March 10, 2020

Only a Tiny Number of Publishers Can Sell Technology

Media companies, in an effort to chase profitability, are looking at a wide variety of tactics. One of them is selling software licenses to other publishers. In other words, publishers are making publishers their clients.

According to a story on Axios about Minute Media:

“The reason we can acquire companies and be effective is because we use our tech platform to absorb, integrate and scale each property,” says Peled. He hopes to hire more engineers to help power the platform.

In the future, Peled hopes to have hundreds of publishers paying to use Minute Media’s publishing software. For now, he says the company has dozens of clients, ranging from small digital companies to large newspapers, like USA Today.

I understand why they’re doing this. Who better than a publisher to know what another publisher actually needs? On top of that, when publishers are looking to raise money, the revenue from these sorts of deals is treated differently than the revenue from traditional publisher sources—specifically, it allows for a higher valuation.

However, there is one piece missing in this question that these publishers are avoiding… By and large, media companies just don’t have the cash for these sorts of huge deals.

Here’s the problem… Once we get past the largest publishers in the world, how many can actually afford these large licensing costs? I remember starting to investigate these systems back in early 2019, but I quickly realized that it was cost prohibitive. We opted to stay on WordPress. And with more publishers trying to enter this realm, it’s going to get more difficult.

That’s not to say it’s impossible, of course. For all intents and purposes, it appears The Washington Post and Vox have figured out how to generate revenue here, even if it’s not a profitable line of business.

According to reports back in September, Arc still wasn’t profitable. However, the company believes that it will be able to generate $100 million a year by 2022. On the other hand, it has been saying that since 2016. Vox has only been selling for a couple years now, so we have to imagine this is eating into growth for Arc.

In reaction to this, some publishers have realized that other publishers aren’t the right client. Instead, they’re targeting corporate clients. Last August, The Information reported that Axios was looking to sell its software:

Axios wants to sell the software, which it is beta testing, to communications and human resources departments at companies with large numbers of employees, according to several people familiar with the plan. Another potential use is newsletters for company investors and customers, said one of the people. It couldn’t be learned whether Axios plans to play any role in producing the newsletters beyond selling companies the software on a subscription basis.

It’s a unique strategy, but it’s also one that The Washington Post is also trying to play in, signing BP to a big licensing deal. With everyone becoming a content company, having the right CMS is important to all brands—not just publishers. Competition is coming from all sides for all of these publishers.

So, we have a scenario where everyone is going to wind up chasing corporate clients and the long-tail of publishers are unable to afford the licensing fees. How does this play out?

We already saw Vox Media acquire New York Media, which came with its own CMS. I fully expect to see this CMS shut down in the next year or two. Why keep two enterprise systems seeking a small pool of client dollars?

But what if these large licensing agreements weren’t necessary? Instead, what if hundreds of publishers could launch on these platforms and give up a percentage of their revenue? Scroll CEO, Tony Haile, opined on this model back in September when The Washington Post launched Zeus:

In my post about the product launch, I wrote:

Rather than charging publishers for the various aspects of the publishing stack, give it all away for free. In exchange, you get a percentage of the revenue that the publisher then generates. It’s not too dissimilar to what Substack does here, but it would be at a far greater scale. Would The Washington Post make more money this way? Would it introduce more publishers to the stack than would otherwise have access? Could it help local news publishers that would greatly benefit from these systems, but don’t have six figures to license technology?

This appears to be the model that Minute Media is hoping to try. According to a Digiday story:

Routman said that Minute Media makes money from its tech stack either by licensing it out or by setting up a revenue share with the customer, both options representing an equal portion of the contracts. The latter option enables the customer to get the tech stack for free but he said the company prefers this model because it has the potential to scale well for Minute Media in the long run.

This presents a scenario where upstart publishers that might not be able to afford the expensive software can align their incentives with the software providers and get access to tools and systems that help them scale.

Always a caveat…

All of that said, it is a much cleaner business to tie revenue to the sale of a product versus revenue shares. On top of that, supporting hundreds of publishers might actually reduce the margins for these businesses. Is it better to have 50 high-paying clients versus 200 revenue-share clients, even if it means that revenue is higher with the latter?

My thoughts on this issue boil down to this… For some publishers, the model might work. However, for many, it won’t. It’s possible that it could work with Minute Media, but the odds are against it. In digital media history, there have been many publishers that have tried to become the platform—either CMS or revenue—for other publishers.

Say Media had its own network of websites and also pushed its CMS and ad network. Now, it’s The Maven, which is just a content farm on steroids. At one time, even Complex had an ad network, trying to make publishers its clients. These businesses are hard. Some may figure it out, but my advice to most publishers is to avoid it. It’s distracting and there are more natural ways to monetize.