Spotify starts signing artists directly

The big news today is that Spotify is offering advances (in the hundreds of thousands of dollars range) to select indie musicians and talent managers in exchange for licensing their music directly to Spotify. By direct licensing, they will get up to a 50% share of royalties plus retain all rights to their work. (link)

The streaming platform is asking these artists not to refer to themselves as being “signed by Spotify.” Spotify’s deals with the major labels prohibit it from competing with them in a substantive way, although that leaves a grey area depending on how you define competitive.

There has always been speculation that Spotify would eventually leverage its scale to cut out the major labels – founder/CEO Daniel Ek said as much in his early pitches on the startup’s strategy. The company has always publicly denied that’s the plan when asked about it though. This news doesn’t mean they’re moving in that direction, but it certainly suggests they are looking to test some aspects of the concept.

Most of the revenue that Spotify takes in goes to the labels and publishing companies that own the songs’ copyrights, and only a minority of those royalty payments end up in the pockets of the artists. Cutting out the middleman would be a big financial boost to both Spotify and the artists (of course, labels and publishers reject the characterization of them as mere middlemen).

Spotify needs to play ball with 3 major label groups who control most of the music in the world that consumers care about; if they walk then Spotify loses its whole value proposition (the music). An attempt to compete with them would be very risky.

Stats on teen social media use

A new Pew Research Center survey shows that YouTube is the most popular online platform among US teenagers age 13-17, with 85% using it. Instagram (72%), Snapchat (69%), and Facebook (51%) trail behind. A plurality (35%) say they use Snapchat most often though – followed closely by YouTube (32%) and distantly by Instagram (15%) and Facebook (10%). (link)

Another interesting data point from the survey is that teens from households with income under $30k are twice as likely (70% vs. 36%) as teens from households with income over $75k to use Facebook.

90% of US teens play video games (83% of females, 97% of males).

95% of US teens have access to a smartphone nowadays (it’s above 90% for every demographic).

New Resource: a Database of Media Investors

I have several projects in the works to make Monetizing Media a helpful hub for media entrepreneurs, executives, and investors. The first was the daily MediaDeals newsletter which is going strong. The second has just launched: a crowdsourced database of media investors around the world.

The List of Media Investors is an interactive spreadsheet (powered by Airtable) with both investment firms and the individual investors who work at them. You can browse the whole thing or search by location, investment interests, geographic focus, investment type, etc.

This database will be crowdsourced among the Monetizing Media community, so expect it to get regular updates showing what certain investors are interested in, whether they’ve switched firms, what their twitter handle is, etc.

I encourage you to help make it a great resource for everyone in the industry. Take a look and use the links there to make suggestions or updates!

The Italian Job

(This is an abstract from today’s MediaDeals newsletter.)

Telecom Italia is shaping into an exciting drama. Let’s take a look.

Telecom Italia S.p.A. (aka TIM) is the big telecom in Italy; it’s publicly traded with a €16B market cap, FY17 revenue of €19.8B (and €7.8B in EBITDA), and was formed in 1994 as a roll-up of the state telephone monopoly and several smaller publicly-owned telecoms.

Vivendi, the French media conglomerate (parent of Canal+, Universal Music Group, etc.), is pursuing a strategy to become the dominant media force in southern Europe. It owns a 29% stake in MediaSet, the Italian broadcasting conglomerate founded by former Italian prime minister Silvio Berlusconi who has returned as a leading force in conservative politics. In 2015, Vivendi began building up its 15% stake in Telecom Italia to the current 24% ownership, gaining control of two-thirds of board seats and naming the Vivendi CEO as TIM’s chairman.

Vivendi’s control has been controversial in Italy – including calls by some political figures to intervene – and with the elections last weekend showing a huge surge in support for nationalist candidates on the right (like Berlusconi) that’s unlikely to disappear. Meanwhile, TIM’s performance has been lackluster (with 1/3 of its market cap lost since 2015 and 3 CEOs over 2 years), and Vivendi has been unsuccessful in creating synergies between itself, MediaSet, and TIM as hoped. MediaSet and Berlusconi’s family office Fininvest are suing Vivendi for backing out of a €800M agreement to acquire its pay-TV division; Vivendi is trying to settle the dispute while getting MediaSet to join its proposed JV with TIM for exclusive content production and distribution to TIM customers…but that is on the rocks now as well.

Enter activist Paul Singer and his Elliott Management hedge fund ($34B AUM) which just revealed it has a stake in TIM and hopes to make changes to the board, although we’ve no details yet. Elliott blocked TIM from a merger 15 years ago. Vivendi CEO / TIM Chairman Arnaud de Puyfontaine has not talked to Elliott and says he’s not concerned about pressure to change strategy or leadership. Yesterday, however, TIM released a 3-year plan focused on digitalization with promises of increased shareholder value, plus it announced it will spin out its fixed-line division as a separate subsidiary in order to placate regulators.

Elliott’s strategy could be to improve performance by negotiating changes to management and strategy by gaining 1/3 of the board seats. Or, buying into some rumors that Vivendi ultimately sees TIM as a trading chip in global media consolidation, Elliott could try to engineer a sale of the telecom.

SVOD and Protectionism

The Dutch Culture Council recently asked legislators to require SVOD services operating in the country to maintain libraries with at least 15% Dutch content and apply a 2-5% tax on all revenue derived from foreign content streamed in the country. It’s a protectionist move both to nurture the Dutch film/TV industry in a competitive global market and to protect Dutch culture from the overwhelming pop culture influence of Hollywood. It’s also increasingly common around the world.

Local content quotas have long existed in television. Now that governments are wrapping their head around online streaming – and especially amid the surge of nationalist populism – clampdowns are coming.

The EU Parliament voted last year on a mandate that 30% of content on VOD platforms be European (FYI: Netflix’s library in Europe is already ~20% European). National governments are layering national quotas over that. Italy raised its local content quota on TV (which is supposed to include SVOD) to 60%. France already has a 60% quota on TV and is pressuring VOD platforms to substantially increase quotas as well, with Netflix CEO Reed Hastings committing to increase the company’s French content production by 40% in 2018.

In China, 70% of content on SVODs must be Chinese (hence why Netflix doesn’t operate there and instead signed a distribution deal with Baidu-owned iQiyi).

The net effect is a limitation on the amount of international content made available to subscribers in these countries and an increase in local content that doesn’t meet the bar for quality those platforms otherwise require. But the concerns are legitimate. The dynamic of online streaming platforms is a hits business. As Netflix and Amazon Prime Video expand globally, their hit shows become the hit shows across every geography. And the resources these SVOD platforms have to invest in their own content dwarfs that of local studios; even Rupert Murdoch felt 21st Century Fox wasn’t big enough to compete on its own. Local content quotas (and potentially streaming taxes) help nurture the local media industry to produce local hits (and sometimes global hits), which is important economically and culturally.

I wonder, however, how feasible content quotas are outside censorship-heavy states like China. How do you define regulated streaming content vs. content that’s just part of the broader internet (like Youtube videos)? What about SVOD services whose entire niche is to share a certain culture’s content with people abroad, like BritBox – a 250,000-subscriber service entirely dedicated to British TV shows and classic British films? If they’re restricted enough, won’t Europeans just use VPNs to access content that Netflix subscribers get in the US?

(This post is an abstract from today’s MediaDeals newsletter.)

New models for storytelling: Skam case study

There’s a new storytelling format I’m excited to see experimentation with: narratives that unfold across both traditional media and social media, blurring the line between reality and fiction. The hit Norwegian TV show SKAM is a case study here. It followed a (fictional) group of high school students through assorted teen drama (compare it to the British show Skins).

SKAM characters had real-world social media accounts that interacted with each other in alignment with the plot leading up to each week’s TV episode: a scene at a party gets posted by one of the relevant characters at 2am on a Saturday when it’s supposed to really be happening; a scene in the school cafeteria gets posted at noon on a Wednesday. Characters interact online (with tweets, posts, photos, comments) as you’d expect them to based on the plot. The high-production-quality videos then got compiled into the TV episode of the week, which acted as a recap providing extra context. The plot unfolds in a world broader than just the TV episodes and intertwines with real social media interactions. Watching the TV episodes was only part of watching the show.

The low-production-budget show broke viewership records in Norway, Denmark, and Sweden and gained a large online following around the world. It ended after 4 seasons due to what creator Julie Andem framed as the exhaustion of running a show that’s constantly unfolding every day. Simon Fuller’s XIX Entertainment is producing a US remake of the show, which will launch on Facebook Watch, and local adaptations are in the works in 5 other European countries.

It’s a fascinating case of blending reality and fiction, something we’ll see a major way when augmented reality finds widespread consumer adoption. And it offers potential for a dynamic production format that’s about storytelling through low-cost daily activity on social media rather than in neatly defined episodes. Why not have fictional characters be real-world social media influencers? Those become channels to monetize too through product placement, etc.

(This is an abstract from today’s MediaDeals newsletter.)

Cineplex and the Future of Exhibitors

Amid the global shift to streaming video, are exhibitors (aka movie theater companies) doomed?

Let’s step back: what role do exhibitors play in the market? 1) They curate and host Hollywood’s new releases so mass audiences know what to see; 2) they provide social, in-person media experiences for the family, for dates, for fun; 3) they deliver digital ads to captive, in-person audiences.

I look to Toronto-based Cineplex as a hint at how an exhibitor can continue to play this role in an evolving industry. (It’s more than just offering 3D glasses, recliner seats, and beer.)

Cineplex is the largest exhibitor in Canada, with 163 cinemas. Its box office revenue and concessions revenue are roughly equal (as is normal) and like competitors, they’ve added non-traditional programming like live streams of the opera and boxing matches plus films/livestreams for large immigrant populations. But that’s just the start. Cineplex is seizing opportunities that fit the broader definition above.

  • Decide you want to stay in for the night? Cineplex offers TVOD films to stream right there on their website, continuing to guide you to new(er) releases from Hollywood.
  • Want to go out but not to the movies? Cineplex has The Rec Room, Playdium, upcoming TopGolf venues, and other physical restaurant-and-entertainment experiences.
  • More of a gamer than a cinephile? Cineplex now owns an esports tournament organizer (online and offline), WGN. And it recently opened VR experiences in two of its Toronto and Ottawa theaters.
  • Regularly do any of these? The SCENE rewards program has you covered with discounts and other membership perks. It has 9M members in a country of 36M people.
  • Want to sell digital ads to in-person audiences? Cineplex has that covered too. They handle the ads not only in their theatres but in most of their competitors, reaching 94% of Canadian movie-goers. And they’re leveraging their expertise to expand digital ad units in malls, banks, quick service restaurants, and other public locations around North America.

In the short term, most exhibitors are enhancing the cinema experience in incremental ways so the corresponding increase in ticket prices for a luxurious experience makes up for the decline in attendees. But ultimately the opportunity is in evolving the whole business like Cineplex is doing. (Many exhibitors won’t stay ahead of the curve, of course, but that’s an opportunity for entrepreneurs and activist investors.)

Over the next 5 years, expect social AR and VR experiences to be particularly transformational for exhibitors smart enough to recognize the market that will arise there (already visible with VR arcades in China).

(This is an abstract from today’s MediaDeals newsletter.)

Why People Aren’t Paying for Your Content

Reliance on advertising is often a way to mask the fact that a media property hasn’t found “product-market fit”.

To find success in any market, you need to offer a product that’s 1) compelling and 2) differentiated. A compelling product adds value to the consumer: it offers a functional benefit and/or emotional stimulation that they place value on. A differentiated product is something they can’t get elsewhere…the brand, the technology, the affordable price point, the geographic focus, or whatever else is fairly unique.

A product that’s differentiated but not compelling is just something no one wants – there’s no market for it. Alternatively, a product that’s compelling but not differentiated has no wedge to break into a market and no sustainable business. You have a commodity product so consumers will just go with whoever offers the same thing for cheapest or who they’ve already been buying from.

Entrepreneurs know they have a product that’s both compelling and differentiated when they receive consistent enthusiasm from customers willing to pay a sustainable price. So when an entrepreneur puts a product out and few people are willing to pay for it, it sends them back to the drawing board. They iterate until they finally find “product-market fit” or run out of money and stop.

In media, there’s a common opt-out here. Media entrepreneurs will produce content that’s compelling but not differentiated; there’s an audience but they’re not willing to pay for it. Rather than iterating to find product-market fit, they sing the common – but false – refrain that “people won’t pay for content anymore” and turn to advertising as a way to monetize the initial audience. It’s the fallback option. But in doing so they’ve moved out of media and into the advertising business…the attention business, the quantity-over-quality business. The content they produce gradually reflects this goal (see The Problem with Advertising). The problem is worst in news publishing, where – since the internet has removed mere geographic location as a differentiator – most publishers produce the same news stories without unique voice or analysis.

The reality is that if people won’t pay for your content it is, simply enough, because they don’t think it’s worth paying for. It doesn’t mean the content isn’t compelling, it might just not be differentiated from what can easily be found elsewhere. In the media industry, there’s not enough pressure to confront this reality and find product-market fit because advertising offers a short-term escape route.

Business Models for Media Companies

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.

1. Transactions

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-experience purchases

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.

2. Subscriptions

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.)

3. Licensing

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

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.

5. Advertising

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.

The Problem with Advertising

I am excited to dig into this Monetizing Media project not just because I see the momentum gathering behind media companies’ move to subscription models but because I want to see more of the industry move toward charging for content.

Here’s the problem with advertising-dependent media…

Misaligned Incentives

Incentives matter, they shape human behavior – individually and in organizations – even if it is subconsciously over time. If my business model is one in which my primary customer is advertisers, then at its core I’m running an advertising company. My content is just ad products, and I’ll evolve those products to better sell to advertisers. That is the basis of my bottom line and the direction my organization will naturally take, as much as I might rationalize it to myself along the way.

In journalism, the creative side has long demanded a “separation of church and state” from the business side of their company that deals with advertisers, fearing pressure from individual advertisers could influence the content they create. There was a fundamental failure over the last 20 years to account for the fact that the free, ad-dependent business model online could undermine the integrity of their work far more than one overzealous advertiser would.

Race to the Bottom

What advertising-dependent digital publishing incentivizes is a race to the bottom on quality and profitability. Here’s how the game works: my media company is getting an $x CPM (cost per mille, i.e. cost per thousand views) for the ads; most of the ads are bought programmatically through ad exchanges because major advertising agencies that represent brands want to make purchases on massive scale.

To make more money, I need more views; so I start producing more articles/videos that each take less time to make, and I start getting really smart about all the best practices for getting people to click on my content. Everything that’s posted is A/B tested so I can determine the most click-able headline, and based on analytics on the type of content that’s performing best (and the type of content I see performing well elsewhere), I iterate. I don’t need deep analysis because the headline and the first couple sentences are all that most people read and all that I need to generate an ad impression. Content that’s timely – responding to some pop culture or news event of the day – performs well, so more of that. Content that uncovers the sensation in every story gets people to share it on social media – scandals that make them angry usually perform better than heart-warming stories that make them happy, but either way the key is to stay at the extremes of emotion.

So now I’m cranking out lots of short, timely, sensational content and getting a lot more views. Except every other site has taken the same path, and the growing abundance of impressions (i.e. slots available for advertising) has caused the CPM on the ad marketplaces to drop. It’s simple supply and demand: greatly increase supply – and increasingly commoditize the supply so its interchangeable – and market prices will drop. My content is getting lower quality and more commoditized but I’m not making much more money from it because the CPM prices catch up pretty quickly. My only way to survive is to perpetually run this race, trying to stay an arm’s reach ahead of the market and falling CPMs for as long as possible.

Duopoly of Tech Giants

Social media companies are the ones earning most the advertising revenue from the content I’m creating and that my audience is sharing…its just part of the daily flow of publisher content that keeps people on their sites. Facebook and Google now collect 73% of all digital ad revenue in the US and account for 83% of market growth. Their platforms are where people actually spend time, engage with content, and engage with each other, so naturally they’re also the ones with the data to best to target ads (making them preferable to advertisers).

My audience isn’t really my audience after all. It’s just anonymous people (or bots) clicking on posts within their newsfeed, Twitter stream, etc. then moving on to the next one without much thought given to my brand or my other content. I don’t know their names and they don’t specifically come to my site to see what’s new. If I stopped publishing for a month, very few of them would notice.

And at any moment, these tech companies can change the algorithms that dictate how content spreads (the algorithms I’ve worked so hard to game to my benefit). In fact, they certainly will, again and again, because they’re companies too and their incentives are to keep figuring out how to evolve their product to make more money.

Lower Valuations

I now have a media company that’s not in control of its own fate…it’s very survival swings with changes in ad markets and the algorithms of tech companies. I don’t have much of an audience that’s truly dedicated to my brand and its hard to differentiate what I do relative to many other sites out there. I haven’t built a very attractive business from an investor standpoint. Even the most successful media companies at this game – who’ve been propped up by funding from investors focused on the audience growth rate – experience this.

Companies whose revenue is dominated by advertising income raise capital from investors on lower valuations than media companies of equivalent revenue whose income is mostly from subscriptions or transactions. That’s because subscription-based businesses have comparatively stable financials and control their relationship with the audience…they have a customer base that likes what they’re selling and would be receptive to new product offerings or even a subscription price hike.

Is advertising a universally terrible idea?

No. It can be a great secondary revenue stream for media companies who treat their audience as their customer. In fact, an engaged, loyal audience within a certain demographic niche that values my distinct brand enough to pay for it offers the type of genuine interaction that certain advertisers would value involvement in…sponsoring segments, product placement, etc. Content creators can maintain their focus on quality, and selected brands can be included in ways that are complementary.

Advertising-dependent companies, however, are a bad business to be in and not where we’ll find top quality content being produced consistently. But they will always be around providing the filler content…the daytime soaps of the digital world offering mindless distraction.


**What about TV? Top TV channels make most of their money from carriage fees the cable companies pay to them. They use the bargaining power of a large, loyal audience to get higher rates: “pay us $X or we’ll walk, and our devoted fanbase will revolt against you”). FOX News, ESPN, USA, etc. get paid the most because they focus on creating (or buying rights to) must-see shows that people follow loyally. Advertising revenue is still a very significant revenue stream, but its secondary to their carriage fees. And notably, the hottest newcomers to “TV” are the online subscription platforms like Netflix and Amazon Prime who are funded directly by their audience and benefit from all the data collected by owning that relationship themselves.**