To judge from a hysterical press, one might think the apocalypse was already upon the media industry: rolling cuts this month at Time Inc., the hallowed magazine group; a new catchphrase among advertising pundits, flat is the new up; and revisions even of the internet advertising that was supposed to be the salvation of the media industry. J.P. Morgan's Imran Kahn just slashed projected growth next year of US online display advertising from 16% to 6%.
We should be so lucky. These supposedly brutal layoffs at Time and other titles amount to only 6% of headcount at the bloated Time Warner magazine group. Other media groups such as the New York Times and Conde Nast—a hiring freeze, how callous!—are being even more squeamish. From conglomerates to internet ventures, executives should be planning now on a decline of up to 40% in advertising spending during this cycle. Instead they're sleepwalking into economic extinction—even those lean online ventures which were supposed to take up the mantle and preserve New York's position as a media capital.
Isn't a 40% decline overly pessimistic? (That scenario—which I first floated last month—is gloomy even by my standards. And Gawker Media's trademark bearishness in 2006 or earlier this year has sometimes been dismissed as gamesmanship: an attempt to unsettle actual and potential competitors. My motives are indeed not entirely pure.) Actually, such a collapse in advertising spending—affecting internet media as much as television and print—is a contingency internet businesses should plan for. Here's the argument.
Advertising forecasts don't anticipate a deep recession. Mary Meeker showed recently with a regression analysis how sensitive advertising revenue was to GDP trends: for every 1% decline in output growth, the rate of advertising growth falls by 3%. But the Morgan Stanley analyst and her counterparts are still basing their models on redundant forecasts for the world economy as a whole. Economists are notoriously bad at predicting the depth of a recession. Meeker's presentation to the Web 2.0 conference cited the IMF's 2009 forecast that the US economy would be basically flat. Again, we should be so lucky; let's look at the precedents.
Other banking crises point to steeper declines. A more reasonable assumption is that US output will follow the path of other countries that have suffered a credit crunch in the last two decades. A relatively mild scenario is that of Japan, where GDP grew at an average rate of only 1% a year during the Asian economy's "lost decade" of the 1990s; a central projection might be based on Sweden's banking crisis in 1990-1993 during which output fell by 6% even though Stockholm acted relatively promptly to recapitalize troubled banks much as western governments are doing right now; and let's take as the nightmarish extreme the experience of Indonesia, where the economy collapsed by 13% in 1998. Plug these scenarios into Mary Meeker's model: US advertising spending would decline by between 9% and 43%; if the US experienced a three-year downturn like Sweden's, the advertising market would decline by a projected 27%. But that won't hold across the board, will it?
Internet advertising is by no means immune. Advocates of the internet claim that the sector is both more mature than it was during the last downturn; and it's more "measurable" than other media. They hope to avoid a repeat of the 27% decline in 2000-2002. Good luck with that. The sector's maturity also means that its underlying growth is more sluggish than it was in the late 1990s. In 2001, internet advertising swung to a 13% decline from 78% growth the previous year; this time the sector starts from a growth rate of 27%; I would hate to see what a swing as violent as the dotcom burst would look like. As for the measurability of internet media: sure, marketers and their agencies can track engagement and clicks in great detail online; but it's still only television advertising that can demonstrate a correlation between spending and a boost to a marketer's sales.
So, what to do? Well, first of all, publishers should be planning for the worst—now. Check out the title of this chart from Sequoia Capital—presented to scare the Valley venture capital partnership's portfolio companies into drastic cuts. The motto—survival of the quickest—is self-evident to lossmaking venture-backed companies. It applies even to companies such as Gawker Media which are—for the moment at least—profitable. Fortunately, private companies can move more nimbly than established behemoths to boost revenues and reduce costs. There are six main levers.
1. Get out of categories such as politics to which advertisers are averse. That's easier for us to say since we spun off Wonkette earlier this year. And outfits such as the Huffington Post and most big-city newspapers—defined by their political coverage—will have difficulty redefining themselves. But media groups cannot afford in the current environment to fund their most noble missions; they should leave that to public-spirited non-profits such as Pro Publica.
2. Renegotiate vendor contracts. It's the one silver lining of recession: just as publishers compete more fiercely for advertising business, so our own vendors such as hosting companies and hardware providers come under growing pressure. This is how deflation spreads. One might as well take some advantage of it.
3. Consolidate titles. Time-pressed media buyers are drawn to scale. Most websites are still way too small to register with the audience-tracking services that agencies rely upon. Of 18 titles launched at Gawker Media, we've already spun off or shuttered six. Even now, 91% of advertising revenues come from the top six remaining titles. Every media group has a similarly lopsided distribution. It's time to choose which properties make it aboard the lifeboat. The era of the sprawling network—established franchises mixed in with experimental sites—is over.
4. Offshore more. For publishers with most of their operations in the US, the decline of emerging market currencies is a potential boon. The dollar cost of development work in Hungary, for instance, has fallen by more than 30% since mid-July. It might seem perverse to push work offshore when costs in the US are falling; in fact, companies should move operations where costs are falling even faster.
5. Variable compensation. Sequoia recommended that their portfolio companies increase variable compensation such as sales commission in exchange for a reduction in base salary and bonus guarantees. We believe media companies should go further than this: reducing base pay for all highly-paid executives in exchange for a share in a profit-share pool. That way staff share more directly in the benefit if revenues turn out better than feared—in proportion to the amount they've sacrificed. And the company lays off some of the risk of volatile revenues. One other possibility along the same lines that we're exploring: four-day weeks for writers willing to trade some income for more free time.
6. More value for marketers. Internet publishers have forced marketers into a straightjacket of standard ad units too small for brands to breathe. If the sector is to capture a larger share of brand advertising from magazines and television, the creative needs to have more impact. We've introduced three new units: the marquee—1,000 pixels by 250—at the top of each page; the panorama in the flow of the posts at 800x250; and a sponsored post format for marketers with a message best communicated by text.
This is all pretty abstract so let me share a couple of charts. They're based on real numbers—and our projections for next year—though we've removed the numbers on the y-axis to maintain at least the appearance of commercial discretion. The first chart shows where Gawker Media would be if the company only reacted in the middle of next year after the decline in advertising hits; the second shows our current plan assuming internet display advertising declines by 20% in each of the next two years and we can no longer out-perform the market. It looks pretty bleak: but at least lean internet businesses can make it through! And if I'm being unduly gloomy? Well, then—see third chart—there will be plenty of cash to invest—or acquire the assets of companies that can't withstand even the mildest of downturns.
Too late
30% decline a year in ad market—with cost cuts
The optimistic scenario: quick bounce back
Background
—-A blog mogul turns bearish on blogs [New York Times, 2006]
—-Gawker Media ditching three sites [Alley Insider, April 2008]
—-How low will online ads go? [All Things D]
Nick Denton is the CEO of Gawker Media. This post is reprinted with his permission from his blog.
