In August, Vice CEO Shane Smith predicted that 2017 would be a “bloodbath” of consolidation in the digital-media industry.
The reason was simple: old media companies want to buy scale online, and new media players need cash. Smith said $4+ billion Vice was building a war chest of funding to “go out there and buy market share.”
“What you’re going to see is a mergers-and-acquisitions frenzy where the last two or three big boys buy the last scale plays to say, ‘We’ve got digital, we’ve got mobile, so we’re smart.’ And the digital guys are going to go, ‘F—, thank God — we’ve finally got money,'” Smith said.
There have already been whispers of this in 2016, with TV giants investing big money in digital upstarts.
Perhaps the cleanest example of consolidation was the creation of Group Nine Media last month, which tied together four media companies, with $100 million in extra investment from Discovery Communications (Thrillist, The Dodo, NowThis, and Seeker, Discovery’s digital network).
At the time, Ben Lerer, Thrillist’s CEO who now heads up Group Nine, told Business Insider that by tying the companies together, they all got safety, security, and strength. And Lerer predicted more would follow his lead.
“Consolidation is coming to media,” he said in an October interview, referencing big investments by NBC in Vox and BuzzFeed, as well as the pickup of Gawker’s assets by Univision, and the sale of Business Insider to Axel Springer.
Are Smith and Lerer right? Is 2017 going to see a wave of consolidation in the industry?
As 2017 inches closer, we talked to industry insiders and analysts to get a sense of why this consolidation could happen, and whether it was really on the immediate horizon. The consensus: It’s coming.
Brands and money machines
To create a successful digital media startup, you have to build two basic pieces, which sometimes don’t go together. The first is a strong brand that snags you a valuable audience — either huge, or loyal, or of a sought-after demographic. The second is a business side that can effectively turn that audience into cash.
In a recent interview with Business Insider, Refinery29 co-CEOs Philippe von Borries and Justin Stefano explained that while there are a handful of digital media companies that have built valuable brands, not all of them had built a revenue machine to match.
These companies are ripe for consolidation, they said.
For certain companies, it’s simply not worth it to spend the time and money to build up the business side, especially if they have fallen behind in that regard. Since its founding in 2005, Refinery29 has helped pioneer many business-side elements of the industry, especially in native advertising, that have proved intensely lucrative (the company said earlier this year it was on track to do over $100 million in ad revenue in 2016). As Refinery29 grew, it built its audience and business side-by-side.
But that isn’t the right path, or even possible, for some digital-media startups. Stefano even said that if he were creating a media company from scratch today, he might instead go for “scale, scale, scale,” and then sell — depending on what the focus of the company was.
Creating an efficient revenue machine is tough in digital media, and not something every company is predisposed to be good at, even if they delight their audience.
Strength in numbers
But the problem for some startups isn’t just that they have failed to build strong enough business teams, but the basic fact that advertisers prefer to deal with a bigger entities when making direct deals.
“Advertisers are looking for a one-stop shop,” NowThis’ head of content, Tina Exarhos, said in an interview last week. (NowThis is one of the companies in Group Nine).
SpinMedia CEO Stephen Blackwell expressed a similar sentiment in a recent interview with Business Insider. SpinMedia includes, of course, Spin itself, but also Vibe, Stereogum, Death & Taxes, and The Frisky, among other brands.
Spin, from its magazine roots, is the recognisable brand for advertisers, Blackwell said. It’s the known entity that can often bring them in. But once the conversation gets started, Blackwell can show how the portfolio of brands can deliver across a bunch of different demographics. In other words: that one-stop shop.
Like Ben Lerer said, there is a strength in tying brands together, particularly when scale is needed for the advertiser to be interested. And for some startups, when the venture capital money begins to run out, and they need to actually start making real money, creating a bigger coalition of brands can look attractive.
The new-old TV
There is strength in scale, but the digital media “bloodbath” won’t only be driven by that. It will also continue to be fuelled by the TV ambitions of digital startups.
It’s no secret that digital media companies really, really want to get onto traditional TV. Vice has gone the furthest so far, landing not only a pair of HBO shows, but also its own cable channel. But companies from Vox, to BuzzFeed, to Mic, to Ozy, to every company in Group Nine are also plotting to make a splash in old TV.
The reason? “Linear TV isn’t dead yet,” Ben Lerer explained. TV still has huge audiences, big-time ad money, and is “probably one of the most efficient businesses that exist in media today,” Refinery29’s von Borries said last month on a WSJ podcast.
Contrast that with digital.
“The challenges are huge in the digital ads business,” Mic CEO Chris Altchek told Business Insider. It’s, quite simply, hard to make money online. And while many people we spoke to thought that eventually the ad dollars would shift to digital, that’s something people have been saying for years, and TV is still holding its own.
“It’s hard to ignore the mature, established economic model [of TV],” BuzzFeed Studios’ head of development, Matthew Henick, told Business Insider.
BuzzFeed is hoping to create “many, many” BuzzFeed-affiliated TV shows, some with the BuzzFeed name on them, some not.
The Wall Street Journal reports that Vox is in “advanced talks” with a cable network for a TV special next year starring Liz Plank, who moved from Mic to Vox earlier this year, and anchored the election digital series “2016ish.” Vox’s real estate site, Curbed, had already announced a show earlier this year called “Prefabulous” with A&E Networks.
Though cable TV is a popular target, digital companies aren’t limiting their ambitions to that platform. They are also exploring options on new premium streaming services like Netflix or Amazon.
“We love anyone who is willing to pay us for content,” BuzzFeed’s Henick said, when asked about Netflix or other streaming services.
“People spend a couple hours per day on Netflix,” Mic’s Altchek replied to a similar question. “Those [premium streaming video] platforms don’t have a ‘news voice.’ It’s a huge opportunity.”
TV money needs TV money
So what does TV have to do with consolidation?
While the piles of cash at the end of the longform TV tunnel already have digital startups salivating, it takes a lot of money to get there. Making premium TV isn’t cheap.
That’s one reason many are taking huge “strategic” investments from established TV giants. Disney has $400 million invested in Vice, NBCU has put $400 million in BuzzFeed and $200 million in Vox, Refinery29 snagged $45 million from Turner this summer, and so on.
Henick said BuzzFeed has a “very strong partner” in NBCU, and that there has been an ongoing and open strategic conversation around how to get BuzzFeed on TV.
Here’s the basic premise of a union like BuzzFeed and NBCU’s: BuzzFeed gets hundreds of millions of dollars and access to the people who can help make its TV dreams a reality, and NBCU gets a huge foothold into the digital world.
And don’t underestimate the “strategic” power of having an established TV partner for these startups.
Ben Lerer said that just a day or two after the announcement of Group Nine, he’d gotten six notes from TV execs asking about creating something together. He’s being taken more seriously as a partner for TV thanks to the $100 million Turner investment.
For digital media companies that don’t have a dance partner, however, the going will likely get tough next year. Shane Smith said in August he thought there would be 30% less digital players by the end of 2017.
Smith said that changes in Facebook and Google’s algorithms would help push a wave of consolidation forward. “What does this do?” he asked. “Well, it’s bad. It means a lot less traffic and a lot less money.”
Mic’s Altchek said that as Facebook has changed its algorithm in ways that hurt text articles, short-form web video has emerged as a big driver for growth for Mic. That trend was corroborated by other publications (though some, like Bustle, have continued to grow without huge investments in video).
But while web video isn’t as expensive as TV to produce, it isn’t exactly cheap, and requires special resources.
In April, Mashable laid off about 30 staffers, a week after a $15 million investment round led by Turner. The cuts were part of a “strategic shift” toward video and TV, which involves a partnership with Turner Broadcasting, according to CNN. Others contemplating an embrace of video to juice growth might not have $15 million to fund a painful transition.
Some, no doubt, will die.
Altchek said he thinks there will be a shakeout of media brands more generally, as the walls between cable TV, streaming services like Netflix, and social-mobile video collapse.
“As these ecosystems come together, strong content brands will thrive,” Altchek explained. “Weak brands, both in digital and TV, will be abandoned. This dynamic will drive consolidation as businesses fight to make sure they are too big to be left behind.”
The consensus: 2017 will be the start.
Previous reporting by Jake Kanter.
Axel Springer, which owns Business Insider, is an investor in Group Nine, Mic, and Ozy.
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