companies have launched media products that operate as a loss because of their marketing value to the rest of the business. Some media entrepeneurs decide to launch their brand as part of a big company’s marketing department (or sell it to them, as we saw with Hubspot’s acquisition of The Hustle).
The content marketing model can also start with media, then expand into relevant products/services to sell once you’ve crafted a brand and audience. In fact, many free-to-read news outlets in the business world are – when you look at their business model – live events companies with extensive content marketing. They cover industry news through articles and videos, and they do monetize that through advertising, but the largest revenue generator is the conferences they host, which are marketed to their business audience with ticket prices ranging anywhere from $500 to $5,000 plus sponsors paying to reach those attendees.
Media companies with e-commerce
A common content marketing model for independent media properties is using IP from the content to do e-commerce…selling merchandise for passionate members of your audience to purchase, just like bands do with their fans. Sites ranging from WaitButWhy to BuzzFeed have done this. Publications like the Wall Street Journal have curated products from other companies to sell in an e-commerce section to their audience. There’s a grey area between being a media company and a consumer brand nowadays.
Affiliate linking is when a media site puts links to other companies’ products in their content and gets paid a fee for referring the traffic. This has become a big part of the digital publishing industry. Sites with write product reviews, travel tips, cooking recipes, etc. and link to sites where you can buy the products they mention. They often frame themselves as neutral reviewers but their business model is to drive sales of the products they link to.
Anyone can earn affiliate income from linking to Amazon products since they have a standardized referral program. In other cases, the media company negotiates their own deal with the product sellers. Sometimes the media company is paid based on the amount of people who click the link (pay per click), other times they are paid a flat fee or a percentage commission of that people they refer end up spending.
The New York Times’ Wirecutter is a major player in the product reviews category. Red Ventures’ The Points Guy is a dominant media site for referring Americans to sign up for credit cards with travel rewards. There are thousands upon thousands of sites making money this way. Generally, the key is to have really good SEO for your sites content so people looking for reviews come first to your content then click your links to buy a product.
This is also a common monetization strategy for YouTubers and other social media influencers.
There are many ways to do it, but ultimately advertising is a simple concept. You create content that draws people’s attention, then you also show promotional content from brands around, above, below, in front of, in the middle of, and/or after your content so the audience sees it too.
Most ads can be direct sold or programmatic:
- Direct sold ads are ad campaigns the media company’s staff sell directly to brands and agencies; this is expensive because of the sales team required but can result in much higher pricing, especially if the media brand has a deeply engaged audience and/or valuable niche audience.
- Programmatic ads are ads sold automatically on big ad marketplaces. Advertisers are on one side (the “demand side”) looking for opportunities to put one of their ads in front of their target audience, but only if the price if within their budget. Websites with an audience are on the other side (the “supply side”) offering their ad space to be bought. This all happens now on an automated, real-time basis for every ad impression (every individual visit to a webpage) rather than with humans on each side. There are adtech tools for both sides matching advertisers with ad space, creating a market where the more advertisers who want to reach a specific webpage visitor there are, the higher the price they pay for show that ad goes. This is a complicated space with many different approaches and technologies so I will leave it at this for now.
Sponsored content (aka “advertorial”) is high quality content similar to what the media companies normally creates, but it is authored by an advertiser. For example, Goldman Sachs might contribute articles in business news publications that share their analysis of economic trends. Or Walmart might sponsor a cooking-focused YouTuber’s video about how to pick the freshest produce at a grocery store. This content is labeled as sponsored but tends to appear alongside normal content.
Sometimes the advertiser (or their ad agency representing them) already have content they created and want to share across media channels; usually the media company creates the sponsored content for the advertiser, with the advertiser’s input and final approval. Many large media companies that do this, from the New York Times to VICE, created in-house creative agencies that not only handle internal sponsored content but also consult brands (for a fee) on making their marketing content and sponsored content elsewhere better.
Since many media businesses have events (conferences, music concerts, etc.), we can also include event sponsorships here. Major consumer product brands often sponsor the tours of major musicians within certain geographies. Consumer-facing media companies that put on events often earn more money from sponsors than from ticket sales (while events by business media companies are often more like a 50/50 split since they can charge expensive ticket prices).
Product placement is the common practice in video and photo content (including video games) of putting certain products from advertisers in the video or photo as if they naturally belong there. A character in a video may use a certain Samsung phone or drink a Red Bell or drive a Volkswagen, and the brand pays for its product to be included like that. It makes fans of the content feel emotional connection to the brand and desire the product. This sometimes also happens in music, often with a reference to a certain alcohol brand.
These tend to be more complementary ways to integrate advertisers into content and are used my media companies with prestigious brands and deeper audience engagement.
Rewarded ads are common in mobile games but can be used with other types of content as well. You offer your users the opportunity to unlock special benefits (like exclusive content or access to in-game assets like coins or weapons) in exchange for either paying money or watching an advertiser video. These are optional ads that your audience chooses to watch in order to access something. The vast majority of any audience isn’t willing to pay for content so this is a way to monetize those audience members.
Advertising isn’t the focus of this blog, and I’m not a big fan of media companies centering their business model on advertising, so I’ll leave it at that. (Read my post The Problem with Advertising.)
Which is best?
Most successful media companies use more than one of these monetization strategies. Which will be most effective for any given media company depends entirely on the content they want to create, the audience they target, and the ambitions they have for how the company will evolve.
I do believe subscriptions are the heart of a strong media business though. A subscription business model requires you to create high-quality, differentiated content that deeply engages your audience and makes them loyal fans. That means a more financially stable business and more valuable IP. It also puts your company in a stronger position to monetize through most of the other strategies here: advertisers will pay more to be featured to an engaged audience with deeper emotional connection to the content; having loyal fans makes e-commerce viable; your fans trust in your brand means they trust your product recommendations (for affiliate linking).
If you have an equity stake in the business, you should also understand that different business models affect the way investors (and larger companies making acquisitions) value the business. Let’s say a media company has $20m in revenue with $3m in EBITDA and it has been growing 20% year-over-year the last 3 years.
- If all of that revenue is from subscriptions then it is very reliable revenue from loyal fans (who you can easy market new products too) and likely to remain stable for years to come, so investors are willing to pay higher prices for shares in the business. They may value the business at $50m (2.5x revenue, 16.7x EBITDA).
- But if all of that media company’s revenue comes from ads, investors recognize that there is a lot more uncertainty about the future of the business because the advertising market fluctuates dramatically. Maybe then they value the business at $20m (1x revenue, 6.6x EBITDA).
If you founded the company in this example and are now selling it, you would make 2.5x more money if it is subscription-based than if it is ad-based. Also, media companies whose audience is businesspeople (like industry trade publications or podcasts) are generally valued higher than media companies whose audience is everyday people because businesses as customers can afford to pay much more money, tend to be much more loyal, and the advertisers eager to reach them are willing to spend much more money.
Originally published on 20 February 2018. Updated on 7 March 2023.