It’s Really Okay That Media Doesn’t Scale

There are any number of reasons why many of the big digital media companies failed. They relied on platforms for all their traffic without ever building an audience. They raised money at valuations that were unsustainable. Their business models relied on third-party cookies to generate revenue.

We can blame it on anything we want.

But during this era, all anyone could talk about was scale. Everything had to be bigger. If something couldn’t continue to grow aggressively—if it couldn’t scale—then there was a problem. And I would argue that it was this obsession with scale above all else that hurt these companies.

Scale for scale’s sake is why media failed. For every Axios, there were a dozen other companies that thought they, too, could become a behemoth. And each and every one of those publications failed because they took their eye off the ball. We create content to serve an audience; when that’s no longer the case, we’ve begun our descent into failure.

Why do I bring this up? Earlier this week, The New York Times reported that Semafor had raised $19 million to offset the $10 million it had taken from FTX’s Sam Bankman-Fried. Collectively, this means the company has raised $34 million. Within the story, though, was some detail on the company’s revenue:

Semafor has booked more than $10 million in revenue in 2023, split between advertising and events, which have been a larger-than-expected contributor to the company’s business, Justin Smith said.

There are two thoughts I have about this news.

First, $34 million is a lot of money to have raised. While the investors are not your typical venture capitalists, they’re still going to expect a return at some point. $34 million would be a lot of altruism otherwise. If you ask me, this is the real risk for Semafor.

Second, $10 million in basically its first year of existence is incredible. There is no way around it. That is an incredible feat and the year is not even half over. It’s possible that this is just early wins for the team and renewals will be abysmal, but wow.

But through every win, there is a way to look at it pessimistically. Over at The Rebooting, Brian Morrissey wrote about the news and said this:

Instead, it has relied on what used to be the sidelights of news businesses: newsletters and events. Semafor CEO Justin Smith said events were a far larger part of the business than anticipated.

These are safe havens, if any exist in media. But both newsletters and events do not scale. There are only so many newsletters you can send, and even the most successful newsletter companies have hit a ceiling on growth. Events can be lucrative, and they will likely only grow in importance as people value in-person gatherings in a disconnected world of work, only there is a limit to how many you can do.

Who cares? Semafor is a little over seven months old. It has booked over $10 million in that period of time despite only having 400,000 free newsletter subscribers and 1.5 million visitors on the site. Are we really looking at that and saying, “both newsletters and events do not scale”?

Yes, there will come a point where Semafor can’t plan another event. But seven months in is not when we start worrying about that. We worry about that when Semafor’s Editor at Large—and leader of the events arm—Steve Clemons is hoarse from moderating so many events that people refuse to show up and therefore sponsors stop spending.

And it’s nowhere near reaching that saturation point. According to Semafor’s events page, it has only done six events in 2023, with one more planned for next month. It has the entire second half of the year that it could generate additional millions of dollars in revenue from events without hitting the limit of how many they can do. For context, Axios has done six events in May. If you ask me, Semafor has time.

But we come back to that $34 million raised. There’s no denying that Semafor has to grow the business considerably to justify its future valuation. According to its Form D, the recent raise is considered an Option or a Warrant, so I suspect this was a SAFE round. Essentially, investors agreed to give Semafor money without actually having a valuation; that’ll happen when it raises another round. It can be a very founder friendly arrangement.

But there is a risk with SAFE rounds for founders. When the next round does occur, if it’s not at a high enough valuation, the SAFE holders could own a disproportionately large percentage of the company. And so, Semafor has to get its revenue to a point where it can raise at a lofty enough valuation to ensure this doesn’t happen. And voila, we find ourselves in the trap every media company falls into when it gets on the fundraising treadmill. It has to get big enough to raise more money before it runs out of the previous round.

But there’s a second path.

Semafor could use these “unscalable” events and newsletters to reach profitability. If I’m Justin Smith and Ben Smith, that’s where my mind is. Investors gave me another $9 million of net new capital on very favorable terms? I’m selling as many events as I can to get to profitability. Because that means the team can raise a second round on their terms rather than out of necessity.

But I’m not them. They have their own path to chart and they’ll figure it out.

That said, let’s return to this idea that media doesn’t scale. At some point, you can’t do anything else to grow the audience. For much of the history of media, that was a fact. A magazine or newspaper could only get so big. In a 1980 story from the Washington Post:

While there are more than 12,000 magazines published in the United States, the top 400 of them generate $7.3 billion in sales — or 94 percent of the magazine industry’s annual total.

11,600 publications generated less than $400 million in sales, or $34,482 on average. Now that’s just subscription dollars, so they were obviously making money from ads too. But the point stands. For the vast majority of media, true scale was never a possibility. Playboy in 1980 had over 5 million subscribers, which we would say had reached scale, but was still only 2% of the United States population.

In the era where media is going niche and sustainable, scale has to leave the conversation. These can be fabulous businesses that generate healthy margins, but they are not going to be massive relative to the companies our friends in the tech community build. Our cost structures won’t allow it.

But that’s okay. There is still plenty of opportunity to build great publications for lucrative passionate audiences. Everything doesn’t have to be massive.

Now… if you want to be the future Hearst or Newhouse and build a massively scaled media company, it’s almost never going to be with a single property. The way media companies scaled in the past and will scale in the future is with a house of brands strategy. You need to own numerous brands that, on their own, might not be all that scaled, but serve specific audiences. One publication might reach maturity, but the smart operator will use the excess cash flow from that and invest in the next one.

Media works. You just need the right attitude when going into it. And a damn long time horizon.

Thanks for reading. If you have thoughts, please hit reply or join the AMO Slack. I may not send an issue next Friday because I’ll be getting ready to travel to the FIPP World Media Congress in Portugal where I’ll be speaking. If you’re going to be there, please let me know. I’d love to meet. See you soon!