July 18, 2023

Media Is at a Unique Inflection Point

We’re going to look back on 2023 as a time of major change in media. It’s not just Vice going bankrupt or BuzzFeed trading like a penny stock. It’s not just Hollywood having writers and actors strikes at the same time. It’s not just Disney thinking about selling some of its prized assets. And it’s not just B2B media assets being some of the most prized on the market.

It’s all of it. And I think 2023—the year of rising interest rates and AI—is when it all will begin to shift.

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In Bloomberg’s Screentime newsletter, the authors write:

Bob Iger built Disney into the world’s most powerful entertainment company by acquiring Pixar, Marvel and Lucasfilm. Now he’s looking to downsize.

Iger put roughly a third of the company up for sale this week, declaring Disney’s linear TV assets noncore. That includes TV networks ABC, FX and Freeform. He also said Disney is looking for a strategic partner for ESPN — though he’s not willing to sell the whole thing — and the company is already looking to sell or restructure its TV and streaming business in India.

A few weeks ago, I wrote about the end of the Vice saga.

I often wonder whether Vice could have gotten to profitability if it were not burdened by all of its self-induced debt. A lot of Vice’s problems were poor execution, but the strategy was predicated on trying to get bigger to justify the valuation. A clean cap table might be all the brand needs to start growing again; albeit, at a much slower pace and, likely, from a smaller base. 

And last week, I wrote about BuzzFeed wanting to sell Complex assets:

As I’ve written numerous times, BuzzFeed needs to get profitable. It needs to control its destiny. It’s never going to reach the type of scale that the team once thought possible. If that means it needs to pay off a bunch of debt and become a smaller company, so be it. I remain convinced the end game here is that someone takes BuzzFeed private. To some operator, it might be a monetizable asset. It’s just a dumpster fire as a public company.

It’d make sense to read this and question if there is any opportunity left in media. But then if we head over to Flashes & Flames, there’s a great breakdown of the potential that exists in B2B media. According to the story:

The Aging Media Network – a US-based digital B2B player focused on the aging population – was this month acquired by WTWH Media. The enterprise value of the $13mn-revenue / $3.3mn-EBITDA company is believed to be $33-36mn (10-11x EBITDA). The founders retain a 30% share of the business under earnout.

Its acquirer WTWH Media had itself earlier this year sold a majority stake for an enterprise value of $100mn (7x EBITDA) – see “How I do It” this week.

A snapshot of deals of the past few years tells the mixed story of some low multiples for what had been regarded as unfashionable media, the 15x EBITDA paid last year for Industry Dive, and also the 20-30% B2B profit margins achieved across the sector:

It’s confusing. On one hand, the news out of Hollywood is doom and gloom. The major players that got all the press are dying. And yet, at the same time, smart operators are selling their companies for nice multiples and proving that there is a legitimate opportunity to build a livelihood in media.

So, which is it? It’s both. For some in media, the death knell has been rung. And for others, the future is so much brighter.

In the above Bloomberg article, the authors ask: “If a diversified company like Disney is bailing on its cable networks, what does that mean for companies like Paramount Global and Warner Bros Discovery Inc.”

For Warner Bros Discovery, the problem is that it’s going to have to cut as deep as possible into quality assets to overcome the massive debt it has on the books. The deal that merged these two brands came with tens of billions of dollars in debt and interest rates have only gone up since then. As for Paramount Global, it cannot get its streaming business profitable with it continuing to pump more money into growth.

And this is where the strikes that I mentioned above make sense. Content is unbelievably expensive to make. In a 2004 article, The Guardian broke down what goes into making a movie:

The big money is doled out to the stars, the director and the producers who, like the less glamorous members of the crew, are still paid a traditional weekly wage for the length of the shoot. They are what’s called “above-the-line” costs that the studios are committed to paying before the cameras even start to roll.

The cast made $30 million in The Guardian’s example on a production that cost, all in, $275 million. That’s nearly 11% of the cost. And this was back in 2004, so you have to imagine those costs have only gone up. I don’t begrudge this, of course. Everyone should get paid.

But it’s getting harder for these studios to make money. And if studios are not making money, you can bet everyone else is going to have to take a cut. It’s a classic employer vs. employee battle and the sad reality is, the employers almost always win. This is especially true when movie stars are, in many respects, commodities.

According to a 2022 story on The Guardian:

“There are no movie stars any more,” said the Avengers actor Anthony Mackie in a clip that did the rounds on Twitter. “Anthony Mackie isn’t a movie star; The Falcon is a movie star. And that’s what’s weird. It used to be, with Tom Cruise and Will Smith and Stallone and Schwarzenegger, when you went to the movies, you went to go see the Stallone movie; you went to go see the Schwarzenegger movie. Now you go see X-Men. So, the evolution of the superhero has meant the death of the movie star.” Chris Evans has enjoyed playing against type in Knives Out and The Gray Man, but almost every Avengers cast member who came to fame through the series has struggled to make it outside the Marvel bubble.

If the individual isn’t a draw, then why should they be paid so much money? Mackie’s point is true: Cruise, Smith, Stallone, Schwarzenegger were all stars that could really pull people into the theater. Now, do we even care?

And if it’s the difference between making money or not, these studios that are also distributors with their streaming platforms are going to cut where they have to. I may disagree with it, but them’s the breaks.

This is the most I’ve written about movie studios, and I probably won’t return to them for a long time. So, let’s look at our friends BuzzFeed and Vice. For these businesses, as well, they’ve likely peaked from an audience perspective. It’s only going to get cyclically worse for them.

These are businesses that were built with the dream of getting to massive scale. Those days are done. The platforms won. Not only did the platforms win, but they are increasingly going to keep people from leaving their sites. Twitter likely shadow banned people for even mentioning the word Threads. And with it now paying people a $0.01 CPM, I suspect Twitter will continue to do whatever it can to keep people on platform.

At the same time, we’re looking at the onset of ChatGPT and the ability for generative AI to fundamentally disrupt search. While interest in this has certainly died down, no executive should feel calm. The best building gets done when the excitement has died away. But if chat-based search is the future, heavily search dependent publishers are in for a world of hurt.

To compound it, we continue to hear about the impending death of the 3rd-party cookie. Google remains committed to getting rid of all 3rd-party cookies in Chrome by the end of 2024.

And so, all of these large scale media companies that thought they could beat the platforms have lost. They’re Teruo Nakamura, fighting a war that they don’t realize they’ve long since lost.

What’s left?

The niche players. Those that are able to build for a very specific audience. Those that are able to zero in on a specific topic and serve the heck out of it. Why do you think Aging Media got 11x EBITDA? Why do you think Industry Dive got 15x? And that’s just B2B sales.

Back in October, employee-owned Defector reported its second year financial report and it’s a profitable business. Some key statistics include:

  • $3.8 million in revenue ($3.6 million came from subscriptions)
  • $2 million in employee compensation + $200k in employee benefits
  • $3.7 million in operating expenses

This is a 3% margin business. But considering the business is only a few years old, I’d say it’s in a fine position. As of September 2022, it had 38,000 active subscribers. It’ll get bigger; I’m sure of that. But is it ever going to have hundreds of thousands of subscribers? I suspect that’ll take a long time.

I will wager that the future of media will look like the past. I wrote on LinkedIn that:

Walk into Barnes & Noble. Look at the magazine newsstand. That’s what the future of media looks like. It [the future of media] may not be print, but each of those magazines serves a very specific passion audience. And there are plenty of ways to monetize those passion audiences outside of just ads and subscriptions.

Each of those magazines can become a very successful business when they prioritize digital. Nearly all of them will be subscription first, advertising second, and the smartest will have even more revenue products down funnel. But most of all, none of them will ever be anywhere near as large as the smallest social media platform. And that’s okay.

This is an inflection point for media. The winners are going to be the tens of thousands of smaller operators serving specific niches. This is what media looked like before the internet and it’s what it’ll look like going forward. It could be a lot worse.

Thanks for reading. If you have thoughts, hit reply or become an AMO Pro member for an invitation to the AMO Slack. Tickets are still available to the AMO Summit here in NYC on October 26th. If you buy a ticket, you get one year of AMO Pro for free. Have a great day!