Here is a question for you - if a company makes the majority of its revenue from carrying out a certain activity, like building a product or selling a service, is it fair to call that activity the purpose of that company? For instance, is the purpose of McDonalds to sell Big Macs? Among other menu items, that seems like a reasonable thing to say. Is the purpose of Apple to sell devices and software? That also seems reasonable. When I talk about purpose here, I’m not trying to conjure up a Sinek-ism - a “why” that motivates their employees. I’m getting at something closer to the textbook definition; the reason for which something exists.
When it comes to social media companies like Facebook, who generate almost all of their revenue from advertising, it still feels slightly odd to say that their purpose is to sell ads, not to “build community” or “bring the world closer together”. Stranger still, traditional media like television and radio networks are clearly in the advertising business, generating the majority of their revenue from advertising, yet we struggle to label them primarily as the developers of advertising products. Even with the very recent invention of subscriptions or paid on-demand product lines known as “digital revenue” it's still fair to say that the overwhelming reason these companies exist in their current form is to earn money by selling products to their audiences.
Adopting this lens gives us a strangely clarifying view on the world of media as it exists today. The industry as we know it appears to have only two modes of generating revenue; selling advertising, or selling content. Newspapers are so interesting to me because for the longest time, they’ve managed to do both; readers buy the paper and advertisers buy ad slots. When that business model was disrupted with the rise of the internet, it looked like newspapers could become a dying art, before cleverly re-asserting this model online via digital revenue - subscriptions and donations.
What Has Media Innovation Brought Us?
Riding on the wave of digital disruption, new forms of media are roaring to the fore, be they blog sites, podcasts or newsletters, but even these new forms of media are simply vectors for targeted advertising. Viewing some of the wildly successful examples in each of these spaces like Business Insider, Morning Brew or The Joe Rogan Podcast through this lens, it's clear to the reason that they exist has become co-opted by the advertising model.
We are told that the old guard of mainstream media is being replaced by new, internet based media companies but it's clear one thing hasn’t changed, and that is the overwhelming majority of these new players are still fuelled by advertising revenues. If all of this innovation has failed to invent new revenue models of any significance, it’s worth asking, is the media as an industry simply a tool to invent new, lower cost, more highly targeted advertising products for advertisers to purchase? Based on its track record, the answer appears to be yes and this is a troubling reality for those working inside it.
Now it is true that with the rise of the internet, there is an opportunity here to adopt new businesses models, ones where users pay for content. There may also be better models, ones we don’t know of yet. The frontrunner is obviously the subscription model. Subscriptions have fuelled the growth of the software industry for the last decade, contributing monthly recurring revenues which make managing cashflow and planning for the future much easier. Media companies have employed subscriptions to varying degrees of success, but where it works, it really works, with shining examples such as the Financial Times generating 60% of revenues from their readers.
What was initially a question over whether newspapers could convince their readers to pay them online, has shifted to one over whether the collective well that media companies tap into to bankroll their subscription models could run dry in the future. How big a reservoir of untapped funds are there waiting to displace advertising revenue, thus shoring up the media businesses and securing their independence from advertisers? Whatever your belief on the public's willingness to fund media companies directly, it's fairly clear that subscription revenues can’t fund the industry on its own, and there are additional questions about the model's ability to scale.
Attention - What Advertisers Really Buy From the Media
Firstly, it's not just subscription revenue that is finite, but also the attention of the reader. When a media company sells an advertising slot, what they’re really selling is a guaranteed quantity of its audiences’ attention. Advertisers demand attention, which puts the subscription business model in direct competition with the advertising model. If a consumers attention is unable to monetised by advertisers, this is a lost opportunity and a threat to their business.
Advertisers therefore will continue to invest in funding free or mostly free content to undermine the subscription business model and secure an attentive audience, one way or another. Faced with a choice between free or paid content, consumers have demonstrated that journalistic quality, such as the Financial Times, or allegiance with a particular cause or worldview such as the Guardian are the two drivers of willingness to pay for content. It’s hard to imagine a future where the ad model won’t be directed at subverting and dismantling both of these drivers of subscription revenues, funding low or no cost alternatives with increase quality and doing what advertisers do best, identifying with their audience. When the supply of attention is at stake, the advertising business model will do just about anything to secure it.
Where Do We Go From Here?
With the lion's share of the media funded by advertising, or publicly funded and a strong desire by private media companies to deleverage into subscriptions, this poses some open questions. Firstly, history tells us that private media has been almost entirely been funded by advertising over its lifespan. Is there something game-changing about our world today that can reverse this seemingly natural tendency for the media to be funded by commercial interests?
Secondly, with the flight into subscriptions, how deep is the well of subscription revenues waiting to be mined and how aggressive will advertisers push back to secure attention reserves? Lastly, given how reluctant governments are to regulate this space, how likely are we to succeed in protecting the things that the media does that could be considered public goods, such as fact checking, investigative journalism and regional or rural news reporting?
I care deeply about all of these questions, because we’re on a dangerous trajectory at present. At the top of this letter, I proposed that if a company makes the majority of its revenue from a certain activity, like selling advertising, then that is its purpose. If this is true, then it’s also worth looking at spillover benefits, such as when media companies produce high quality journalism, or culturally significant television shows, or really enjoyable podcasts. If all the things we love above the media are paid for by advertising, then if a media actor like Facebook could displace huge volumes of advertising dollars from the media business, this would directly threaten these spillovers, killing things like fact-checked and unbiased news, investigative journalism and quality programming. It’s no wonder the public are now asking Facebook to pick up the mantle on these things.
But it's not just volatility of the advertising model that threatens us. The flight to subscriptions simply creates a new battlefield where media outlets ultimately compete for attention. A failure of the subscription business model could leave media companies stranded, captured entirely by the advertising model. What all this amounts to in my opinion is a clear need to find other, sustainable business models along side the subscription model, and to protect the spillover benefits that the media gives to society. If we get this wrong, only governments stepping in can save the media, and that comes with its own set of problems.