Posted by: structureofnews | February 10, 2011

The Arithmetic of Advertising

In the wake of the AOL-Huffington Post acquisition, Alan Mutter, at Reflections of a Newsosaur, digs into the different valuations Wall Street puts on content creators vs. content aggregators (or low-cost content creators, like Demand Media).

The results aren’t pretty.  But they’re not surprising.

Recent deals like the Facebook financing, the Demand Media IPO and the Huffington Post sale show that investors put far more value on companies aggregating cheap or free content than on dedicating generous resources to original, high-quality journalism.

So he notes that Facebook is trading at 25 times its annual sales, while  McClatchy – not a much smaller company in revenue terms – is trading at a third of its sales. Demand Media, which figures out via algorithm what content people are searching for so that its army of freelancers can turn it out quickly and cheaply, trades at 6.67 times sales.  And the Huffington Post was valued at more than 10 times its revenues in the AOL deal.

Old media companies – the ones who continue to invest in content – are valued at no greater than 1.5x revenues, because financiers consider their future business prospects to be unclear (or, worse) in the digital age.

So what does that mean, other than that life’s not fair?  There are lots of ways to go – from an insistence that content creators should be paid more, advice that they set up walled gardens, or an acceptance that old media companies blew it because they didn’t really work to engage their audience the way Facebook does.  And so on.   The comments on the post are interesting in how they illustrate the divide – from “When the legacy media have died, who will provide free content for Google, HuffPo and others to aggregate? ” to “Markets don’t figure value by how much it costs to make a product, but by how many people want to buy that product, and how much they are willing to spend.”

But that ideological divide doesn’t really advance the discussion about how to build new, sustainable business models for original high-quality content.  Because the problem isn’t valuation, it’s costs.

The companies on Alan’s list mostly make their money from advertising; and what advertisers want is an audience.  If it costs you little to give them an audience, then you have a great margin, and investors love you – eg, Facebook.  If it costs you a lot to get the audience, then your margins suck, and investors flee.

That’s not going to change, no matter what how important a robust media is to democracy, or whether we want content to be free or paid, or whether aggregators are parasites or content curators, any of the other ideological debates we’re having.

So if we’re going to depend on advertising revenue, we need to dig into the costs of generating content with a fresh eye – not just in terms of firing people and aggregating cheap content, but in terms of really rethinking newsroom processes and products so that we can find ways to build longer-term value in what we do, ala the ideas in structured journalism.  If you want to earn a salary and get paid via advertising, then you need to think about how to earn much more of annuity from your daily work – because you can’t really compete against much cheaper content on any given day.

But mostly it shows the need to find other revenue streams beyond advertising – because the arithmetic of  this is pretty stark.


  1. […] This post was mentioned on Twitter by mediatowork, reg chua. reg chua said: The cold, hard math of advertising-supported media businesses – it's not pretty. […]

  2. […] Chau digs deeper into the advertising on Facebook. Chau simply elaborates on the growth of advertising on Facebook. Where advertising […]

  3. I have been reading lately about Facebook’s use of advertising and the future of print media versus online sources. The idea that Facebook is receiving advertisements for every kind of company or brand only makes sense. It leaves me questioning the advertisements for online news sources? Will advertisers still be interested in funding these news sources if they are putting a lot of energy into selling ads to social media sites?

    At the end of your post, you mention different sources for revenue besides advertising. Since you wrote this post, have you come to any different ideas or resources for this revenue? I recently wrote a post including some of your ideas on my blog. Here is the link: and feel free to e-mail me at

    • I think there are any number of possible advertising revenue streams for media – from brand campaigns to local stores that want to connect to a neighborhood to industry-specific organizations that want to reach their community. The real problem is that the explosion of ad inventory online – and the capability to more precisely target advertising – means that ad rates aren’t ever really going to get to kind of levels needed to support a traditional newsroom.

      Clearly lots of news organizations are going after subscription revenue now, and some having a fair measure of success at it. Others run conferences and so on. All those are good ideas, but I’m mostly focused on how to extract more value (and provide more value to readers, too) from the story creation process, mostly by rethinking what a story is.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


%d bloggers like this: