August 14, 2020
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The DNA of a Company Matters And Breaking It Is Nearly Impossible

Who you are as a business matters. It explains a lot about the approaches taken to accomplish things and what the priorities are.

Each business has a DNA. When a business is small, that DNA can change (a term in genetics known as a mutation). As a business grows larger, though, it becomes increasingly difficult for that DNA to change. This is why we find large organizations often get disrupted by little ones.

In media, there’s a specific DNA associated with the business. It’s very much a people business. Day in and day out, your journalists are talking to sources, reporting on what’s happening and filing stories. Each day is a new day and you have to build the product all over again. It also doesn’t really scale without additional inputs.

Compare that to a technology business. For Twitter to add another million accounts, it doesn’t need to hire a linear number of employees. That means the business thinks about things in a different way.

When you run counter to the DNA of a business, it can begin to cause problems.

Let’s go through a few examples…

Revenue vs. Profit

The first is centered around the Vices, BuzzFeeds, etc. of the world, that raised considerable amounts of money. I’ll be honest… When I was first getting started in media, this was how I thought it was done. When I was working on an early business idea with a friend, talking about raising VC came up often.

As time went on and I worked in media for longer, my perceptions started to evolve.

But a light bulb went off for me when I was attending a Digiday event last March in Vail. The Atlantic’s President, Michael Finnegan, got up on stage and talked about how his branded content business was competing with other VC-backed media companies.

I am paraphrasing here, but the gist was simple… His sales team was running into resistance from some advertisers who would say that The Atlantic’s competitors could offer similar packages for much cheaper. As Finnegan explained, those businesses were ignoring the cost of business when selling those deals because they cared more about showing top line growth.

This fundamentally changed my perception of these media businesses. Revenue, not profit, is what powered their ultimate business goal: raising additional rounds of venture capital. Therefore, the DNA of those businesses was top line growth no matter the cost.

Now counter that with The Athletic. “If we have to, we let them [advertisers] walk away,” Finnegan said at the event. His company’s DNA was about selling profitable advertising campaigns. If they couldn’t do that, they wouldn’t sacrifice.

Imagine their shock when that venture money started to dry up. They suddenly had to start charging more, which meant they were now competing with other businesses that had always had a margin as part of their sale of goods. This need to become profit-focused versus just revenue-focused continues to be a problem, which explains why nearly none of them were profitable even before Covid-19.

The flywheel of cash

Let’s look at the opposite of the above narrative. The flywheel in media can basically be summed up with this wonderfully designed image:

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You start creating content, then build an audience using that content, generating revenue from that audience and then further invest in additional content.

When I talk about media businesses actually behaving like businesses—you know, actually having to bring in more money than goes out—this is what I am talking about. This is the core of healthy DNA in a media company.

Because of how strong this type of foundation is, it can handle more trying times. Let’s compare two businesses side by side as a good example.

Morning Brew did $13 million last year. It expects to do $20 million in revenue this year. Why was it able to do that even during Covid? Part of it has to do with the fact that the team, which I respect considerably, really focused on adhering to that flywheel. Now that the audience is much larger and they are generating considerable revenue, they can start to make bigger gambles.

Contrast that with TheSkimm. It got away from that flywheel by over-staffing. It had raised $28 million in total and expanded into a variety of new initiatives, none of which really did well. A company that was still primarily a newsletter had 130 employees when it finally let go of 20% in May. Morning Brew has fewer than 50.

When times are good, the flywheel is boring and slow. But when they get bad, having that grit that comes from relying on the flywheel for growth is fundamentally very important.

Trying to sell technology

I want to change pace and focus on the media companies that try to sell technology. For the most part, I do not believe that media companies should be building technology. There are a multitude of reasons, but a core one boils down to DNA.

I want to use Axios as an example, because I believe over the next year, we are going to start hearing stories about how much friction there is within the ranks.

Why?

Axios wants to be in the software business, but to everyone in the outside world, it is a media company. According to a piece from The Information published nearly a year ago:

Digital media publisher Axios is planning to enter a new business that includes selling software for helping companies create newsletters for their employees. The move comes at a moment when more media businesses are seeking to diversify their revenue through software sales.

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.

A year later, Axios is apparently still being incredibly tight lipped about those beta tests because we have heard of no deals being done. You could argue that Covid-19 interfered in sales. However, I have another theory.

Axios is 100% a media company. It generates over $20 million a year in digital sponsorship revenue. It employs 200+ employees that are by and large media people.

For it to suddenly shift and start down the path of trying to sell software is a hard pill to swallow. But let’s assume that it can be done. If it wants to be a software company, then let’s do it!

The problem will start to arise when it begins seeking more money from investors. How do you justify 200+ employees when you’re a software company? The margins on media are much lower than in software.

This is where the tension will start to pick up. What projects will gain priority? Those that can help the media business grow or those that will help software clients? Can Axios do everything? I don’t think so.

When Axios really starts going to market with these offerings—and a leaked story on The Information may have been that attempt—I imagine there will be cultural push back internally.

For the vast majority of other media companies that try to sell technology, this will be the same outcome.

The chimera is the exception

A chimera is a really interesting phenomena. Each of us has a single genotype that is spliced together from our parents. From time to time, though, a human is born with two genotypes. These are chimera.

In other words, these are beings that have two DNAs.

Very few companies can pull this off… In the case of being a media company and a technology company, there is only one that comes to mind.

The Washington Post is a chimera.

It has a very successful media business and it has a couple of very successful software businesses in Arc Publishing and the newer, but rapidly expanding Zeus.

Why was The Washington Post able to achieve this and not many of the other companies that have tried? The answer is simple: Jeff Bezos.

When Bezos came in and purchased The Washington Post for $250m, he brought a very different way of looking at building businesses. In an interview with the FT, former President of The Washington Post said:

Since taking control, Mr Bezos has asked Washington Post executives to explore how they can position the business to succeed digitally for the long term, Mr Hills said.

“He is asking a different question. He is asking the question of: ‘What can you do to have a great digital audience 10 years, 20 years from now?’” Mr Hills said. “Under previous ownership, the very reasonable question we were asking was: ‘How do we make money in the next two to three years?’

“This different orientation opens up a wide range of new opportunities,” he added. “That’s the interesting part of the story.”

There is no denying that software is a different process than doing news. Every day, the homepage changes. With a piece of software, it can take months or years to get the first version out.

But what Bezos effectively allowed was for the two to live side-by-side.

Think about it… In 2015, two years after Bezos purchased The Washington Post, the company spun up a skunk works division called research, experimentation and development (RED) to help the company get rid of its over reliance on third-party ad tech.

In 2019, The Washington Post announced Zeus, which was its advertising technology that it was now licensing to companies. This was technology that was already powering The Washington Post’s ad business, but now any other media company could come along and buy it.

It took years for the product to get to the point that it was ready to be licensed externally, but that doesn’t matter to The Washington Post. It’s a chimera. While it is operating its daily media business (profitably, mind you), it can also invest in a long-term software business.

Now look… This piece isn’t meant to be a fan boy expose on Jeff Bezos. The dude has like 188 billion reasons not to care about that.

But it helps to look at it through the lens of DNA. Operating within a specific genetic framework is fundamental to a media business being able to survive. But more importantly, you need to operate in the right genetic framework.

If we look back at my first example, all of those VC-backed media companies were operating within their DNA of revenue over profit, but that came back to bite them when it came time to act like a real business. Compare that to my second example of the flywheel effect of growing. This was a much healthier approach.

Chimera are rare. In media, The Washington Post might be the only real exception to the rule. When it comes to being a media company and a technology company, it can do both well. But it takes a very particular type of person to support that.

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