The Real Reason Why Big Content Sites are Losing Money? Ignoring Simple Math

I’ve been a website owner since 2007 and have been a profitable one every single year since I’ve started in this business.   Does that make me an expert?  No.  Does it make me someone qualified to talk about why certain sites fail and certain sites make it?  Absolutely.  So let’s get started and talk about the psychotic year 2018 brought us in digital media.  And by digital media I’m specifically referring to content based websites that make money with advertising.  You know, the big guns like Yahoo’s Oath, Vice, Huffington Post, and Buzzfeed.  You know, the outfits that are bleeding cash, hiring considerably less, and also trimming staff in what seems to be a weekly occurrence.  With layoffs of more than 3500 already between just these media entities alone, there are clearly more layoffs out there and there are likely more to come.

Why did they fail?  Simple mathematics.   Any business is supposed to bring in more money than it spends, correct?  If only it were that simple.  But isn’t it?  There’s absolutely nothing wrong with having an excellent idea and spending money to execute that idea.  But what is the eventual goal folks?  First it’s to break even and then it’s to make money.  But at what cost and in what time frame?  These guys?  They’re still miles away and that’s what the problem is.

As far as I’m concerned, it all happened for three main reasons and here they are:

1. Raising money with no true measurable plan on how to monetize

Digital media and online publishing have become bigger buzzwords over the last five years.  Ever since Facebook came onto the scene (before that it was Digg and Reddit but that feels like eons ago) and was able to drive traffic to websites, any Tom, Dick and Harry thought they could start a website and get 100 million visitors a month without even trying (Facebook put a stop to that years ago when they changed their newsfeed algorithm and put TONS of smaller websites out of business without you even knowing it).  So what did people do?  They went nuts presenting these “amazing” business plans to venture capitalists who also had no clue how sites actually make money, and duped said capitalists into handing them over millions of dollars because these guys said “we’ll get to 100 million users in a year and make a ton of money off of them” even though they never truly truly explained to them how they were going to do this.   You see, up until now there are only really a handful of truly reliable ways to make money off of a website.  Let’s take a look at those now:

  • There are display ads which include banner ads, text ads, home page and sitewide takeovers and skins, and video.
  • There are afilliate ads which is when a site pushes a product and whenever someone is referred by said site to said product, said site makes a commission off the sale.
  • There are Ecommerce sites who sell their own products (who we’re not focusing on in this article)
  • Selling products or courses – again, not really what we’re talking about in this article.
  • Subscriptions to newsletters or other “exclusive content” options

What people won’t tell you is that of all these monetization methods there’s really only one that truly works and is relied upon when it comes to content based websites: display and video ads.  That’s it people.  That. Is. It.  There are no other tried and true ways of making money on a content based website.  Trust me.  If I were wrong I wouldn’t be writing this article and your big content outfits wouldn’t be canning thousands of employees.    Sure you can make money on affiliates, subscriptions and even creating your own course but if you look at that as a primary source of income, you’re screwed from the get go.

So what happened here?  Simple really.  These companies dangled multiple revenue sources to investors saying that “once we reach a certain scale, we can monetize our users however we want.”  Clearly that didn’t happen and probably won’t happen anytime soon.

2. Seduced by scale and growth

So here’s problem number 2.   When a venture capitalist is invested in a company or any investor for that matter, what do they like to see?  GROWTH.  It’s rare you find an investor who says “I’m glad you’re profitable and that’s what we want.”  Nope.  Investors want a company to grow huge in a quick period of time so they can sell the investment for a much higher price than they paid for it.  Now, here’s the problem with content based websites.  You CANNOT, I repeat CANNOT get large in a short amount of time without taking some kind of shortcut.  For most sites starting out, it takes a minimum of 6 months just to start getting crawled by search engines and getting organic traffic.  So then how the hell do you speed up the process?  There are a few ways but in essence?  You PAY for it.  You either scale up your content resources, i.e. producing a TON of content so that search engines crawl more of your site and send you organic traffic, or you do what most of these guys did:  both.  They paid for both traffic and content.   Why pay for traffic?  Because with the likes of Facebook or content recommendation platforms like Taboola and Outbrain, the amount of traffic you can buy is unlimited.  And let’s not even talk about all the dirty traffic sources these guys buy from that none of them ever publicize.  It’s practically the wild west out there, or at least it was a bit more a few years ago.

Oh and yeah, let’s bring this up again.  Think you can do it for free?  Well, initially you could on Facebook.  If you simply created crazy headlines you’d get a boost from the newsfeed and you could “Virally” grow your site overnight.  Remember Viralnova?  Site sold for $100 million and went into the crapper after the algorithm changed.  Kudos to getting rid of it in time Scott DeLong!  Genius.

Bottom line, as I said, the only way to grow something in a short period of time to appease investors from a growth perspective is by paying for it.  Therein lies the problem.  Unless you’re either breaking even or making money on your spend, you’re setting yourself up for failure.

3. Reliance on unpredictable, paid platforms and arbitrage

You might recall that before we were reading about the bigger cases I mention today, there were smaller outfits getting destroyed.  Just recently the owners of the site Littlethings all but declared the site dead ($15 million bankruptcy)  Remember Littlethings?  This was a site doing over 100 million visits a month.  How you ask?  Facebook.  How did they get that much traffic on Facebook you ask?  Relying on Facebook’s algorithm that would send buckets of traffic because Littlethings knew that people loved animals and cute stuff.  So Littlethings created TONS of content based around these very things, promoted the hell out of them on Facebook (some paid, some for free) and raked in the numbers.   And it was working, up until Facebook changed its algorithm and dropped their traffic by up to 80%.   By then it was too late.  Littlethings was spending a ton on content, server costs, staff, you name it and the bottom dropped out.  They’re not the only ones by the way.  Tons of sites got hit by Facebook’s algorithm change.  But what else?

There were also websites doing pageview arbitrage.  Remember how big slideshows were and still are?  A website would create a 20 item list, separate it into 20 pages so a user would have to click 20 times which in effect would inflate pageviews on the site thereby blowing up impressions numbers on ads and creating more revenue.  In essence they could pay 10 cents a click on Facebook, from that click, garner around 10-12 page views which really meant they were paying a penny per click.  As long as the total revenue from each site visit exceeded that penny per click (or total CPM, cost per 1000 impressions) the sites could make money.    In simpler terms, if a site were making $11 per page, they could pay Facebook $10 per page and pocket the other dollar.  And if it worked, there was no limit on the traffic they could buy because platforms like Facebook, Taboola, and Outbrain (there are more) are HUGE.

But what happened here? Competition. More and more sites popped up thinking they could do this and guess what?  Costs per click skyrocketed and sites couldn’t arbitrage anymore.  Adios to making money that way.

The overall result?

So here’s what happened.  The amount of money going out simply kept exceeding the money coming in, in whatever way.  What I mean here is, some sites hit a big scale and hired TONS of people to create more content.  Some sites just kept spending more on traffic and not making that money back.  Some sites spent a fortune on original video, production costs, office space, you name it.  As these companies grew, they acted like any company who was growing: get more people and more space and do more stuff.  Only the problem is they were never profitable.  The pressure to continue to grow meant pressure to continue to spend.  Without a reliant monetization method on each site that meant losses after losses month after month.  How do you recoup those losses?  You either raise more money or you make cut backs.  These guys raised more money and the more they raised the more they got into trouble.

It’s pretty simple really until it’s not so simple anymore.  The math is easy but the fact that these companies have affected thousands of lives and partner companies makes things a bit more complicated.  If only they stayed simple from the beginning.

So what do they do now and how do they survive?

So what are the big guns trying to do now?  They’re trying to right their ships.  The best way to right their ships from the get go?  Cut overhead.  Best way to cut overhead?  Relieve staff, their salaries, and the healthcare and benefits you are paying for.  It sucks but it’s true.   What’s another way you can try to survive?  Figure out more ways to make money.   That hasn’t been done yet and frankly I don’t think it can.  I’m not saying these companies are doomed but there’s no way they can make it on the overhead they have.  There’s just no way.

Paywalls won’t work unless…..

What is a Paywall?  So now these big sites are trying to get people to pay for additional content or “exclusive” content in the form of subscriptions.  Many companies are doing this with very little success.  Why?  Because to get subscribers A. You have to have a superior product and B.  You need to get people to sign up.  How do you do that?  MONEY!   The only other way to get subscribers other than spending money is by already having a built in audience who loves  you.  This is why places like Forbes and New York Times are having success with these models.  They aren’t paying through the roof to get subscribers.  They are redirecting their dedicated users to their products and services.   Since the Vice’s and Buzzfeeds of the world never really had this kind of dedicated user base (only a ton of inflated traffic, from various sources but not direct, bookmarked traffic), it makes it that much harder to get subscribers without paying for them.

So is anyone doing this right at a larger scale?

There’s only one company out there that I know of doing this well at a large scale (i.e. over $100 million in revenue) and that’s Dotdash but even they have somewhat of an asterisk and I’ll explain why.   Dotdash was formed out of the original About.com.  CEO Neil Vogel came into the company and essentially split up About.com into a bunch of domains/websites.  These domains already have, in essence a ton of traffic from About.com’s massive previous audience.  What Vogel did was EXTREMELY smart.  He essentially already had a free, organic powerhouse and split it up into multiple entities and verticals so that each could advertise in their own way.  But again, was this done overnight?  Nope.  This was spawned from a website that already had nearly 100 million visitors a month.  Vogel just carefully constructed the road map and did it extremely well.  So Dotdash, unlike our other friends who are making layoffs, makes more money than they spend.  Why?  Again, built in, organic audience.  The Chive is also another example of a company doing it right.

What about you Mr. Author?  Who the hell are you and what do you do?

Glad you asked. I’ve been running a tight ship since day one.  Have I used paid platforms like Facebook?  You bet.  Have I lost money at times in my career?  Of course!  But one thing I make sure of at all costs: I spend less money than I bring in.  No matter what.   The internet is still too new and the ways sites are monetized is also new.  Until the day comes where banner ads make the same kinds of money as TV ads, raising millions or even billions for a wing and a prayer should be over…for now.  And if it isn’t, buyers beware.


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