January 7, 2022
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The Athletic Story Comes to an End

And just like that, The Athletic was bought.

When I wrote on Tuesday that I was expecting The New York Times to buy The Athletic this year, I didn’t think it’d happen this fast. And yet, I shouldn’t really be that shocked. The Times had walked away last summer, but to come back a second time, it must have had a very good idea what it was doing.

Yet, when I saw the $550 million price tag, I’d be lying if I said I wasn’t shocked. As I wrote a few days ago:

I think this deal gets done this year primarily because The New York Times wants to grow faster. However, it will not get done at $800 million or $500 million. If I were a betting man, my guess is that The Athletic gets acquired for under $300 million.

Here’s why… It’s running out of money. 

That was three months ago, so now it has enough cash to cover its needs for roughly the next five months. And with marginal profitability in 2023, it’s hard to see investors coming in to save the day. That means, we’re dealing with a business in a pretty desperate place, so The Times isn’t incentivized to overpay (and $500 or $800 million is overpaying).

It’s a damn good thing I am not a betting man because I would have lost money. And let me just say congratulations! There are not many media companies that have scaled to over 1 million subscribers and this team achieved it pretty quickly. I’ve said a lot about the business over the past couple of years, but I have to congratulate the team.

I did say one other thing in that piece, though. “However, the terms of the deal could help boost that number.” And I think there’s more than meets the eye here.

Much of what I’ve seen online today is that this deal is being done with 100% cash. But that doesn’t mean that 100% of the cash is paid immediately; it just means that there will be no shares for shares as is common in some deals. And based on what I heard on the webcast announcing the deal, it seems to me that there are significant earn-outs here.

By and large, The New York Times plans to treat The Athletic as a relatively independent entity. While the Times will obviously help with certain user journeys and my guess is The Times will handle a lot on the ad side, The Athletic will chart its own course (just with NYT paying the bills).

This is why there aren’t a lot of cost synergies being discussed. If this deal were a true integration, that would be used as a justification for the price. Pay more with the understanding that you’re going to get immediate margin improvement because you don’t need to support separate teams and systems.

And yet, that’s not the plan. Additionally, the founding team is sticking around. That could simply be for a short transition period, but again, that’s not the feeling I got when I was listening to the call. Instead, it seems that the founding team will be around for a while. The press release announcing the deal supports it:

They will stay on after the acquisition, Mr. Mather as The Athletic’s general manager and co-president and Mr. Hansmann as its chief operating officer and co-president. The Athletic will be a subsidiary of The Times Company and continue to operate separately. Mr. Mather and Mr. Hansmann will report to Times Company executive David Perpich. Mr. Perpich will be stepping into a new role as publisher of The Athletic.

What does this have to do with earn-outs? It’s not fair to integrate the business, take away much of the control of the business from the founders, but then expect them to earn their purchase price. Instead, what’s happening here is the Times is providing support in the newly named publisher, covering the bills, but then incentivizing the founding team to achieve a multitude of goals to unlock additional earn-outs.

Those could be anything from revenue targets to reductions in cost to subscription numbers. Maybe it’s the goal that The Athletic is actually profitable in the next three years? Unfortunately, we’ll never really know.

It’s important because, if this is the full, up-front purchase price, I fundamentally believe The New York Times dramatically overpaid. There were no buyers for this business at this price. The gambling companies who are in an arms race for users decided against playing. All the other media conglomerates have their own sports asset. At $550 million, who was the buyer?

And things are way worse than I anticipated. According to The Times’ CEO, Meredith Kopit Levien, The Athletic generated $65 million in revenue in 2021 and had $55 million in losses. That means, its costs are $120 million a year. In 2022, there will be “slight improvements” in operating losses followed by smaller losses in 2023 and 2024 before it’s finally accretive.

Wow.

Alas, because I do not know the terms of the deal, I don’t want to opine much further on why it’s a good or bad deal. Maybe it’s only $200 million upfront and $350 million in earn-outs. Maybe it’s actually an incredibly amazing purchase price. We’ll never know.

But let’s assume that The New York Times doesn’t see this as a bad deal for specific reasons. And, instead of it just being momentum that got this deal done, there are concrete justifications. I have a few theories on why this deal materialized.

Advertising

The New York Times still generates strong advertising revenue. In Q3, digital advertising accounted for $67 million of the total $509.1 million in revenue. It’s not a huge piece, but it’s still a piece.

With 1.2 million subscribers, The Athletic is in a great position to gather strong 1st-party data that will make an advertising business possible. I know that the team has historically been resistant to advertising, but the reality is, there is revenue in it and I think The Athletic was wrong not to enter the ad market earlier.

How much revenue is up for debate, though. According to SimilarWeb, The Times got 339.25 million visits in December while The Athletic got 18.38 million—that’s about 5%. For example’s sake, let’s assume that ad rates were exactly the same at both publications. In a quarter where The Times earns $67 million in digital advertising, The Athletic could be expected to earn $3.6 million.

Annualized, that’s $14.5 million. That’s not an insignificant amount of money for a business that lost $55 million in 2021. This is crude math, but it does offer a path forward for The Athletic in its quest to cut costs.

The money could be greater than that. While the gambling sites passed on The Athletic, this is a great audience to run gambling advertising. The Times should lean into that aggressively and really try and sign some large, long-term agreements.

Cross-pollination

This is likely the crux of the entire deal. NYT’s Levien said, “The Athletic will give people another reason to turn to The Times’ products as a separate subscription or as part of the Times Bundle.”

I got into this discussion in the AMO Slack channel on Thursday. Essentially, The Athletic will likely remain at its standard price of $5-7 per month. But, for subscribers that get the entire NYT bundle, it might only cost a few dollars extra per month to get The Athletic. The Times wants to make the value of this bundle too good to pass up.

Then there’s the fact that there is “modest overlap” in subscriber bases between the two publications. That’s key to this deal. If few people that subscribe to The Athletic also subscribe to The Times, then there must be a belief that NYT can convert a decent percentage to a broader bundle.

How many is hard to predict, though. Is it 5%? That’s 60,000 people who might choose the bundle. Rather than generating $5 per month now on just The Athletic, could 60,000 people spend $25 every four weeks for the entire bundle (or an updated $28 every four weeks)? That math starts to look interesting. Those 60,000 go from generating $3.6 million per year to generating $19.5 million.

Maybe it’s not the full bundle, but instead, 20% choose to get the Games product. That’s 240,000 subscribers. To add this onto your subscription costs an additional $5 every 4 weeks, which adds another $14.4 million in yearly revenue.

And none of this takes into consideration anyone who might subscribe to Games that then decides to subscribe to The Athletic.

The reality is, when you offer a multitude of subscription products, users can pick and choose what they want to receive and, hopefully, increase overall revenue from the same user. This is why The Times talks about subscriptions rather than subscribers; one person can buy multiple things.

A push into local

Back in July 2020, Twitter’s Tony Haile wrote about how local news could compete with The New York Times. And this paragraph really jumped out to me:

Here’s the Times in 2020: it added 587,000 new subscribers in the first quarter. That’s almost three times the number of total subscribers to the Los Angeles Times. It’s more than 70 percent of the total cumulative subscribers to Gannett’s 260 media properties. The New York Times has more digital subscribers in Dallas–Fort Worth than the Dallas Morning News, more digital subscribers in Seattle than the Seattle Times, more digital subscribers in California than the LA Times or the San Francisco Chronicle

Go to Seattle and people are more likely subscribed to The New York Times than the local paper. That is truly incredible. One of the products that kept people engaged with local papers was the sports section. Except, now the Times has a massive, local sports section in its arsenal to offer people. I can see the marketing now. “Unsure if you want to give up the Seattle Times’ sports section for a Times subscription? Don’t choose. Get The Athletic for $3 more per month… Savings!”

But what if this is just step one to a broader push into local?

Between the NYT subscribers in Seattle and The Athletic subscribers in Seattle, could it hire a team of local reporters and create a Seattle-specific product? Would that encourage even more people to make the jump from the Seattle Times to The New York Times?

The Seattle Times costs $16 every four weeks. The New York Times bundle (before The Athletic) is $25. What if, for $30 per month, you get all of The Times, The Athletic, your local news, Games, and Cooking? This is the power of a bundle. How can the Seattle Times compete with that sort of offering? It can’t.

Haile was right when he said that The Times is competing with everyone. And The Athletic gives NYT a big leg up in that competition.

Conclusion

There is so much that remains unclear about this deal. Did The Times overpay? How much money will it earn from advertising? How can it grow its subscriber numbers with cross-pollination? Is this The Times crossing the Rubicon on its quest to acquire subscribers?

We don’t know.

But it’s a big move for The New York Times. It could certainly backfire. At $550 million, I think the company overpaid. If there are earn-outs of considerable size, maybe it won’t be so bad.

It’s interesting to see this saga come to an end. I have written many times about this. And while I’ll continue covering the integration and how The Times is growing, I’ll never again write about whether The Athletic is being acquired. I feel a little like I am closing a chapter in my life.

Congratulations to the team.

Thanks for reading. If you have thoughts, hit reply or join the AMO Slack channel. As always, I appreciate you being a member and I hope you have a great weekend.

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