Vice & Buzzfeed - traditional media businesses now having to deal with the economics of being media businesses

Last week was a bleak one for many journalists and non-content staff at some of the most prominent digital media businesses not named Google or Facebook.

Layoffs impacted staff at Vice, Buzzfeed, Verizon/Oath and Garnett and had many (including the New York Times) dramatically asking what went wrong, as these new upstarts made moves that so far had been the domain of the incumbents they were meant to displace.

NY Times headline - 1 February, 2019

In all the rush to diagnose what went wrong, most of the analysis has glossed over four areas I think are key reasons behind the current state of affairs, and four areas any “new media” business needs to sort if they are to move from a funded disruptor to a profitable business.

The journeys of Buzzfeed and Vice in particular provide the best colour behind these.

1.      Both raised too much money for the businesses they are

In the middle of one of the most seismic shifts in advertising spends we have seen (the move to addressable, programmatic advertising) here are 2 entities completely dependant on good old advertising to generate the entirety of their revenues. Neither had any meaningful direct to consumer revenue (ie. Subscriptions) and neither had any sort of meaningful recurring revenue (more on that later). So you have two businesses, that operate commercially awfully like every other media business, somehow raising huge rounds with an expectation they would defy the entire market commercially.

The volume of funding was also at levels rarely seen – levels that are generally associated with software businesses that have recurring, subscription revenue and scale benefits. Vice and Buzzfeed have neither – as they scaled revenue and users their costs followed in a straight line (or worse). However their funding resembled two funded software businesses that made it to IPO.

Buzzfeed’s funding resembled Box’s – and Vice’s funding resembled Facebook’s.

It’s been 11 years since Buzzfeed took its first round, and there’s been around $100m of financing that is now 5 years old. Box at the time of listing (2015) had about $158m of funding that was 5 or more years old, and it crawled to an IPO 9 years after its first round.

For a company not generating a profit an exit is the only way for an investor to realise any return on their investment. What’s more – Box is a subscription based SAAS product with both consumers and enterprise revenue streams. It’s annualised return per customer is higher than a media business and for much less work – with lucrative renewals providing revenue streams year (or decades) on.

Vice raised levels of funding that look more like Facebook. Facebook went from first round of funding to IPO in 5 years, and ultimately only raised $555m in proper funding (the big $1.5b round was very close to IPO).

Facebook was growing at weed like levels (100% yoy in terms of revenue and users) and was fundamentally changing the world, hammering their raised funds into more and more coders and engineers and R&D and capital/acquisition investments and a dramatically enhanced product. Vice has raised at the same levels yet as a mediaco remains incredibly similar to what it looked like in 2013 – effectively using funds for opex.

2.      People made the mistake that they weren’t media companies

Buzzfeed was positioned as a software company. Vice as a lifestyle brand. Both were and still are media companies.

They are media companies in such that they create content, place advertisements around it, and rely entirely on advertisers spending more money with them than their cost base in order to generate a profit.

As mentioned, in my opinion neither had the hallmarks of software – recurring revenue, self-serve model (or at least light touch) and a quantifiable technological moat (or at least advantage).

Not being media companies meant they didn’t need to subscribe to the valuation principles of media companies. For instance, Vice was valued at 8-10x revenue. Buzzfeed at 6-7x. At the same time the New York Times was trading at around 1.5x revenue (right now it’s about 3x) and domestic media companies such as Seven West Media trade at 0.5x of revenue.

The New York Times is worth looking at more closely as it is now resembling a SAAS business more than an advertising one. 60% of its revenue comes from subscriptions and this amount is now over $1b annually. It has global scale and a differentiated position in market. If anything the NYT resembles the modern digital media business as it has a global customer base, larger recurring revenue than ad based ad-hoc, and adjusted operating costs.

Buzzfeed and Vice trading at Google and Facebook like multiples was a mistake of optimism. Google and Facebook are successful enterprise SAAS businesses that are funded by ad budgets but generate consistent spending on the whole month on month from a majority of customers. They also have scale and systems built around them that mean their customers have no alternatives.

3.      Raise more, spend more.

Higher capital raises meant higher operating costs – staff, offices, facilities, sales, marketing etc. This allowed both businesses to operate at levels that their revenue wouldn’t normally allow them to.

The idea generally is revenue will grow at a level commensurate with the higher operating costs, but what normally happens is as revenue grows, opex grows and there’s never a time when the level is restored to balance.

The layoffs are simply a way of trying to cut operating expenditure more in line with the levels of revenue. But – the question is, can revenue be sustained without this inflated level of resource. This is the big question for both.

It also indirectly implies both Vice and Buzzfeed planned IPO’s and investor exits by now that haven’t eventuated. This could make raising funds troublesome at the current valuation (potential for a down round) and in the current market M&A is unlikely (Google/FB/Apple/SFDC are out as they’re not habitually buyers of moderate growth media companies, Yahoo/AOL/Oath out as Verizon rapidly backs away from media, Disney/Fox/NBC out as their focus moves to OTT) which leaves a limited list of overseas obscure investors and private equity flippers.

The hope will be to cut costs, minimise burn and ideally generate some sort of profit to fund the future build. Like pretty much all other media businesses – legacy or otherwise.

4.      Both Vice and Buzzfeed are growing at an impressive rate

There is nothing “wrong” with growth rates of 10-15% per annum in terms of revenue. This puts both Vice and Buzzfeed in the top 1% of media “winners” in terms of positive revenue movement. The problem is 10-15% isn’t 30-50% that was expected.

This isn’t a slight on the journalists or the content, or even the sales teams. They are strong, above market, growth rates. It is just in the climate at which they funded themselves these figures can feel like a failure. On the contrary both organisations are finding ways to improve their share of attention with consumers and share of wallet with advertisers.