Diversification of Revenue Comes in Different Flavors

If there’s one thing that you can always depend on when running a business, it’s a revenue source drying up. Even if it takes years, at some point, a chunk of cash that you had grown to expect and depend on suddenly doesn’t exist any longer.

The big example from this week is Meta informing partners that it would no longer be paying publishers to include their content in the News Tab section of Facebook. According to Axios:

The deals were worth roughly $105 million in the U.S., sources told Axios. In addition to that, the company spent around $90 million on news videos for the company’s video tab called “Watch.”

“A lot has changed since we signed deals three years ago to test bringing additional news links to Facebook News in the U.S. Most people do not come to Facebook for news, and as a business it doesn’t make sense to over-invest in areas that don’t align with user preferences,” a Facebook spokesperson told Axios.

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Meta spent more than $10 million on its news partnership with the Wall Street Journal, more than $3 million on its deal with CNN, and more than $20 million on its partnership with the New York Times, sources told Axios. In some cases, the partnerships also unlocked paywalled content.

This should come as no surprise to anyone. Facebook has, historically, always changed its priorities. That’s just the way Facebook does business. And it’s not even wrong to do that. Businesses evolve. But for CNN, which was depending on that $3 million, or the New York Times, which was counting on that $20 million, it stings.

And yet, those businesses will be fine. They’re diversified enough that while it certainly stings to lose the cash, they’ll be able to stomach it.

But not all businesses are that diversified. Different companies have diversification weaknesses that come back to bite them. And to be clear, I’m not just talking about ads vs. subs here. There is far more to being diversified than just that debate.

Here are three types of diversification worth exploring.

Business model diversification

The classic example I’ve spent a lot of time writing about is business model diversification. The most straightforward argument is the ads vs. subscriptions one. I won’t bore anyone about this because it’s a pretty tired point. We all know it’s not versus, but both.

But let’s look at it from the perspective of the events business model. For years, events brands were riding high and commanding premium multiples over advertising-driven media brands. Because events had such sweet margins, investors were willing to pay more.

This disparity became so evident that many large-scale event brands removed their media assets. I wrote about this when I talked about Informa buying Industry Dive.

A big reason this happened, in my opinion, is that Informa regretted some of the deals it made over the past three years. So let me break those down:

– In February 2019, Informa sold over 20 print and digital brands focused on the healthcare, pharmaceutical, and veterinary spaces for a little over $100 million.
– In November 2019, Informa sold more than 20 titles to Endeavor Business Media. Although the price is unknown, Informa said it represented $64 million in revenue.
– In December 2019, Informa sold a handful of events and B2B digital brands to Questex.

In big part, Informa offloaded dozens of titles because events were the name of the game. You could do no wrong owning an events brand. The margins were more substantial, so why would anyone want to own an expensive media asset?

But these major companies have realized that it helps to have other revenue sources. Blending events, where you make money from sponsorships and ticket sales, with marketing services is an excellent way for Informa to build more relationships with its partners. And if one of them suffers, the other can continue to thrive.

This goes back to why the Meta news sucks for publishers in the short term, but it will be alright for many of them in the long run. Many have subscriptions, advertising, licensing, events, and other revenue sources that ensure it’s not an existential crisis. But for events-only brands in 2020, Covid was truly existential. The secret to being diversified from a business model perspective is never having to deal with business-defining issues.

Partner diversification

There’s a straightforward understanding in sales organizations. The $10,000 and $1 million clients will require nearly the same effort. That’s why sellers are often encouraged to focus on larger deals. It’s also why sellers default to bigger things.

But there’s a big problem with chasing those larger deals. When things are going well, everyone’s happy. You have clients renewing, generating $1 million every year. But what happens when that $1 million client disappears?

If you had $1 million in revenue tied to 100 $10,000 clients and one cancels, you lose $10,000; however, if you have one client tied to $1 million and that business cancels, you have no revenue.

This always happens. Many times, it might not even be in your control. What if the marketing lead at that big company spending a lot with you leaves to join a different company? You did nothing wrong, but there’s a new marketing lead, and they don’t know you. They’re not about to spend much money with you because they don’t know you. Even if you had been a great partner to that advertiser, the new marketer has to cover themselves and ensure you’re worthy. So, the budget gets cut, and you have to fight again.

And so, what you need to do is diversify your partners. And the way you do that is to cycle through new ad partners. That means looking at your advertising through two buckets:

1. The few big advertisers that are needle moving
2. The many small advertisers that don’t move the needle on their own

The nice thing about that second category is that some of the partners will graduate into the first category. For example, Morning Brew has had partners that started spending under $10,000 grow into spending over $1 million across newsletters, branded content, and more. If we hadn’t focused on those small advertisers, they would never grow to become more significant.

You have to be diversifying your partners constantly. You never know when you’re going to lose a significant partner. But if you have smaller ones graduating to larger amounts yearly, you can handle the downside of losing one of those big ones.

Sales teams must look at more than just the total revenue generated. If they’re not also looking at the breakdown of partners—big and small—they’ll find themselves with a significant hole when a partner walks. And I promise, it always happens.

Publication diversification

When all else fails, diversification comes from having more publications. This is what holding companies like Condé Nast benefit from, and it’s why they’re as large as they are (even after magazines have seen a major gutting over the years).

Consider this piece in Puck. While much is about all the drama at The New Yorker, this part about revenue jumps out:

Indeed, according to various people I spoke with who were familiar with its business, The New Yorker’s topline revenue is now north of $150 million, with nearly 75 percent coming from its subscription business—a true anomaly compared to other Condé titles that rely heavily on ad revenue, and a near total reversal from the days when advertising accounted for the bulk of its own revenue.

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If The New York Times just paid $550 million for The Athletic, a subscriber pure-play with more than $60 million in annual revenue, it’s conceivable that the terminal value for The New Yorker is well over a billion bucks.

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The New Yorker’s success is best revealed when contextualized among the other business units in the Condé portfolio. According to my sources, V.F. and GQ each turned under $60 million in U.S. advertising revenue last year; Wired just under $50 million. And 2021 was a good year for the advertising business. Many expect those numbers to decline over time.

Much in the Condé portfolio struggles compared to where it used to be. And yet, The New Yorker is generating an unbelievable amount of revenue. This makes it possible for Condé, the holding company, to do well even if individual publications start to struggle.

Now, am I suggesting that every media operator launch a network of publications? No, of course not. But when running a single site, you depend on that site for survival. When you have multiple, the others will ensure you keep living on if one fails.

Diversify however you choose… just diversify

Ultimately, the message is simple. Most operators are going to build the best single publication possible. And you know what, that’s fine. Others are going to launch multiple sites and run a network.

It’s not so much how you diversify that matters, but rather that you diversify to begin with. That is what is most important here. And so long as you have diversification in your company’s DNA, scenarios like Facebook yanking major spend won’t be existential.

The secret to surviving in media is always having cash coming into the bank. Don’t depend on one source, partner, or publication, and you’ll be fine.

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