When Henry Blodget announced that Amazon’s Jeff Bezos had led a $5 million investment round in Business Insider, PaidContent’s founder Rafat Ali tweeted about the “Dawn of fat content startups.” Indeed, Business Insider ($19 million), Buzzfeed ($46 million), Cheezburger ($37 million), VOX Media ($23.5 million), Sugar Media ($46 million), BuzzMedia ($58 million) and Bleacher Report ($40.5 million) are just some of the companies that have raised tons of money from institutional investors.
What are the trends driving this activity? And is this really anything new?
VCs Are Content-Averse Historically
Ever since I launched my company and began covering the industry, I have written about VCs’ aversion to content: not so much because content doesn’t scale, but because it was outside of their sweet spot. A lot of VCs use the “content doesn’t scale” argument, so for the record: production of good content admittedly doesn’t scale in the traditional sense, but the business of content can, and does, if you focus on scaling distribution and monetization of the catalog.
Production and Marginal Distribution Costs are Close to Zero
A few years ago, I observed that digital media – with practically zero printing and distribution costs – was the “new software,” especially with the advent of digital distribution and downloads. So while Microsoft boasted high profit margins by selling countless copies of Windows or Office without a commensurate increase in costs, digital publishers had a boundary-less potential to boost profits by distributing their content to as many places as possible while maintaining their margins. Remember: with digital publishing, the producer doesn’t even carry inventory.
Where Things Go Off the Rails: Labor Costs
As a writer in the venerable Atlanticnoted about Time magazine: “For Time, the challenge wasn’t just the weekly print cycle; it was the weekly print cycle plus a crushing load of fixed costs. It’s expensive to support a model that demands reporters around the world, big name columnists, and massive distribution. The high costs means that there’s virtually no room for Time to stumble.”
Indeed, what made tech startups so attractive to VCs — the ability to disrupt established players by shrinking a market — is even more true and possible with content startups.
The problem, or irony, is that content startups exploit that opportunity until they raise VC money. VCs need to deploy cash – lots of it – so the second they come on board, the previously successful content startup morphs into a semblance of the very same incumbents they are attacking.
The Wild Card? Marketing costs
The second reason I love the content business (first one is storytelling, of course) is because content lends itself very well to marketing. Whereas a producer of a good or a provider of a service needs to find direct or indirect hooks to sell their wares, content is a natural magnet for marketing pitches. For example, we use our clips in out-of-home venues such as gas stations and cabs as walking billboards.
When Everything Else Fails…
VC-funded video startups have arguably blazed the trail for text publisher, with VCs heavily funding these kind of companies for at least a decade. Mind you, most have bombed, but aren’t nine out of ten VC-backed startups supposed to do that to make way for the grand slam?
The first wave of VC-backed video startup included Pseudo.com. The second wave included Mania TV ($22 million), Heavy.com ($23 million) and Ripe Entertainment ($45 million) – – all pioneers in their own right who faced the gargantuan task of building infrastructure, spending on marketing and, yes, creating content, too. The three-front battleplan was too much for most. ManiaTV shut down only to come back, while Ripe shut down after $45 million in wasted VC money.
The third wave includes companies that have been spared the tasks of spending on marketing and building their own infrastructure by relying on YouTube. They include Machinima ($49.6 million) and Maker Studios ($41.5 million).
The jury is out on whether the model of building an audience on YouTube’s platform is a viable strategy. It is a wonderful tactic, no doubt, and one being underwritten by VCs. But with 99% of VCs lacking a background in advertising, it’s a case of the blind leading the blind.
The Atlantic article also mentioned how increasingly hard it was for Time — but ultimately for all content producers — to produce content for a dwindling subscriber base, only to hope to make it up in volume via advertising.
So yes, while digital content could very well be the new software where the marginal costs of production and distribution are close to zero, I like to remind people that Google remains the only truly successful ad-supported tech business around. That’s the other irony of PaidContent’s founder commenting on content startups, in that very little of the content out there is really paid for by anyone.
But regardless of the mechanics behind it, it’s a true positive that content companies are in the news. Maybe those trailblazing VCs finally got religion and believed in content as a big opportunity worth chasing. Maybe I was right after all. Or, then again, maybe as they say: even a broken clock is right twice a day.