When Diversification Can Hurt The Business

One of the oldest pieces on A Media Operator in August 2019 is about the importance of diversification. Pacific Standard had grown overly dependent on its single benefactor and when that money got pulled, the publication had no chance to survive. And so, a core tenet of operating a media business is that you have to diversify.

However, the need for diversification can oftentimes confuse operators and introduce problems down the line. Just because you need to diversify where your revenue is coming from does not immediately mean that you need multiple different types of revenue.

For example, if I told you that a business was 100% advertising-supported, but it served 25 different industries, would you say that it was a diversified business? Many might say no because the revenue is all advertising, but I would actually argue that it is diversified. Unless we have another financial crisis, not every industry is going to be hit with a recession at the same time, so ad spend might not be tied together.

You could argue that this is why businesses like Endeavor Business Media and Industry Dive have been able to weather the turbulent ad markets over the past year and a half. The bulk of their revenue is coming from their partners’ marketing budgets, so while they might not be overly diversified that way, they are diversified in who the advertisers are. One publication might dip, but the whole network can continue to survive.

And so, it is very important to understand exactly what you are trying to accomplish when it comes to diversification. If done incorrectly, it can actually hurt the business because it distracts.

I’ll use A Media Operator as an example. I have three lines of business: advertising, subscriptions, and events. From a top line perspective, the event is the single biggest revenue driver for my company, but because I am a one person operation, the margin on ads and subscriptions is obviously significantly better because I am going to run the newsletters one way or the other. I am thinking about what I need to accomplish for A Media Operator next year to make it significantly more successful. Here are a few of those things:

• Expand the number of advertising partners running on the site to diversify
• Execute on another AMO Summit
• Build out a complete user funnel to increase single subscription conversions
• Sell more group subscriptions

So, I’ve got one priority tied to ads, one priority tied to my event (which has a ton of tasks within it), and then two priorities tied to my subscription business. Which should I do first? Since I started as a subscription business, I should probably do that, especially since each incremental paid subscriber goes straight to the bottom line. On the other hand, the event is the single biggest revenue driver for the business. How do I prioritize which of these three things to do, especially considering I have to execute on all three?

You could look at the diversification of A Media Operator and argue that it might be a liability. An operator I was recently talking with about this said, “the mistake media companies make is they get distracted. They should focus on one thing and do that to the best of their ability before trying to do other business models.”

Adam Ryan wrote a really great, in-depth breakdown about the first two years of Workweek. And in it, he wrote:

My other significant mistake was not setting the team up for success by having us go too wide too fast. Workweek didn’t have an easy “copy-and-paste” model. So, for a while, I felt compelled to say “why not?” instead of “why?”. This attitude allowed us to push boundaries that most would have avoided, but when you find the winning formula, it’s time to double down and focus. I missed that window of decision-making for a period of time in 2022.

In 2022, we added a new creator every ~three weeks for five months. We also were launching new products and initiatives almost every other week. It was an insane pace. It’s a testament to our team’s work ethic and ability to pull this off.

When I first wrote about Workweek, I wrote:

The immediate concern I have is the niches. It has a publication about cannabis, fintech, healthcare and, my favorite, media. These have absolutely nothing in common. That makes the business harder for two reasons. First, there is likely very little audience overlap. Maybe there’s some healthcare and cannabis crossover, but it’s more tangential than truly complementary. Second, there is little sponsor overlap. Are media advertisers and fintech advertisers actually the same?

In an effort to diversify and launch as many different creators as possible, Workweek overcomplicated the business. After shutting down a number of creator publications over the past week, the vast majority of Workweek is now focused on content for sales & marketing. That is a much more narrow focus and gives the team an opportunity to excel.

Update: After publication, Adam Ryan qualified a couple of points that I think are worth mentioning. First, none of the creators that were cut was to get out of specific verticals. They were simply not growing or lacked good unit economics. Second, while I focused on the bulk of the business being sales & marketing, Ryan explained that only 45% of Workweek’s revenue comes from those categories. In no way did I intend on criticizing Workweek’s business here; focusing on what works is always the right decision and think the changes that Ryan explains in his tweet articulate the right maturation for the business going into year three.

And I think this is something that more media businesses need to take very seriously. Before you start spinning up numerous new business units in the quest for diversification, it helps to stop and really make sure that you’ve done a good job with the primary one. That means, for a subscription business, making sure those systems are cranking before then moving onto something else. One of the biggest criticisms I have of many of the failed media companies of the past decade is that they were like a dog with a squirrel, constantly changing their attention. Focus and operational excellence was always missing.

When, then, can you start to diversify into new business models?

I think the answer is, ultimately, when you can dedicate the necessary resources to it and it can be done profitably. For example, imagine you’re an ad business and then decide to introduce a subscription component. The simple answer is, “just throw up a paywall.” But we all know that a truly successful subscription business requires a complete marketing operation that is focused both on the acquisition of subscribers as well as the retention. How much does that operation add in costs to the business?

To make matters worse, how much does the introduction of this subscription business distract from the core advertising business? Are you trying to save on your investment, so people that were once just trafficking marketing campaigns for partners now also responsible for running marketing campaigns for subscriptions? Whether you realize it or not, the partner campaigns are going to suffer, which might result in an increase in partner churn.

There’s also opportunity cost risk. Even if you could make the subscription business profitable, would it be the most profit obtainable? Compare that to expanding the ad business with new types of partners. Would that be higher a margin because you get efficiencies of scale (i.e. the same ad operations team to support more partners)?

None of this is to say that diversification is not important. It obviously is. But even with things that are good for you, there are inherent risks. If you do not expand intentionally, you might wind up overcomplicating things. It is often better to be an amazing business at one thing than an average business at three things. I hedge with the word often because sometimes, the ad markets completely fall out from under you. And in that case, being diversified would be very helpful.

Thanks for reading today’s AMO. If you have thoughts, hit reply or join the AMO Slack. I hope you have a wonderful weekend and see you next week.