Wednesday, 24 March 2010

Journalism: The Advertising Business Model

A few weeks ago Y Combinator funded NewsLabs announced a call for journalists for their new news platform which seeks to provide a platform that journalists can use to publish their articles with NewsLabs handling some of the work traditionally done by newspapers (ad sales, hosting, etc.)

The basic business model they propose is selling ads on the content and doing a 80:20 revenue split with the journalists doing the writing while avoiding the high overhead costs that traditional newspapers have.

The obvious question is: Will the web advertising model produce enough money to make this financially viable.

Let's construct a business financials model and see if the figures add up. There are two key figures,
  1. How much it'll cost to pay a journalist for an article to make it a viable alternative to writing for traditional newspapers
  2. How much money an article can bring in.
If the second is higher than the first we have a workable business model.

For the first we can just use industry standard figures. Typically a journalist will get paid between $0.10/word (low-end) to $0.50/word (high-end). Most professional freelancers will get somewhere between those two figures, so lets take $0.30 (a typical rate for an article that would require some research) as our average cost and 1000 words as our average article size. From this we get the cost per article of around $300.

How much money an article can bring in is trickier due to huge variations in ad rates. So to get around this let's establish a range. To get sample price data I used the Federated Media rack rates, FM provides advertising for a wide range of popular blogs and news sites so is probably reasonably representative of the type of content we're interested in. Let's assume we'll run three ads per page, a Wide Skyscraper, a Leaderboard and Medium rectangle - a combination fairly popular on news sites.

From FM's catalogue I picked their most expensive ad prices for our best case, prices from the second highest quartile for the average case and prices from the fourth quartile for our worst case.

However before we can uses these prices we need to apply a couple of discount factors. Firstly because FM will take a cut of around 40% (which is typical cut for ad sales) and secondly because often a lot of ad inventory will remain unsold by direct sales. Typically for unsold inventory (called "remaindered" in the industry) those ad spaces are replaced with a generic source of ads such as Google Adsense. So I've added some estimates for how much our remaindered ad space will bring in, $0.50 - $3 CPM is typical for general content so those are the figures we'll use.

So now lets plug the numbers into a spreadsheet and see what we get (click to enlarge):

Best Case

Average Case

Worst Case

Before we look at these figures in details lets do a little sanity check to make sure our numbers aren't completely crazy. One way to do this is to run an alternative analysis and see if the numbers match up.

Luckily Dharmash Mistry (former executive at EMAP; now partner at VC firm Balderton Capital specializing in media) has done this for us. He did an analysis of online newspapers and came out with an estimate that a newspaper website with 20 million unique monthly viewers would likely make less than £20 million/year. To get a comparable CPM we need to convert monthly views into page views. As audited circulation figures are made public we don't have to guess this value but rather just look it up where we can see that when the Guardian had 20 million page unique monthly viewers they had 186 million page views.

If we crunch these numbers we get a CPM of $13.40 - so slightly worse than our average case of $17.40 but in the same sort of ball park, indicating our model is probably not unreasonable if a little optimistic.

Now we can combine our figures for advertising and the cost to pay a journalist for an article and come up with a figure of how many page views we need. At $17.40 we'd need 22,000 views per article (at $13.40 we'd need 28,000), while these figures aren't completely infeasible for a good writer, it seems unlikely that a significant number of journalists would be able to maintain that sort of readership for an individual column over a prolonged period especially for only "average" returns payment wise.

Overall it seems even with a "bare-bones" model, there just isn't enough money in online advertising to finance journalism.