October 5, 2021

Is The Athletic Running Out of Time?

Trying to build a quickly scaled media company is incredibly difficult. We’ve seen numerous other companies try and the outcome has often been the same: failure. It takes time to build a sufficiently large audience to cover the costs, let alone make a profit, but all that time, costs are eating away at the cash position.

It seems that The Athletic is running into this issue itself. According to The Information:

Last year, when Covid suspended most sports, the firm generated revenue of $47 million, while its cash burn was $41 million. The Athletic is projecting that revenue will rise 64% to $77 million this year, while its cash burn drops to $35 million. Next year The Athletic expects its cash burn to drop sharply, to about $7 million. And the company has told investors it expects to be marginally profitable in 2023 on revenue it projects will be $156 million.

The Athletic has enough cash to cover its needs for about the next eight months, said a person familiar with the situation.

When last The Athletic raised money, it was January 2020 and we were living in a different era. The company added $50 million to its war-chest at a $500 million valuation. With Covid hitting, this likely saved the business, but as the above quote says, it may not have been enough.

Here’s the issue…

The Athletic isn’t really growing all that quickly. One thing I’ve always noticed about reporting on The Athletic is that the numbers seem to get a little loose. In June, I wrote about The New York Times buying The Athletic, and I pasted these supposed subscription numbers:

  • Jan 2018: 90,000 subscribers
  • Jan 2019: 350,000 subscribers
  • September 2019: 600,000 subscribers
  • September 2020: 1,000,000 subscribers
  • May 2021: ~1,200,000 subscribers

The first three bullets come from a Bloomberg story that had a very nice chart showing the growth. Hitting 1 million subscribers was reported by CNBC. Then, in May, Axios reported that they had hit 1.2 million. On the surface, this is totally fine and when I wrote my piece in June, I predicted that The Athletic would hit 1.3 million subscribers by the end of the year. It was slow growth, but it was growth nevertheless.

Except, there’s a problem. According to The Information, “It has told investors it expects to finish this year with 1.2 million subscribers.” If it had “about 1.2 million subscribers” in May, according to Axios, and it expects to finish the year with 1.2 subscribers, one of two things is going on.

First, media reporters are really getting things wrong when they talk to The Athletic. Or second, The Athletic’s growth has slowed quite considerably and it is churning subscribers almost as quickly as it is adding new ones.

My guess is it is the latter. Even if it’s not, to grow from 1 million to 1.2 million in 16 months—20% growth—is indicative of a product that might be reaching a more steady growth curve rather than the fast growth the company was used to.

Additionally, The Athletic is still running its 50% off plans—getting an entire year for roughly $35—so any new subscribers it does get are lower margin and perhaps more price conscience.

Then there’s the biggest news of all (at least in my opinion). According to The Information:

The Athletic has been looking to diversify its revenue beyond subscriptions. It has a small ad sales business driven by its podcasting business and sponsorships, which brought in a total of $261,000 in revenue in 2019, rising to $3 million last year. To support its ad sales, The Athletic recently launched a free daily newsletter which will carry ads. The company has told investors it expects its ad business to grow to $8 million this year and then to reach $31 million in revenue in 2023.

What’s the saying? When the going gets tough, sell ads? Or maybe it’s that everyone embraces advertising one day? I don’t know.

I think this is a good move for them. They have what appears to be a loyal audience with some expendable income, so advertisers are likely going to be interested. They’re still avoiding website ads, which is fine. I think they’ve got a lot of work to do to grow that newsletter into a multi-million dollar business, but adding some semblance of diversification to the table is important.

But this brings me back to the original question: is The Athletic running out of time? Sadly, yes. I am just not sure where the needed money comes from.

One option is that The Athletic tries to sell. The Information reports that it is seeking $750 million. The problem is that the bench of companies that could pony up $750 million for a business that doesn’t appear to be growing that quickly—and will barely make a profit in the next two years—is just not that large. I thought The New York Times was a good buyer, but not at this price.

What is the right price? Finding comps is always tricky because every deal is unique. But let’s try a loose comparison. Politico just got purchased for $1 billion or 5x revenue. More than half of Politico’s revenue comes from its very sticky, high-priced membership, so this may not be the best comparison (unfair to Politico). But let’s say 5x is the benchmark. Based on 2021 target revenue for The Athletic of $77 million, it’s probably worth less than $400 million (or 20% less than its last valuation).

Suffice it to say, The New York Times and The Athletic just couldn’t see eye-to-eye on the price. Who else is a buyer of a text-based subscription business at this price?

The other option is that it simply raises more money to give it time become profitable. The issue here is that, if it raises again, it makes it even harder to get acquired. With an even higher valuation, who invests at these prices?

Building a scale media company is hard, especially when you’re trying to do it quickly. The Athletic is going to have to figure out how to double its revenue to reach a point of profitability when it only has eight months of runway remaining. These next few months are critical for The Athletic.

Downside of everyone taking a cut

A little over a year ago, Defector launched as an employee-owned sports publication. After a year, the company has released its approximate financials and the results are in:

Of the $3.2mm revenue Defector recognized this year, 95% was generated by subscriptions to the website. We truly could not exist without our subscribers, as we overwhelmingly rely on their direct subscription dollars to fund all of our editorial and business operations. 

The company had expenses of $3 million, which means that in its first year, it actually made a roughly $200,000 profit. There were some AMO readers who were skeptical of this working, but it seems that the team has done the hardest thing: survive a year.

Unfortunately, it’s going to be limited as it continues to grow, which is really unfortunate. Let me explain.

Across employee costs (salaries, benefits, and freelancers), it spent just shy of $2 million. There’s nothing wrong with this, especially since they’re all owners and actually want to be able to pay their bills.

After those hard people costs, its next major expense was the $550,000 in technology costs. That’s broken down into two chunks.

The first is $300,000 for Pico (a registration system that I use as well), Mailchimp (ESP), and Stripe processing fees. Since Pico charges 5% and Stripe always takes a cut, this will naturally grow as the business grows. This basically comes out to about 10% of total subscription revenue.

The other big chunk is $250,000 to Alley for their product called Lede, which is basically a platform to help subscription media companies. As part of this cost, Defector got a great website and anytime there are issues, the Lede team has to fix it.

In some respects, this is really a good move for Defector. Having to hire in-house designers and developers would have been expensive. And hiring an agency might have also cost a similar amount of money with the need to buy a basket of billable hours.

Unfortunately, Defector is going to have to continue paying Lede those fees despite the fact that the big work (making the site) was accomplished in the first year. One person told me that agreements with Lede are for three years, which means that if revenue were to stay flat, it would earn $750,000 building and supporting this site. If, however, Defector revenue grew by 25% in its second year, Lede would apparently get $333,000 in a single year. That is a lot of money to support a relatively static site.

This is where the whole rev-share model becomes incredibly difficult for media companies. Sure, it’s great for the first year when you’re first starting out. But as time goes on, you’ve got a cost that never stops growing. If we do the math, Lede, Pico, Stripe, and Mailchimp cost around 18% of the revenue. As a small publisher, who cares? But when you’re doing millions in revenue, it really starts to add up.

Now, perhaps Lede does a lot more than just support the site. If they are actively helping that business grow, giving a revenue share is important. But I am increasingly cooling to the idea that a software company should get a revenue share. You’re a tool. Unless you’re actively helping me grow my business, why should a passive participant get a revenue share?

Nevertheless, The Defector team should be proud of its first year success. Media’s hard. They figured out how to get people to pay for what they have to say.

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