Polygraph Media Blog

The Future of News is Now, and it's Tiger Teams

News media has always been an interest to me going back to my time as sports editor of my high school newspaper, The Northwestern, in 1991.  I was deeply involved, maybe even instrumental, in converting Stratfor from a consulting business to a web publisher in 1999.  And our first go-to-market strategy for Notice Technologies in 2009-2010 was to partner with local newspapers and the families that owned them.  So I have a professional curiousity about local media that I can't quite shake, even if it isn't the best business decision.

The other day, I read an update posted by my friend, Scott McKay, Publisher of The Hayride -- a Louisiana-based conservative blog that covers Louisiana & national politics.  Scott was updating his audience on traffic that The Hayride has earned, relative to its major media competitors in Louisiana.  You can check out his post here... it's fascinating.

Scott has gone from nothing to being the #2 most read media property in Louisiana in just two years.  Let that sink in for a moment.

From nothing to being #2 in his market in two years.

Some of you might say, well... I'm sure some Conservative think tank is funding Scott and his efforts.  Nope, think again.

Growth of The Hayride has been ENTIRELY organic, driven by a small tiger team of people insanely focused on developing content interesting to its audience.  And it really hasn't made significant adjustments to its original editorial voice or content.  They've stuck to it, and in turn developed a large, growing, and apparently loyal voice.

Looking around the media landscape, The Hayride is not at all an anomaly.  This era has been more or less defined by the emergence of either bootstrapped or modestly funded (initially) entities that have grown their audiences.  The Drudge Report was probably the original -- one guy curating content for the world's edification has turned into a profitable powerhouse.  Stratfor was one in the late 1990s and continues to thrive despite its recent hacking attack.  The Huffington Post and Breitbart emerged in the middle of the last decade and continue to roll.  Mashable is doing the job today in the tech/social media space.  Henry Blodget's Business Insider is reporting on business and stock market issues, but with a far smaller staff than say CNBC.  At the local level, we're seeing companies like Culturemap, The Magic City Post (Birmingham), Buffalo Rising, The Texas Tribune, and countless others challenge incumbents.  In traditional media, even the venerable Seattle P-I has moved entirely to a Web model and streamlined their team several years ago.

What's the lesson here?  Traditional media reporting is tough, labor intensive, and expensive. Opinion and analysis, on the other hand, can be a lot more inexpensive.  It doesnt' require travel, developing relationships, covering a "beat", or doing deep investigative reporting in person.  It is, however, very tough to do on a consistent basis.  Those properties who have a supremely talented Publisher/Editor who can pump out 5-7 articles per day *and stick to it* are the future winners.  We've seen it time and time again, and we shouldn't be surprised when it happens again.

And if anything, we're in an era where, counterintuitively, less money provides better outcomes for winning niche markets.  The future is being built from the ground up by tiger teams.  It's a long term play.  But if I were building the media conglomerate of the future, I'd find a way to align with or acquire a network of emergent local and vertical blogs.

Groupon, the S-1, and the state of the group purchasing market

A few quick thoughts on group purchasing this morning.  We have a pretty unique perspective on this business because our first launch was a local coupon platform.  We considered adding group purchasing to our product, but we did not initially do so for a few reasons all related to the fact that we didn't think the business was sustainable.  First, we thought the discounts were too high for most small businesses to bear long-term.  Second, there was no apparent long-term competitive advantage as the technology and business process could be easily replicated.  Ergo, millions of dollars would have to be spent on customer acquisition in a business where competition would drive down operating margins.  i.e. bad and worsening economics = no thanks.

Several things happened throughout 2010.  Millions of dollars were being earned by Groupon, LivingSocial, and the hundreds if not thousands of blatant knockoffs built by enterprising developers around the world.  It wasn't easy answering questions about why we didn't take advantage of this opportunity, and we were starting to question ourselves in the process.  Even our partners started to ask about group purchasing more and more as the "lore" of "millions" of "easy profits" became legendary.  We reluctantly added group purchasing to the Lasso platform in early 2011, but not without the reservations that we always had about the economics of the business.

Around that time, we had also been brought in to talk about group purchasing with a few companies who were not making the money they expected to make with it.  We pretty consistently heard problems related to the economics -- either customer acquisition was tougher than expected, the merchants were pushing back, or both things were happening.  I remember saying sometime to someone (can't remember who) in the early spring that the worst job in the world was being an oppressed group purchasing salesperson.

Now after reading Groupon's S-1 in detail, I am a little stunned at just how bad the economics of group purchasing are playing out even for the "market leader".  I thought second-tier competitors faced a much bleaker situation than the market leaders.  But if Groupon is suffering, who isn't?  Maybe the entire group purchasing industry is just a big money burning machine.

Folks in the local media business have taken a lot of criticism over the last decade for failing to modernize their businesses -- more or less for focusing on revenue and not on new business models.  That criticism is pretty fair, but it is what it is.  Local media companies have operated profitably for many years by doing the same things -- so why would they change significantly especially when executive management just has to keep chopping wood to sail into the sunset for a very comfortable retirement.

But here's what's a bit horrifying for technology folks -- critics at local media companies may just be correct to ignore group purchasing.  Unless something changes pretty significantly, group purchasing is headed down a path of other overhyped "technologies" that just don't make economic sense.  Group purchasing was considered to be a "no-brainer" just a year ago.  Now after reading the S-1, do you still think it is a huge opportunity.

Consider a few numbers from the S-1:

• Groupon lost $420m in 2010 and $117m in Q1 2011.
• Groupon earned $713m in 2010 (far less than the $1-2 billion reported elsewhere), but did earn almost $700m in Q1 2011.
• Marketing + SG&A was 178% of Gross Profit in 2010 and 143% in Q1 2011.  Yowza.

So all the numbers say at present is that you can make billions of dollars in revenue if you spend billions and more.  I can walk around my neighborhood and give away $1.25 for $1 all day long. :-)

But in all seriousness, the S-1 was really the first time the general public got a look under the kimono of the world's leading group purchasing provider.  Here's what it told me:

1. Groupon can't continue as is forever.  They'll have to get more efficient and/or eliminate some competition.
2. They'll have to become considerably more innovative.  Groupon Now is one such innovation, but even that will take considerable marketing funds and great execution to work.
3. Being a group purchasing provider is a really terrible business at scale.  I don't doubt that smaller companies can be profitable winning a niche, but local group purchasing done at scale all around the world is tough especially as competition intensifies.
4. Group purchasing, as it currently exists, cannot win the local advertising market.  In a business where nobody involved in the transaction truly wins -- the provider or the local business -- interest will fade.
5. New media companies that thrive in the coming decades will effectively combine content, local advertising, and services for advertisers as an agency would.  I particularly like the work that our partner, Culturemap, has done with their "hybrid" new media play.

Deal data has always been the name of the game -- and will define the future of this business.  This is why I like aggregators who rise above the fray -- Yipit is one such company.  It's also why I think Facebook has gone the aggregation route as well.  More to come on this as it all plays out.

AOL, the Huffington Post, and the assault on local

Today is a watershed day in new media, whatever it is that we're calling it in 2011.  Why?  Because AOL is now truly doing something interesting in the content business by buying one of this cycle's best content properties, the Huffington Post, for $315 million.

Sure, AOL spent 40% of its available cash on the property.  Yes, there will be a culture clash as HuffPo is integrated into AOL.  And of course, we've heard of issues with AOL's integration of TechCrunch.  

But this isn't the same AOL that distributed tons  of these discs via mail for more than a decade.  It's a company led by someone with experience at a market leader who has a vision for the future.  That vision requires that AOL repeatedly produce profitable content -- something that old media has certainly struggled to do lately.

The TechCrunch and now HuffPo acquisitions, however, tell me that AOL has determined that it is a better strategy to buy great properties than to build them.  Why?  I'd posit three reasons:  1) these are properties that have discovered how to create quality content sustainably, 2) these properties make money, 3) AOL's experiments with Patch and Seed likely have not succeeded as they've hoped.

But the last reason isn't necessarily a criticism of AOL.  If you look at business across the United States, one megatrend that we're seeing is that big, relatively antiseptic brands are winning the war for $$ and mindshare against local businesses with local/regional flair.  Like it or not, eyeballs and attention flock to Chili's, the HuffPo, and the NFL instead of Billy Bob's Bar & Grill, the Smalltown Gazette, and high school football.  The American experience is homogenizing right before our very eyes, and as such brands that specialize in products with mass appeal will likely win in the long-term over local providers that struggle to effectively reach a local audience.  Niche businesses will survive, but a vast majority of local businesses are going to continue to suffer as the local experience gets more corporate.

I'd argue that these trends are driving the content business and will continue to do so.

We will see what happens with AOL's play -- one that puts it in Demand Media's neighborhood and clarifies competition with old media.  It's on.  I think the early advantage is in companies like AOL & Demand who are driven by the unit economics of creating content far more than old media as a generalized whole.

Old media has two other distinct disadvantages: 1) significant overhead, and 2) traditional "journalistic" standards.  But as an industry it is much, much larger than AOL or Demand Media and can still compete if meaningful changes are forthcoming.  And you can argue that neither AOL nor Demand Media have quite yet figured out how to scalably create great content for profit.  It will be an interesting battle to watch in coming years.  Consider also that of the major tech players only Apple, Yahoo, and Amazon have made major content plays.  Are Google, Facebook, and Microsoft next to jump in?

It's possible that as old media continues to be disrupted, that content is the next bubble.  We'll see how the industry responds.

Lessons Learned from the SMB "segment"

Having worked in the SMB segment with a variety of newspaper partners over the last six months or so, I thought I'd share some thoughts on what we've learned from the small & medium business "segment".  I use air quotes for the "segment" because it is more like a catchall... a bargain bin at the grocery store where you're as likely to find onion powder as an overstock of mango chutney.

Lesson #1 - small and medium sized businesses really are not a "segment" but rather share the economic commonality of being more or less owner operated.

Many of these small businesses are successful outside of the context of the Internet.  The business owner opens a retail store on the right corner.  A restaurant has the best salsa in town.  A plumber is on call all day, every day, and has a great reputation for providing excellent service even on holidays.

Lesson #2 - Internet marketing makes a lot of sense for small and medium businesses, but it isn't what built many surviving businesses.  So it is a "nice to have" and not a "must have" for many established SMBs.

New businesses have a lot to gain by using social media and internet marketing as promotional vehicles.  There's a reason mobile food trucks use Twitter aggressively.  New businesses get a ton of response from things like Groupon.  Awareness is the sweet spot for SMB internet marketing and social media today because the business owners are motivated.

Lesson #3 - Motivation matters, and it's a lot easier to sell an immediately effective solution to a needy customer.

Finally, simplicity and ease of use matter.  For many SMB owner/managers, the ease of use bar is extremely high and probably beyond what most software people should expect.  This brings me to an interesting point -- it is almost impossible to market "software" to local businesses.  If you ask a SMB owner/manager what they want, odds are they won't tell you that they want "software".

As such, our business continues to evolve... smarter and more effective than ever.

 

My 2010 Advice for Newspapers

For those of you who know any history about our business, you probably know that we originally worked to build a way for local businesses to create their own coupons and do their own marketing.  But we realized very quickly that our job was different than we thought - the technology was one part of the problem.  The other part of the problem was putting those offers/discounts in front of large audiences of people.  That thought process is what ultimately pointed us in the direction of local media and purposefully *away* from creative disruption.  More on that in a later blog post.

As we pursued local media properties and newspapers, we secured a few deals and have launched our local offers/discounts platform with several major newspapers -- most notably The Dallas Morning News, The Milwaukee Journal Sentinel, and American Consolidated Media.  But as any other startup experience, that has kicked off more learning and insights that I thought I'd highlight today.

First, a caveat.  Local newspapers are very much like any other industry that is facing disruption.  Threats come in a wide range of forms -- companies, movements, individuals who have some iteration of "self-publishing" capability but don't need a ton of profit (and sometimes no profit) to be motivated to create great product(s).

It is in this creative disruption sense that the smallest, most under-the-radar companies in the world are driving innovations in publishing today.  It is probably why the Knight Foundation recently boosted its funding of new innovation, why "super angels" are the new big thing in venture capital, and why folks like Y Combinator and other small incubators are centers of innovation.  Other people in the blogosphere have covered these phenomena in much more intelligent and much better detail over the last 18-24 months.

Anyhow, newspapers (like other big businesses) don't rush to support innovation because they can't just aggressively turn a dollar into a dime & do so enthusiastically.  So their moves in technology are incremental, and not revolutionary.  And their attempts to do things revolutionary just quite frankly miss the mark.  I'm referring to things like experiments with pay walls, the creation of a "me-too" mobile app strategy, and relatively meaningless partnerships with location-based services.  All of it reinforces the opinion that many people have that newspapers don't really encourage true innovation and that senior leadership typically doesn't understand the Web in a real, intrinsic way.

All of that said, if I were running a paper or in the executive boardroom, here are a few things I'd consider deeply:

• Understand that the business is "local" and not "news" or "content" -- big misconception in most local media companies I interact with.  As late as the mid-1990s, the content was the key to the business.  Fifteen years later, the key is relevance to local audiences -- people, businesses, etc.  Content can be found anywhere.  Great content can be pushed to you by friends, the "curated Web", Twitter, etc.  The key for local media in the future is staying relevant in the local market.
• Recalibrate human resources to skilled Web & mobile personnel -- most newspapers have 10, 20, maybe even 50 writers per developer or Web/mobile product manager.  These same papers may have another 50 people in the supply chain per developer.  Guess what?  The supply chain is different now.  The winners will be people who understand technology, not the route of a paper truck.  Skilled labor is key, but I don't see a lot of urgency in papers to fix operational inefficiencies that put all the pressure on a small number of people to help modernize the business.
• Emphasize social media for brand extension, but not direct selling -- some papers are panicking about their social media offering and are scrambling to find monetizable ways to reach consumers and businesses.  Local media companies have a role to play to help local businesses navigate marketing in 2010 and beyond -- and some of that may involve social media.  But local media companies that seek to monetize social media directly from consumers quite frankly just don't quite understand the nature of the medium and the ill will that will be created by trying.
• Accept the iterative imperfection of the Web -- huge disconnect here and likely a legacy issue tied to years of print deadlines.  Nobody likes mistakes, but programming isn't exactly print layout either.  Give everything its due -- folks at newspapers stand behind their editorial process and the # of people who have to be involved in creating content.  But the same people don't give the same respect of the programming craft, and they certainly don't fund it adequately either.
• Stop making excuses for salespeople -- everyone is being forced to get smarter.  So should your sales reps.  Sure, the cash cow is & remains to be selling print ads to car dealers and other folks with big pockets.  But that business is getting weaker and weaker every year.  The successful sales rep of 2020 has a different suite of products and is involved in a different, much more consultative sale than the rep of 2010.

I say all of this at risk of upsetting a few friends here and there.  But it's my outsider perspective looking into an industry that still has a lot of resources and brand affinity even in 2010.  I don't think newspapers are by any means dead, but the best ones are already iterating, learning, and modernizing.  Are you?

The Travelling Road Show

The job of a CEO is never easy -- but it's been particularly challenging over the last few weeks.  Travel has picked up significantly as we get more and more traction.  Our core business -- helping local newspapers and new media sell relevant advertising systems to small and medium businesses -- is booming.  We've had a few soft launches this summer with more in the works right now.

Overall I think that many local media companies and newspapers are beginning to realize that the SMB segment is indeed a moneymaker.  It just requires a few things to work well:  product, price, value for the consumer & local business owner, and probably most importantly -- sales team engagement & readiness.  In that sense, our engagements with local media have been a TRUE partnership -- requiring and depending on both us and the partner to execute.

Anyway, I've had a few customer/partner visits and a lot of engagement with local business owners around the country over the last month or two.  I won't use this forum to share all the feedback from them, but I can tell you that the advances of the last few years (self-serve, social media, group purchasing, etc.) have really empowered business owners.  I don't get the "fear, uncertainty, and doubt" I got when we first started talking to local businesses back in 2004!

Newspapers & Local Media Fast to Adapt?

Interesting article today from The Economist about how newspapers are modernizing operations, making cutbacks, and gearing up to compete in the 21st Century.

Popular opinion is that local media has not adapted to new technologies.  Certainly, reaction has been slow in a lot of places.

That said, this article communicates a contrarian point that jives with what we're seeing in the marketplace.  Old media has certainly awoken to the realities of new media, and are now aggressively adding new offerings to their product mix on both the editorial and advertising sides of the house.  They're running leaner and stronger, and I expect that (like the purported demise of the music business) we won't see the fall of local media either.

It was only a matter of time for big media to begin to make sense of it all, and we're just now seeing it.  Expect more here.

The Disruption of Publishers & uncool annuities

I'd like to think that I'm gaining a pretty interesting perspective on the disruption of the publishing industry.  As I've pointed out before, I was instrumental in the conversion of Stratfor into a web publisher in 1999.  I got a crash course in Internet Advertising in 2002-2003.  I've been the tech editor of one book and the writer of a second book over the last two years, so I've met a lot of folks in the book business.  And over the last year, I've been talking with folks in the newspaper business at a variety of families, big and small.

I think Marc Andreesen had some great yet unrealistic comments in the recent TechCrunch article, "Burn the Boats".  Sure, most publishers need to make their businesses more Web friendly today and without delay.  But put yourself in the shoes of an executive at one of these companies... can you honestly say you'd ignore cash flows from legacy businesses?  Especially when those cash flows are 1) admittedly declining yet significant, and 2) the only thing you really have?

Newspapers, television, and book publishers are all the same -- just with different challenges. Their businesses are being modernized, but each has put systems in place to maximize old revenue while experimenting with ways of bringing in new revenue.  Some prioritize the old revenue more, others are more adventurous.  Some put more investment dollars into new businesses, some less.  Some treat new technology with great enthusiasm, others with suspicion.  Some are quicker to analyze the impact of new technology on the old business, and others are quicker to experiment. 

Just about all companies that go through this transition have one thing in common -- they're woefully uncool.  They're uncool because they do a lot of things to preserve the old business that outsiders and tech early adopters simply don't understand.  I've made the case before on this blog that Microsoft is one such business.  Although I didn't make these decisions at Microsoft, I had a pretty good idea of the problem Steve Ballmer and other execs faced every year when prioritizing investments.

Here's a hypothetical example.  Say Steve has $1 billion in discretionary investment dollars that he can deploy across a variety of businesses.  So he decides to host leaders of a variety of business units so they make their investment ask:

• Office -- $400 million for an advertising campaign in the BRIC countries in 2011 that will generate an incremental $1.5 billion in company revenue over the next 5 years.
• Windows -- spending an additional $300 million on anti-piracy technology and an advertising campaign will result in $1.2 billion in incremental company revenue over the next 4 years.
• Office Live -- $250 million needed over 5 years to create a new Web-based Office integration product.  Product will be revolutionary but will be given away for the first 3 years, followed by an anticipated $200 million/year annual business.
• Server and Tools -- $500 million needed to accelerate development of additional Windows Server, SQL Server and developer tools features necessary to help enterprises build better client applications.  Total estimated impact to Microsoft across all businesses is $400 million/year starting in 2014, and is needed to also preserve other parts of the Client business.
• Azure -- $550 million in additional server capacity to support the growing business.  Impact unknown -- an additional $100-$400m/year in revenue is expected.
• Mobile advertising -- $800 million for new mobile advertising business unit, mobile provider partnerships, advertising campaign, and rollout of new location-based advertising initiative to advertisers.  $400 million annual business is estimated by 2015.

For those of you keeping score in our hypothetical example, that's $2.8 billion in new investment asks with only $1b to spend.  There are requests across old businesses and new businesses.  Some asks are inherently more speculative, while others are more certain.  All decisions are not made in a vacuum -- there are pressures to bring predictable returns to investors while modernizing the business at the same time.  Saying "it's complicated" would be grossly underestimating the problem.

I think my hypothetical example is a lot more real than most people would like to admit.  Most executives at publishing companies -- newspapers, book publishers, and television -- are dealing with similar issues every day.  

Disruptors are sexy because they don't have to deal with legacy annuities.  They have a business vision and they need to execute on it and it alone more or less.

What incumbents lack in agility (because of those cash flows), they make up for with... well... those annuities.  Even in decline, those annuities are significant and thus can't be ignored.

I am not saying anything new when I say that the best executives and the publisher incumbents that win will be the ones who effectively balance the needs of their organizations.  Jump in to new technology too fast, and you'll diminish those annuities prematurely.  Jump in too late or let process overtake you, and you'll miss the wave.

So should publishers burn the boats as Marc Andreesen suggests?  Maybe not yet.  But it's time to hunt in the jungle because you may just be here awhile.

Hal Varian on newspaper economics

Interesting blog post from Hal Varian, Google's Chief Economist, on newspaper economics.

http://googlepublicpolicy.blogspot.com/2010/03/newspaper-economics-online-and-offline.html

Hal points out a few things that I 100% agree with:

• special interest local advertising was the bell cow for the newspaper business,
• people consume news and information on social nets, mobile devices, etc. more and more today,
• experimentation is key to helping newspapers survive and thrive in the 21st Century.

Google has been demonized by folks in the newspaper business for making audiences mobile and destroying newspaper brand loyalty.  While this has in fact happened, I don't know that it's fair to blame Google. These are trends that were bound to be realized with Internet technology.

Now Mr. Varian is certainly not a "disinterested" party.  But he does make good points here.  Newspapers must continue to push the envelope and experiment with new models.  It's a cultural problem that must be overcome -- and it's tougher in some local media companies than others.

ModernizeNewspapers.com

As we work more and more with local media companies and newspapers, I've decided to break out those posts into a separate blog at http://www.modernizenewspapers.com.  This will allow me to focus on our business on that blog while continuing to write occasionally about startup issues here.

Thanks for reading, and please check out the new blog!

Chris