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.