Wednesday, February 09, 2011

Not all content is king on Wall Street

While journalists and other media types like to think professionally produced content is king, our friends in the financial community apparently don’t agree.

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.

There are several reasons for this, as discussed in a moment. First, let’s look at the huge difference between the value of a digital superstar spending absolutely nothing on content and a struggling legacy media company still employing a small army of reasonably well paid professional journalists.

The companies are Facebook, which needs no further introduction, and McClatchy, the largest publicly held pure-play newspaper publisher in the land.

Although there are many ways to value a company, one of the quickest and easiest is to divide the value of its stock by its sales. So, that is what we’ll do.

Facebook, which had an estimated $2 billion in sales in 2010, was valued at $50 billion earlier this year in a private financing, or fully 25 times its sales. By contrast, McClatchy, whose sales were almost $1.4 billion in 2010, had a market capitalization at the close of trading yesterday of just $372.1 million, or a mere 0.30x of its revenues.

In other words, Facebook, which is filled with a growing abundance of often-trivial user-generated content, is considered by its investors to be 83 times more valuable than McClatchy, which employs hundreds, if not thousands, of journalists.
(McClatchy, which suffered a traumatic series of layoffs and furloughs since 2007 as its sales fell 39%, declined to say precisely how many scribes remain on its payroll. But the publisher still employs way more content producers than Facebook, which employs none.)

The divergent market momentum of the two companies explains the sharp disparity in their valuations.

Users and traffic have been growing so rapidly at Facebook in the last couple of years that the site now surpasses all others in the amount of time users linger at it. Facebook accounted for 12.3% of the time spent online in the U.S. in 2010 vs. 7.2 % in the prior year, according to a study released yesterday by ComScore, the audience-measuring service.

More visitors spending more time at Facebook create a perfect environment for the targeted keyword advertising the company sells on its pages. Best of all, Facebook’s ads are sold through a do-it-yourself system, meaning that the company spends no money on producing content or selling ads. This is a recipe for highly efficient growth and profitability, so long as Facebook doesn’t someday fall out of consumer favor like the formerly high-flying MySpace.

While Facebook has been dazzling the media world, McClatchy’s world has been rocked by the secular collapse of the newspaper industry.

After peaking at $2.3 billion in 2007, McClatchy’s revenues fell to $1.4 billion in 2010. Its net profit last year slid a vertiginous 33.4% from the prior year to 43 cents a share. McClatchy also is burdened by nearly $1.8 billion of the debt it incurred to purchase of the Knight Ridder newspaper chain in 2006, the year the wheels started coming off the once-indomitable newspaper business. The high debt burden contributes to the low esteem in which the company is held on Wall Street.

As you can see from the table below, the mismatch between the valuations of Facebook and McClatchy is evident among several other media players, too.

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.

New media companies, on the other hand, are regarded as potentially capable of the dramatic growth
epitomized by Facebook.

Google, which brilliantly scrapes and organizes everything on the web but decided against creating content of its own, is valued at 6.70 times its sales. Were Google not as large and mature as it is today, it probably would carry an even higher valuation.

The valuation of Demand Media, which began trading publicly last month, is almost identical to Google’s. Demand Media generally pays freelancers $10 per article to write stories of little journalistic import that are designed, instead, to build traffic and fetch advertising dollars on sites like eHow and Cracked.

Huffington Post was valued at a steep 10.33 times sales when AOL purchased the company this week. Although HuffPo publishes some original articles by a few properly compensated writers, its ad-based business model relies heavily on contributions from some 6,000 unpaid bloggers and the aggressive aggregation of articles cribbed from other prominent websites, including many who still spend money on journalism.

Creative and prosperous as the digital publishers may be,
they aren’t doing much to afflict the comfortable and comfort the afflicted. But investors, at the moment, seem to love them more than the publishers who do.


Blogger Unknown said...

Well put.

But it's not only the Huffinization of cheap/free content, or the advance of content farms. The third development is de emerging news-aggregator, basically robots crawling the web and publishing it. Google News is mentioned, but local models work just as 'good', or, 'bad', depending on your point of view.

"Don't fear the Reaper", well I do.

5:11 AM  
Blogger Unknown said...

Wall Street would love slavery if it were legal. Investors view free labor as a competitive advantage, even if it destroys the industry they are putting their money into.

7:32 AM  
Blogger Unknown said...

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. If McClatchy were attracting anywhere near the number of readers of Facebook and Google — even accounting for its smaller footprint in the media market — then its revenues would be much higher, as would its valuation.

Google and Facebook have such high readership (in the most attractive demographic, too) that they don't even need much of a salesforce to sell their ads. They sell themselves. Could McClatchy's newspapers do that? Would people buy newspaper ads if they weren't constantly harassed by salespeople?

The sad thing is that newspapers blew their chance to be the Googles and Facebooks and Huffposts of today. They defined themselves by their products (we produce expensive news written by professional journalists and printed on paper, by god!) instead of paying attention to attracting an audience and providing value to them, and value to the advertiser as well.

It wasn't exactly a secret — even back in the late 90s — that helping people find information online or helping them connect and share information are valuable services. Newspapers missed that boat. I was there, trying to get my former newspaper employer to let me start a local search engine (ironically, using the same pay-per-click ad system Google later adopted), and set up a system for readers to post their own stories on their own pages. I know there were others who were pushing the same things to other newspapers. But trying to convince newspaper people that readers might prefer the kind of trivial content you denounce over their professional news fell on deaf ears.

When your only tool is a hammer, everything looks like a nail.

And the lessons are still not learned. Why didn't these newspapers create their own Huffpost or Demand Media when they had the chance? They failed to give readers what they wanted, and the Internet makes it easy for other less risk-adverse players to step into that void.

Now I see newspapers either cutting back their online efforts, or putting their hopes into paid subscriptions on the iPad, for news you can mostly get for free online. Some things never change.

7:45 AM  
Blogger reinan said...

When the legacy media have died, who will provde free content for Google, HuffPo and others to aggregate? That's the question.

At that point, you can look forward to a news diet of articles like this: "How to Get a Big Mac for $1 at McDonald's."

Step 1: Go to your local McDonald's.

8:17 AM  
Blogger DigiDave said...

Awesome post Alan - I'm going to echoe KC's point.

You write: "investors put far more value on companies aggregating cheap or free content than on dedicating generous resources to original, high-quality journalism."

This is the wrong frame.

What investors value is the audience and the relationship the audience has with content.

Investors could care less if the content is aggregated, produced with fine care, etc.

What they see is that on Facebook people freely reveal everything about themselves (books they read, their relationship status, etc) and when reading a news site - they reveal none of this.

THAT is what they value. It's not as if the investors are looking at the content on both sites and thinking "well this content is aggregated, so we'll bet on that."

They do see the scalability but also the high demand.

Which is to say "content was never King on Wall Street" - so to act shocked that it isn't now is a bit of a farce.

8:51 AM  
Blogger Stephen said...

Well, great for wall street. They once told me that Lehman Brothers, Bear Stearns, GM, and a hundred other .com companies were worth $100 a share.

HuffPo brings in the revenue of a car dealership. Call me when revenue is over 500M and I'll care.

10:03 AM  
Blogger Unknown said...

Good article, but I would argue that some news aggregators do add value even if they offer little or no physical content.

I say this as the owner of a news aggregator that has been in business for over 14 months, called We update content in a continuous roll and keep the old links on-site, in steadily expanding "old news" pages. Our links send business to the people who produce the content, thus rewarding good content with additional traffic.

The value added is to make considered editorial choices on the internet content available at any given moment, and make an editorial decision of what is the most worthy news and comment.

There is far too much good stuff available daily for everyone to read, so a skilled aggregator editor spends the day picking and choosing. I bring the perspective of over 3 decades of professional writing and editing, with an education in political science, history and journalism. So i don't do local news unless it's big and matters.

In effect, I'm the editor of a newspaper with the world's best reporters and writers on staff. that's what my readers get.

Where we proudly differ from some aggregators is in not hijacking the content, duping readers on the content, and we don't run several paragraphs from each linked story.

Robot-driven aggregation sites may work on certain levels but I prefer the human driver.

6:05 PM  
Blogger Steve Outing said...

Good post, Alan, but I quibble with this: "Facebook, which is filled with a growing abundance of often-trivial user-generated content, ..."

Ah, but it's not trivial at all! Because it's so well targeted, the FB post from my friend about what you would think is trivial is truly valuable "micro-personal" news to me. It's the McClatchy, et al news story about the car crash in the next city over that's "trivial" to me.

Newspapers' mistake is pretty obvious by now: Publishers never deemed it worth their effort -- or perhaps deemed it "beneath them" -- to add micro-personal to their news streams. I'm still waiting for the soup-to-nuts news-stream service that covers it all for me. I suspect that in time Facebook will turn into that service; it's partly there now.

7:02 PM  
Blogger Robert H. Heath said...

Good points with a couple of quibbles.

When investors look at the valuation of a company compared to its revenues, they typically consider "enterprise" or "firm" value as opposed to equity value.

Equity value is the value of all the company's outstanding common stock. But the cash flows to stockholders (the source of all value according to finance theory) are subordinated to the cash flow owed to lenders.

Hence, to ascertain the value of a company's operations, you should add "net debt" to the equity market capitalization. "Net debt" is simply long-term debt minus cash (since cash on hand could be used to reduce debt).

On this basis, MNI's valuation is $2.2 billion and its enterprise value to sales ratio is 1.6x rather than 0.3x.

That doesn't change the larger point that Facebook (and Twitter) are valued an order of magnitude greater than the traditional media companies.

I took a slightly different cut at the data here.

In my (slightly different) view, the market is actually stuffing DMD, AOL and the HuffPo into the same category as the traditional newsgatherers. I think it is unlikely that AOL/HuffPo or DMD will ever achieve the profitable scalability of Facebook, Twitter or Google.

Google's scalability advantage is well-known.

Facebook obviously gets all its content for free.

What I think many have overlooked (excepting a few of your commenters here) is that while the media industry has been talking about hyper-local reporting for the last two years, Facebook has actually shown us what it looks like... without a single reporter on the payroll.

9:28 PM  
Blogger Lee Arthur said...

The revenue multiples reflect the maturity of the business and its revenue growth potential. Larger companies, that have larger market shares, have less room to grow and so have reached their fuller price. This is different from quality vs quantity arguments, that operate in different market segments and serve different needs.

12:56 AM  
Blogger DVD said...

The HuffPo valuation has not received much ratification from the market. While it's true that one buyer felt it was worth 10x annual sales, and paid $315 million, the market cap of the buyer has fallen since making that purchase by at least that amount. So you might say that "the market" thinks HuffPo is worth something closer to zero.

9:51 AM  
Anonymous Anonymous said...

I key point is being missed here. Facebook's valuation vs McClatchey or NYT or News Corp has nothing to do with the value of professional journalism vs user generated content. It is simply a statement of Wall Street's market valuation of the commercial viability of the companies, now and in the future.

11:13 AM  
Blogger Reg Chua said...

Alan, nice post. At heart I think one of the key issues is simply that the new media companies have lower costs, and that makes all the difference in an ad-supported environment.

That may or may not be unfair, but it's a fact, and unlikely to change. So if we want to support (relatively costly) content generation, we need to get away from advertising revenue as a main source of revenue, or at least find ways to extend the shelf-life of the content we create, so that we amortize the costs over a longer time.

I elaborated a tad more at

12:20 AM  
Anonymous Anonymous said...

@reinan, who said...

"When the legacy media have died, who will provde free content for Google, HuffPo and others to aggregate? That's the question."


"You see the dynamic all the time. One newspaper (or broadcaster) runs a story and, within hours, the rest of the media pick it up and repeat it, sometimes with their own spin, but with the basic facts unchecked. Thus, a core error gets repeated and repeated until it becomes part of the narrative, pulled out for ever more whenever the issue is raised, becoming part of the received wisdom, simply by dint of constant repetition.

"Discussing with one senior official a particularly egregious example of an error-ridden story which had spread through the system, in frustration he described the process as akin to journalists eating each others' turds."

That's why we refuse to pay for it anymore.

5:25 PM  

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