Should Media Companies Go Subscription First?

One of the core theses of A Media Operator is that the vast majority of media companies are going to get smaller. It is something we have written about since the early days of AMO. There is a clear barbell that exists where you are obviously one of the largest publications out there—NYT, DDM, Condé Nast, FT, etc.—or you are a niche operator. Being in the middle—BuzzFeed is the easiest example—is a recipe for disaster.

And so, we are going to see publishers get inherently smaller as time goes on. Teams are going to get much leaner. They will have no choice. The outcome will also be that we have many more publications. I think this is a totally fine future because for each of those publications to survive, they will need to have very clearly defined audiences. For too long, media companies have created content without that clear understanding.

But I also believe that business models will have to evolve and priorities will have to change. For a publication that is inherently smaller and more focused on a niche audience, it’s going to become even more important to figure out how to generate revenue directly from the reader. And in many respects, that money will come from subscriptions.

Now, I have been—and remain—a very big fan of advertising businesses. We’ve built a phenomenal one at Morning Brew. Industry Dive has a beautiful ad business (though they prefer to call it marketing services). And there is clearly money to be made in advertising. But advertising requires distribution. With platforms not sending as much traffic to publishers, that distribution will become harder to get.

Let’s look at Defector as an example. In its 3rd annual financials disclosure, it reported that it generated $4.5 million in revenue with $3.75 million coming from subscribers. It has about 200,000 people on its free list with another 42,000 paying subscribers. That means that its ARPU is approximately $18. It’s able to support a team of 28 (though I know a few of these are probably part-time).

Now let’s imagine this same business as advertising-first. If it had a weekday newsletter that went to 242,000 people with a 50% open rate and an RPM of $35 ($20 for the primary, $10 for the secondary, and $5 for the tertiary), it would make $2 million with a 100% sell out. That’s an $8.33 ARPU. Still a fine business, but would clearly not support the above team.

And the reality is, it would likely be very hard to get a 100% sell out because many consumer advertisers are uninterested in dealing with this sort of subscale. Which means, many of these publishers would need to use ad networks to help get them any sort of revenue and those CPMs are nowhere close to what I described above.

At the AMO Summit, I had the pleasure of interviewing Dotdash Meredith’s CEO, Neil Vogel. Here’s a short transcript:

Vogel: Publishing is full of trends and buzzwords and people who write blogs saying stuff, and all of a sudden everyone’s like, oh, it’s the end of scale. No, that’s the dumbest effing thing I’ve ever heard.

Donnelly: I think I wrote that piece. 

Vogel: It’s wrong. I will tell you, it might be right for what Flying is doing. It’s definitely right for what you do. But for what we do, it’s totally wrong. What we are doing is we are delivering intent driven, highly performant audiences in totally safe branded environments at scale. We are more often competing with Snap and Meta than we are with other publishers at this point because of what we can deliver in scale, what we can deliver with our ad targeting and our ad tech stuff. So scale gets us in the conversation with these big CPGs and the big Pharma companies and everybody at this point does not want to talk to you if you can’t take a big chunk of their money and if you can’t be reliable and if you can’t deliver it in a safe way and if you’re not a pro. They want to be able to do a PMP and target across your thing; they want to spend a lot of money and they wanna know it works. You know, it’s working. Like scale for us is the key. I would get more of it if I could.

Vogel’s point about these big advertisers not wanting to talk to you if you can’t take a chunk of their money is critical. It is, ultimately, an effort game for these brands. Why throw around $25,000 to 20 different publishers when you can give $500,000 to one? In B2B, it’s a little different because our advertisers tend to have smaller budgets. But if we did the same comparison as I did with Defector, the math would still look the same.

So, why have so many media companies defaulted to advertising over subscriptions? There are three reasons.

First, for some publishers, ads just work. Dotdash Meredith, Industry Dive, and others have figured out how to make it work. There was a clear arbitrage opportunity where distribution was easier, they were able to acquire the sufficient scale they needed, and equally as important, retained that scale. They’ve had little reason to disrupt themselves now that the business is set.

Second, it’s what we’ve done for decades. Subscriptions were, historically, just a means of covering the cost of print and distribution. The real goal was to grow circulation so we could sell more ad lines. In reading Katherine Graham’s memoir, one of the ways they measured the turnaround of WaPo after her father bought the company is by tracking the number of ad lines that were sold.

Third, it was just easier. To build a subscription business requires really great content. And so, many media companies focused on growth hacks to get a ton of eyeballs—since that was easily monetized with programmatic advertising—versus focusing on delivering an unbelievable product to a clearly defined audience.

But as it becomes harder and harder to monetize ads-first, I believe that more publications will have no choice but to go subscription-first. The issue is, it’s a very tough business. Many of the publications that have launched over the past 10-15 years were not built with this in mind. Some have tried to make the transition, but have failed miserably. And so, we are going to see more media companies fail as the ad markets continue to compress due to their undifferentiated subscale.

And yet, new ones will rise. Defector didn’t exist until three years ago. While its subscription business is growing slowly—only $150,000 year-over-year—it’s still growing. Others will look similar to this. The publications will serve smaller audiences, but they will generate more revenue. And that revenue will, by and large, be far more predictable.

One of the things that sucks about ad businesses is you have to start over every year. I have this problem with AMO. I don’t know what my ad revenue will be next year. However, I have a very good idea what the floor of my subscription revenue will be. That makes investment so much easier. I met with the former CEO of a subscription business this week and despite it being years since he ran the company, he was confident he could predict its subscription revenue simply because he understood how it had grown for years. You can’t say the same about ads.

But here’s where things get truly wonderful. You’ll notice the headline of the piece is “subscription first,” not “subscription only.” I believe any media company that says it is subscription only is idiotically leaving money on the table. You should absolutely sell ads even if you are a subscription business. There is a clear marketing funnel where you have a small percentage of readers that actually pay, but many more that derive some benefit for free.

That’s what we do here at AMO. Free readers are the bulk of the audience, enjoying the free Tuesday piece. And that’s necessary because that content acts as marketing to convert them to the paid subscription. But even though ads are a greater percentage of our revenue right now, I view the subscription revenue as more important. I’ll never turn off ads, but some day, there will be a flip where subscription revenue surpasses ad revenue. And that’s what I am building toward.

Thanks for reading today’s AMO. I’d love it if you joined the AMO Slack to discuss this piece more, so head over there.

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Have a great weekend and see you next week.