Vice and Buzzfeed: Media businesses faced with the economics of being media businesses
Redundancies across the digital publishing landscape have affected hundreds of staff over the past few weeks. Ben Shepherd argues Buzzfeed and Vice both raised too much for the businesses they are.
Last week was a bleak one for many journalists and non-content staff at some of the most prominent digital media businesses not named Google or Facebook.
Layoffs impacted staff at Vice, Buzzfeed, Verizon/Oath and Garnett and had many (including the New York Times) dramatically asking what went wrong, as these new upstarts made moves that so far had been the domain of the incumbents they were meant to displace.
NY Times headline – 1 February, 2019
In all the rush to diagnose what went wrong, most of the analysis has glossed over four areas I think are key reasons behind the current state of affairs, and four areas any “new media” business needs to sort if they are to move from a funded disruptor to a profitable business.
The journeys of Buzzfeed and Vice in particular provide the best colour behind these.
- Both raised too much money for the businesses they are
In the middle of one of the most seismic shifts in advertising spends we have seen (the move to addressable, programmatic advertising) here are two entities completely dependant on good old advertising to generate the entirety of their revenues. Neither had any meaningful direct to consumer revenue (ie. subscriptions) and neither had any sort of meaningful recurring revenue (more on that later). So you have two businesses, that operate commercially awfully like every other media business, somehow raising huge rounds with an expectation they would defy the entire market commercially.
The volume of funding was also at levels rarely seen – levels that are generally associated with software businesses that have recurring, subscription revenue and scale benefits. Vice and Buzzfeed have neither – as they scaled revenue and users their costs followed in a straight line (or worse). However their funding resembled two funded software businesses that made it to IPO.
Buzzfeed’s funding resembled Box’s – and Vice’s funding resembled Facebook’s.
It’s been 11 years since Buzzfeed took its first round, and there’s been around $100m of financing that is now five years old. Box at the time of listing (2015) had about $158m of funding that was five or more years old, and it crawled to an IPO nine years after its first round.
For a company not generating a profit, an exit is the only way for an investor to realise any return on their investment. What’s more, Box is a subscription based SAAS product with both consumers and enterprise revenue streams. It’s annualised return per customer is higher than a media business and for much less work – with lucrative renewals providing revenue streams year (or decades) on.
Vice raised levels of funding that look more like Facebook. Facebook went from first round of funding to IPO in 5 years, and ultimately only raised $555m in proper funding (the big $1.5b round was very close to IPO).
Facebook was growing at weed-like levels (100% yoy in terms of revenue and users) and was fundamentally changing the world, hammering their raised funds into more and more coders and engineers and R&D and capital/acquisition investments and a dramatically enhanced product. Vice has raised at the same levels, yet as a mediaco remains incredibly similar to what it looked like in 2013 – effectively using funds for operating expense.
2. People made the mistake that they weren’t media companies
Buzzfeed was positioned as a software company. Vice as a lifestyle brand. Both were and still are media companies.
They are media companies in such that they create content, place advertisements around it, and rely entirely on advertisers spending more money with them than their cost base in order to generate a profit.
As mentioned, in my opinion neither had the hallmarks of software – recurring revenue, self-serve model (or at least light touch) and a quantifiable technological moat (or at least advantage).
Not being media companies meant they didn’t need to subscribe to the valuation principles of media companies. For instance, Vice was valued at 8-10x revenue. Buzzfeed at 6-7x. At the same time the New York Times was trading at around 1.5x revenue (right now it’s about 3x) and domestic media companies such as Seven West Media trade at 0.5x of revenue.
The New York Times is worth looking at more closely as it is now resembling a SAAS business more than an advertising one. 60% of its revenue comes from subscriptions and this amount is now over $1b annually. It has global scale and a differentiated position in market. If anything the NYT resembles the modern digital media business as it has a global customer base, larger recurring revenue than ad based ad-hoc, and adjusted operating costs.
Buzzfeed and Vice trading at Google and Facebook-like multiples was a mistake of optimism. Google and Facebook are successful enterprise SAAS businesses that are funded by ad budgets but generate consistent spending on the whole month on month from a majority of customers. They also have scale and systems built around them that mean their customers have no alternatives.
3. Raise more, spend more.
Higher capital raises meant higher operating costs – staff, offices, facilities, sales, marketing etc. This allowed both businesses to operate at levels that their revenue wouldn’t normally allow them to.
The idea generally is revenue will grow at a level commensurate with the higher operating costs, but what normally happens is as revenue grows, operating expense grows and there’s never a time when the level is restored to balance.
The layoffs are simply a way of trying to cut operating expenditure more in line with the levels of revenue. But the question is: can revenue be sustained without this inflated level of resource? This is the big question for both.
It also indirectly implies both Vice and Buzzfeed planned IPOs and investor exits by now that haven’t eventuated. This could make raising funds troublesome at the current valuation (potential for a down round) and in the current market merger and acquisition is unlikely. Google/FB/Apple/SFDC are out as they’re not habitually buyers of moderate growth media companies, Yahoo/AOL/Oath out as Verizon rapidly backs away from media, Disney/Fox/NBC out as their focus moves to OTT. which leaves a limited list of overseas obscure investors and private equity flippers.
The hope will be to cut costs, minimise burn and ideally generate some sort of profit to fund the future build. Like pretty much all other media businesses – legacy or otherwise.
4. Both Vice and Buzzfeed are growing at an impressive rate
There is nothing “wrong” with growth rates of 10-15% per annum in terms of revenue. This puts both Vice and Buzzfeed in the top 1% of media “winners” in terms of positive revenue movement. The problem is 10-15% isn’t 30-50% that was expected.
This isn’t a slight on the journalists or the content, or even the sales teams. They are strong, above market, growth rates. It is just in the climate at which they funded themselves these figures can feel like a failure. On the contrary both organisations are finding ways to improve their share of attention with consumers and share of wallet with advertisers.
Ben Shepherd is a director at PwC. This piece first appeared here.
And so it becomes clearer by the day that these “digital disrupters” were never any such thing ( despite being funded as if they were). Their business model – create content, wrap ads around to monetize – is no different to the traditional
Publishers whose model they were supposed to be disrupting. (Albeit with a few more tricks up their sleeve to pull in audiences). And they are coming up against all the same challenges traditional pubs have trying to make this model work . Sympathies to the people losing their jobs and to the masterminds running these businesses : welcome to reality
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Spot on assessment .
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This is a great article which highlights the fact that investors overvalue these unicorn (not just media) companies like Snapchat, Spotify, Uber, Vice and Buzzfeed which do not have a sustained business model, lack viable/profitable product extensions and do not have alternative revenue streams. Investors only hope, is as you pointed, is for these companies to bought out or to go public with an IPO. Even if they do go public, there is a risk of the share price going down ie Spotify/Snapchat. These companies have huge consumer bases and big data at hand, so why not use it to extend the business beyond its core offering.
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Ben with more stellar, data-driven analysis. Love it!
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Ben, I’d have a fifth underlying factor.
Back in the GFC years the Fed reduced interest rates to zero in December 2008. They then kept them there until 2015 even though the US recession ‘officially ended’ in June 2009.
That is, the cost of borrowed money was in the same postcode as Zero. So why not borrow truckloads?!
In December 2015 the rates were raised to 0.5%, and again in December 2016 to 0.75%. Definitely an inconvenience but still manageable.
In March 2017 they were raised again to 1.0% – the same as in October 2008. They moved again in June 2017 to 1.25%, then in December 2017 to 1.5%, then in March 2018 to 1.75%, to 2.0% in June 2018, to 2.25% in September 2018, then to 2.5% in December 2018.
Digital disruptors that built there business on massive borrowings and investors all of a sudden are seeing a line on the P&Ls – Interest Payments – as the fastest growing line, while on the Balance Sheet the Debt Liability is not moving anywhere (apart from maybe up as many had interest rate rollovers on the facility).
Now these digital disruptors are feeling the heat of the POTUS disruptor with no visible horizon f when relief may occur. So, jobs go.
What
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Excellent analysis, Ben. I’m staggered that investors were somehow convinced to value them both like a saas given that the core product experience is obviously and entirely reliant on ongoing manual effort and traffic from FB. The 15%-40% difference in revenue growth expectations could be the extent by which they were impacted by FB’s algorithm change last year. Publishers like these, that rely on FB for 50%+ of their traffic are vulnerable to the smallest changes.
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Anyone who says they know what’s going to happen with the media is an idiot or a liar.
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I resent that Rutegar!!!
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I just knew that someone was going to post a comment like that.
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great article, thanks Ben. really enjoying the trend at mumbrella to do more journalism with more data, and fewer thinkpieces and outrage magnets. it’s a brave move and I really appreciate it.
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Hi John – definitely businesses that borrowed money via debt would be feeling some sort of interest creep in terms of liabilities. These two mostly raised via equity funding so there’s no interest/principal pay back required in the sense of borrowings. However – there is clearly pressure from the equity holders to turn operating losses into black ink in order to either pump valuation or generate some sort of dividend.
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Plus their product is shyte, and (particularly in the case of Buzzfeed) is identical to that which can be sourced for free from media companies like the ABC (which has the advantage of never-ending taxpayer funding).
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