Digital Media’s Future Lies Beyond Ads and With Direct Consumer Revenue

Owners are no longer willing to fund these unprofitable outfits

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Owners have shown a new unwillingness to fund unprofitable digital media companies in perpetuity.
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The long-predicted digital media consolidation has finally come to pass. More than 100 online publishing companies are on pace to be sold this year, highlighted by the recent purchases of Refinery29, PopSugar and New York Magazine. The impetus for the sudden deal velocity is the direct result of a newfound profit imperative. The optimistic period when digital media companies successfully raised millions of dollars in venture capital funding with the promise of delivering billion-dollar valuations has given way to shrunken ambitions and a focus on the bottom line.

It took years for reality to hit, but in recent months, owners have shown a new unwillingness to fund unprofitable digital media companies in perpetuity, especially as it has become clear that the ROI will be smaller than originally expected.

As a result, a handful of digital media companies, out of ideas or capital required to achieve profitability, are throwing their lot in with larger entities they think can drive greater shareholder value. The consolidators include Vox, Bustle, GroupNine and IAC’s DotDash. These companies are placing bets that operational excellence in the realm of programmatic advertising, content distribution and technology platforms will deliver savings that turn the acquired entities into profitable enterprises. And since many of the bets are being made in stock rather than cash, the bets aren’t high stakes.

It’s a good plan and one worth rooting for, owing to the high-quality editorial content, visually stunning products and impactful brand integrations these companies are committed to. But dangers persist.

The inability to execute on this plan will force painful decisions down the road. Some of the companies further along this cycle that were acquired in previous years were forced to make these decisions last month.

The former Gawker properties were sold to Univision in 2016. After adding even more brands to the portfolio but failing to make the whole profitable, the collection of sites was sold earlier this year to private equity firm Great Hill Partners, which renamed the company G/O Media. Since then, the company has laid off 25 employees, adopted a more aggressive monetization stance and announced the shuttering of political news website Splinter. The changes are working, as it achieved profitability in the third quarter for the first time in years.

Another company ahead of this cycle starting to face up to reality is Quartz. Founded inside of Atlantic Media in 2012 and lauded for its journalistic excellence and innovative design, the company was sold to Japanese financial information company Uzabase last year. Less than one year later, the company’s public filings revealed Quartz lost $16 million on $12 million in revenue in just the first half of the year. Quartz co-founder and editor announced his departure in what will surely be the first of many moves made to stop the bleeding.

Equally devastating is the turmoil roiling Sports Illustrated. The venerable brand was sold earlier this year by Meredith to Authentic Brands, which quickly licensed the rights to operate the media entity to a company called The Maven. In order to pay off the $45 million it paid for the license, The Maven announced that it is laying off 40% of the SI staff in favor of a contributor network model.

Hiding in this tumultuous landscape do remain a few spots of unadulterated optimism. Food52, a home chef content site that morphed its focus into a direct-to-consumer homewares retailer, sold a majority stake to The Chernin Group. Atlas Obscura, the wonderfully offbeat travel publisher that has expanded to offer its users curated trips and experiences, raised $20 million from strategic partners, including Airbnb.

What these companies have in common is that they’re ahead of the curve in controlling their own fates. They successfully diversified away from an advertising-based model in favor of building out direct consumer revenue lines.

The new overlords at Refinery29, PopSugar and New York Magazine could take a page from these two upstarts. Focusing on direct consumer revenue while maintaining the ad business would help them avoid the same painful fates of some of the other properties that sold before them.

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