Glimpse of Tumblr is reminder new media business model isn't generating many jobs

There is still a lot we don’t know about the new media business model, so even a glimpse of the model’s inner workings can be valuable. A New York Times article about Tumblr offers such a glimpse, which shows the company is unlikely to generate a significant number of media jobs.

 

There is a great deal of fascination about companies like Tumblr, a popular blogging platform that Yahoo purchased last year for a reported $1.1 billion, mostly cash. Tumblr wasn’t profitable, but Yahoo did acquire millions of Tumblr bloggers to add to Yahoo’s user base. Yahoo is developing ways to distribute advertising aimed at Tumblr users.

 

Tumblr, like other new media companies, has some superficial similarities to traditional media companies. Both new and traditional media publish content that attracts an audience, then sell advertisers access to that audience. But the similarities end there.

 

New media companies like Tumblr don’t pay for the content - blog posts (including pornography) – they need to exist. Traditional media companies do pay for content, which increases their production costs.

 

New media companies like Tumblr also rely on automation -- computers and computer software --to provide a platform for the production and distribution of the content they use. Traditional media companies cannot easily develop similar platforms because millions of potential users have already selected new media platforms for blogging and other Internet activities.

 

The new media business model relies on free content and automation to keep costs low, otherwise these companies would go out of business. That is because new media companies generate very small per-unit revenue from Internet advertising. These companies must keep their per-unit costs low if they want to generate enough money to survive.

 

The Times article reports that Tumblr doubled its staff, but still employs only 220 people. As of today, Tumblr claims it has 185 million blogs. That is about 841,000 blogs for each employee. If Tumblr expands to 500 employees, it will have 370,000 blogs for each employee. Even if activity on the blogs varies, these numbers show the kind of astonishing productivity that new media companies enjoy because of their reliance on automation.

 

The low per-unit revenue at new media companies means they must also attract a very large number of users before they can generate enough profit to justify the high values that new media companies receive from financial markets. Traditional media companies have much lower values in financial markets, but traditional media still generate high enough revenue-per-unit to survive without an audience in the hundreds of millions.

 

For example, Tumblr’s enormous number of blogs means it has to generate average revenue-per-blog of just $5.95 to match its $1.1 billion purchase price.

 

However, Tumblr still isn’t generating enough revenue to develop “a working business model” according to The Times. (Yahoo hasn’t broken out figures for Tumblr in Yahoo’s most recent financial reports).

 

Yahoo is still trying to develop advertising that won’t disturb the Tumblr ethos, which rejects advertising. I suspect Yahoo is also developing ways to generate revenue from data about Tumblr users even though Yahoo only requires an e-mail address to identify each Tumblr user.

 

This suggests one more thing the glimpse tell us about the new media business model. Small per-unit revenue means these companies require enormous numbers of users to generate enough revenue to become profitable. But sometimes, even a large number of users and a very small number of employees won’t be enough for a new media company to become profitable.

Coordination costs can make it difficult to create synergies at media firms

Media firms have for years tried to reduce their costs by centralizing the production and marketing of a variety of content. But the cost of coordinating centralized activities can be considerable, large enough in some cases to offset the savings that firms hope to realize.

 

For example, firms that own multiple newspapers have for decades tried to reduce costs by centralizing the production of news or centralizing administrative tasks. Efforts to centralize news production have also been extended to newspaper websites and mobile editions.

 

However, centralization can be difficult to coordinate if individual newspapers use different computer systems or software to manage and publish their digital editions.

 

Technically, these companies are trying to create economies of scope, colloquially known as “synergies.” Economies of scope exist when the joint production of two or more products is cheaper than producing the products separately. 

 

Technically, it’s also much easier to say you are creating economies of scope than it is to actually reduce costs this way. The successful creation of economies of scope often requires that a firm re-arrange details of the production process.

 

If, for example, a multi-media news story is distributed to multiple papers with different publishing software, the story might have to be re-formatted for compatibility with each individual paper’s software.

 

Media firms are also trying to collect and analyze data about how audiences interact with the firms' web sites and mobile applications. This kind of analysis might also be expensive to coordinate if different websites use different measurements or data collection techniques. Trying to reconcile differences in the ways that numbers are collected can be a lengthy, frustrating and sometimes impossible task.

 

Firms might have to make significant capital expenditures to eliminate inconsistent software or other internal barriers to coordination. Some newspaper companies are buying or creating new software platforms for distributing digital news and advertising. Some of these initiatives may be intended to resolve coordination issues, if so that is a hopeful sign.

 

Problems coordinating activities inside a media firm are not likely to draw much attention outside these firms. But there is a reason multiple economists have won Nobel Prizes for examining coordination costs (here, here and here).

 

Media firms that centralize internal activities to save time and money will find it worthwhile to include coordination costs in their analysis of what it takes to make those efforts work.

Shifting production to the Internet creates new problems that newspapers must solve

As newspapers shift from print to the Internet, they are hoping to significantly reduce production costs. These companies are trying to offset declines in advertising revenue by reducing the amount they spend on printing presses, newsprint and delivery trucks.

But the benefits of this change are not guaranteed. Reducing offline production costs is a complex problem to solve.

Most of the industry’s advertising revenue – about $21.8 billion in 2012 – still comes from print publications. So newspapers must maintain that revenue source at the same time they are moving to the Internet.

Production costs might be lower on the Internet, but they are not zero. Newspapers must pay for websites and mobile applications. But Internet advertising and other digital sources accounted for just 11 percent of the industry’s total revenue in 2012.[1] Newspapers also face significant competition from digital firms for online revenue.

To make the transition succeed, newspaper companies must keep digital production costs low enough to be competitive and attract enough online revenue to cover those costs. Meanwhile, the companies must continue to produce the print products that generate the bulk of their revenue for as long as those products remain profitable.

And economic survival isn’t likely to get easier for newspaper companies that do leave print behind. Those firms will have to manage new kinds of competition.

There was an important reminder this week of just how difficult the transition can be. Digital First Media, which owns 75 newspapers, has a strategy of moving quickly away from print to digital distribution on the Internet.

One high-profile piece of the Digital First strategy has now failed. The company is closing a centralized newsroom that used digital production to provide national stories for its newspapers across the U.S.  Rick Edmonds notes the failure is a valuable reminder that even digital news production is expensive:

It is myth, embraced by digital future-of-news enthusiasts, that Web publishing is close to free. [Digital First CEO John] Paton seemed of that view early in his tenure when he asked newsrooms to use mainly free tools to put out their reports for a week. 

But in his most recent manifesto/speech to the Online Publishers Association in January, he said he was looking for another $100 million to invest in the company’s digital activities on top of an earlier $100 million. 

Digital First is a private company, so it's hard to tell what the implications are for other newspaper companies. There is reason to be cautious because Digital First has complex finances – it was created by merging two other companies that had both been gone through bankruptcy. A hedge fund is a major investor, and that fund may be looking for a quick return on its investment.

Other companies with stronger finances or different investors might have more flexibility in managing the transition from print to digital. But it won’t be easy for any company to do.

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[1] An estimated $4.2 billion of $38.6 billion in total industry revenue according to the Newspaper Association of America.

Thoughts on the proposed sale of Newsweek and what it means

The Washington Post Co., a bastion of journalistic excellence, wants to sell Newsweek because the magazine keeps losing money.

This development illustrates why some proposals for preserving first-class newspapers and magazines are unlikely to succeed.

The company has owned Newsweek since 1961. The company's record of journalistic excellence rests on reporting in both the Washington Post newspaper and in Newsweek.  Despite this fact, the Post Co. has for years not relied on either publication to ensure its economic survival.

The majority of revenue at the Post Co. comes from the educational testing giant Kaplan. The long-term decline in print advertising revenues has forced the company to use Kaplan's earnings to offset losses from the continued operation of Newsweek and the Post newspaper. This could not be sustained, so the Post is now forced to try and sell Newsweek.

What does this mean for other journalistic organizations?

First, Newsweek has tried to adapt to the digital world where a week's delay publishing news or commentary is far too long to satisfy audiences. This report says Newsweek's "digital side" generated just $8 million last year, too little to pay for the magazine's production.

The cost of producing print newspapers and magazines is relatively high.  But advertising revenue per reader in print is also relatively high.  The cost of producing digital news is much lower, but ad revenue per reader is much, much smaller than print revenue. Print journalism organizations face the problem of transitioning from high-cost high-revenue markets where audiences are still sizable, but stagnant, to low-revenue markets where audiences are growing.

Newsweek probably had unusual support for making this transition because the Post Co. is controlled by the Graham family, which has a commitment to journalism.  The family was probably more willing than other Post Co. stockholders to subsidize losses at Newsweek while trying to make the transition work.

But in the end, no company can afford to keep losing money in one division and subsidize the losses with profits from another division. At some point, the company's ability sustain itself will be questioned.

So the second lesson is that suggestions for subsidizing journalism -- with profit-making parts of a company, with donors or endowments, or with government funds -- ignore a fundamental economic reality. Journalism that cannot sustain itself economically will always be at risk of economic failure.