September 13, 2019

Can The Athletic Justify its Valuation?

I have had The Athletic on my mind for a while now for a couple of reasons. The first is because I am a subscriber and, for the most part, the experience has been quite nice. The second is because I am curious about their model and wonder if it’s enough to justify their very high valuation.

The company has only been around for a few years, and in that time, it has grown to a valuation of $500 million with total investment of over $90 million. They’ve been on a press tour talking about how they’re adding subscribers left and right, but the question remains: can they justify their very high valuation.

Rafat Ali, founder and CEO of Skift, posted a provoking question on Twitter a few days ago that I responded to, but thought it was worth more thought.

Anytime you compared a company to the burning dumpster fire that is WeWork, you’re going to elicit some responses. But I understand what Rafat is trying to say here. In a follow up tweet, he said, “Quality aside, it is likely the high valuations that will do it in, even if it turns out to be a great biz in itself.”

It helps to understand what The Athletic is trying to build.

If you’re a subscriber to The Stratechery, this is worth reading. If not, here’s the summary: The Athletic raised a bunch of money so that it could hire the best writers in a specific league. That then makes it possible that subscribers are not only interested in their team, but also the league overall. That makes it easier to stomach spending $60 a year on sports content. The problem is you can’t bootsrap that model because “writer’s salary needs to be paid immediately, while subscription revenue accumulates over time.” Thus, the need to raise money.

The question that needs to be asked is whether The Athletic can reach profitability before it needs to go back and raise more money. Once it raises more, the valuation is higher and that makes it even harder to actually be worth what you’re saying you’re worth.

Let’s try to break the company down using some numbers that we know, starting with growth and then moving to revenue/costs.

Much of its growth has been in the past 1.5 years. According to the image below from Bloomberg, it went from 90,000 subscribers in the beginning of 2018 to 600,000 today while expanding into close to 50 markets.


According to the Bloomberg article, there are over 400 editorial employees. Let’s assume it’s a 2:1 edit to business ratio, so you’re looking at over 600 employees. Between marketing, product, engineering, design, finance, human resources, and the various other roles that go into managing a business, a 2:1 ratio feels right.

Diving deeper into the numbers, Bloomberg reports:

Starting salaries, according to conversations with more than a dozen Athletic employees, ranged from $55,000 to more than $120,000, depending on experience and location. For a top beat writer in a new market, the company might pay a 20% premium or more. In the early days, the site offered bonuses for bringing in subscribers. Every employee gets a small slice of equity.

Let’s simply take the average of those two numbers, which is $87,500 and then round up to $100,000 when you factor in benefits, real estate, etc. So, 600 employees at $100,000 a pop is $60,000,000. It could be higher and it can certainly be lower.

According to the Bloomberg article, the company has 600,000 paying subscribers with an average revenue of $64 per subscriber. That means revenue is $38,400,000.

$60,000,000 in cost – $38,400,000 in revenue = $21,600,000 deficiency

That’s a lot of money. But if we think about their need to build a bundle, it’s fine to lose the money now if you’re going to be able to make it back and then some in the future.

According to the Bloomberg article, The Athletic believes it will hit 1,000,000 paying subscribers by the end of this year. If it does that, it’s going to be at $64,000,000 in revenue at current revenue/user. But I think in their quest to hit 1,000,000, they’re going to see a reduction in revenue per user. The Athletic is currently offering an annual plan at $3.99 a month. And if I refer someone, they can get it for $2.99 a month and I get a $25 Amazon gift card. Even at 1,000,000 subscribers, I will wager that they’re still losing money.

I also think in their quest for 1,000,000, they’re going to need to hire more. Consider their recent expansion into the UK for Premier League. BuzzFeed wrote about how The Athletic set up shop in a hotel and made offers one after the other to Premier League beat reporters.

According to a source involved, the recruitment occurred in recent months during a series of meetings hosted by one of the Athletic’s cofounders at a lavish London hotel. One by one, the football reporters met with the US website’s management for coffee and got the pitch on how they intend to “disrupt” the football journalism market.

“I came out of my little meeting, and there was another reporter waiting to see them,” one source involved said. “They were really churning through them.”

My big question is whether their subscriber growth is linear to their editorial growth? If it is, that’s a tricky busy. If it’s not and it adds subscribers faster than it adds new journalists, the investment makes sense.

All of this is okay, of course, if they’re able to keep the subscribers around in their second year because then the plan goes to full price. So, let’s look at churn.

In the beginning of 2019, it had 350,000 subscribers. It said in August that it had 600,000, which means it has added 250,000 in 8 months. With average revenue of $64/user, that means most people are picking the annual plan versus the $9.99/month plan. A lot of first time subscribers are going to renew starting in January 2020.

The Athletic says it retains over 80% of its subscribers, which is good. On the other hand, I question if that number will remain that high. Early subscribers are probably your most dedicated, so keeping them renewed and engaged should be easier. Later members tend to be a little more fickle. If The Athletic does hit 1,000,000 subscribers by the end of the year, that means they will have added 650,000, nearly double what they had in the beginning of the year. And that’s where I think retention numbers are going to begin to falter.

If we recall the LA Times, they added 52,000 digital subscribers in the first half of the year and lost 39,000 for a net gain of only 13,000. In subscription businesses, retention is the name of the game.

Fortunately, The Athletic does appear to have a plan for that. They are introducing a slew of personality-driven podcasts that are only for subscribers. I’m a New York Knicks & Tottenham Hotspur fan. Will I renew at $60 if I get articles about those teams and two podcasts? It’s quite possible.

The next 6-12 months are going to be a mad dash to produce enough engagement product to keep people happy. If they can, perhaps they keep their retention numbers high. If I had to guess, they’ll settle somewhere around 70% retention in the next year. It’s still impressive, but at 1,000,000 subscribers, a 10% drop is millions of dollars, which a money-losing operation can’t stomach.

The other big worry is that they really only have their subscription business. It’s the best business there is for media, but media companies need diversification. I’ve written about this a few times now, but it is so important. What happens if retention drops further? What if it hits 60%? That’s a huge hit to revenue. Having a diversified business can ease those pains.

It helps that The Athletic is finally introducing another revenue stream with their daily podcast, The Lead. The Lead will talk to a different The Athletic reporter each day for 20 minutes and there will be 3 ads in the podcast.

They think they can build something that is similar to The Daily from The New York Times, which would be great for them. In a Vanity Fair article from a year ago, The Daily is a solid business:

Chief Operating Officer Meredith Kopit Levien wouldn’t discuss how much money The Daily is making so far, but a sales proposal that I got my hands on for June sought $290,000-per-month to be part of the show’s monthly sponsorship rotation, which generally includes several advertisers. A person with knowledge of The Daily’s finances told me the show will book ad revenue in the low eight figures this year.

If The Athletic can introduce a low eight figure advertising business to its repetoire, that would be a huge win for them. Add in that this also acts as a subscriber generator and that’s a smart move.

So, let’s look at valuation. According to their last round, they’re worth $500 million. But that doesn’t mean anything without a liquidity event. According to analysis from two years published on Poynter, acquisition valuations are a blend of revenue multiples and EBITDA.

Buyers, not surprisingly, are motivated by how much money they believe the company is going to make. Looking ahead, prices paid tend fall between 3–7x the predicted forward revenues for the upcoming 12 months.

Most digital media companies sell for about 8–12x EBITDA.

Sophisticated strategic buyers look much deeper. They want to know not just the current EBITDA as a percentage of revenues, but also what they might do to improve on it.

Can they cut expenses from combining back end operations like bookkeeping or human resources? They might look to see what new profits they can add through new revenue streams.

So, let’s do some math on the assumption that The Athletic reaches 1,000,000 subscribers at $64/subscriber, which is $64,000,000.

  • 3x Revenue: $192 million
  • 7x Revenue: $448 million

As the article continues to say, “Multiple streams of revenue are better than fewer, especially if they are offsetting and perform differently in different market conditions.”

So, The Athletic really only has one revenue stream, which probably reduces the multiple. On the other side, it does have the best revenue stream, which increases the multiple.

But let’s also not lose sight of the fact that The Athletic is still not profitable. When you’re losing money and chasing scale, your only option is to raise more money. If they raise at a higher valuation, that blows all of this math up.

In summation, while I don’t think that The Athletic is WeWork because WeWork is such a financial meltdown, I do think Rafat’s point in a follow up tweet is true.

”Quality aside, it is likely the high valuations that will do it in, even if it turns out to be a great biz in itself.”

Atlas Obscura gets $20 million

The Wall Street Journal reports that Atlas Obscura has raised more money.

Airbnb is leading a $20 million Series B funding round into the Brooklyn-based media and experiences company. Atlas Obscura said it plans to use the money to vastly expand its trips and local experience offerings, which the company says make up more than half its business.

As part of the deal, Airbnb will offer users the ability to book Atlas Obscura trips and events through Airbnb’s site and mobile app, alongside its traditional accommodation offering, for which Airbnb will take a cut.

I had never heard of Atlas Obscura, but I really like their model. They’re predominately an events business, but rather than expo or conferences, they’re about experiences.

In New York, for example, I can pay $55 to “Tour the House of Wax with the Curator” or pay $25 for “Behind the Scenes at the City Reliquary.” But they also plan wonderful looking trips like “Sailing Sardinia’s Hidden Coastlines,” an 8-day, 7-night excursion that costs $3,580 per person.

They write about wonderful experiences and then offer travel opportunities to their audience. In the past, they tried to rely on advertising, but this is a much better business for them. I’ll be curious to see how they deploy the additional capital and what the addition of Airbnb’s audience can do to the business.

Friendly Google?

Google is in full on press mode as it talks about its algorithmic ranking changes relative to original reporting.

While we typically show the latest and most comprehensive version of a story in news results, we’ve made changes to our products globally to highlight articles that we identify as significant original reporting. Such articles may stay in a highly visible position longer. This prominence allows users to view the original reporting while also looking at more recent articles alongside it.

The way they will do this is with changes to their rater guidelines. While Google relies a hundreds of different variables to dictate where a specific page/site will rank for a specific keyword, it also has more than 10,000 raters that evaluate the algorithm to determine if it’s doing the right thing. “Their feedback doesn’t change the ranking of the specific results they’re reviewing; instead, it is used to evaluate and improve algorithms in a way that applies to all results.”

That makes sense… It’s still an algorithmic business, but people are helping the algorithm to learn.

Here are the changes that Google is introducing:

To illustrate the update, in section 5.1 of the guidelines, we instruct raters to use the highest rating, “very high quality,” for original news reporting “that provides information that would not otherwise have been known had the article not revealed it. Original, in-depth, and investigative reporting requires a high degree of skill, time, and effort.”

In addition to recognizing individual instances of original reporting at the page level, we also ask raters to consider the publisher’s overall reputation for original reporting. That update in section 2.6.1 reads: “Many other kinds of websites have reputations as well. For example, you might find that a newspaper (with an associated website) has won journalistic awards. Prestigious awards, such as the Pulitzer Prize award, or a history of high quality original reporting are strong evidence of positive reputation.”

If a media company breaks a story, it should show up top more often with supporting stories that might dive deeper. Often times, the original reporter would lose out to a much larger entity.

Here’s an example… It was a local media company down in Florida that continued reporting on Jeffrey Epstein when no one else was looking at him. Now, this is truly national news, and you can’t find that media company referenced anywhere in the search results when you Google “Jeffrey Epstein.”

That should change. Just because a larger media company has greater domain authority doesn’t mean that it should get first billing.

I’ll be curious to see how this plays out, but it’s a good step for media companies that do true investigative journalism.