For traditional media businesses with a background in print, the rocketing profiles and valuations of the latest generation of pure-play, free digital content businesses have been hard to watch with anything but jealousy verging on outrage.

Vice was valued at $5.7bn at its last funding round in 2017; Buzzfeed at $1.7bn; Refinery29 at a mere $0.5bn in 2016. There is a long list of such companies including Quartz, Mic, Vox, Clique Media, Group Nine Media, etc, who have convinced investors that they will become very valuable, creating significant long-term profits, even if many are still burning through cash.

Their generational conviction was built on shared beliefs that:

  1. Digital advertising’s share would continue to grow and new generation companies would win a significant proportion of it.
  2. Their social media strength would continue to grow the scale of their reach and their commercial revenues across both their own and social platforms (predominantly Facebook, Instagram and Snapchat).
  3. Native advertising supported by the creativity and consumer understanding of their teams would grow and be high margin, like the creative agencies they imitate.
  4. Video could be delivered at low cost, drive more social scale and add a further layer of revenue growth.  
  5. E-commerce and affiliate revenues would become significant.

In combination, these forces would enable the new generation to achieve the 30%+ margins that the print publishers once took for granted. These companies were insurgents, ripping up the status quo, with all the confidence and self-belief that brings. As Suede put it 24 years ago…

But it isn’t working out as promised. Time for the ‘poison and the pity’?

Mic is closing, having spent its $60m of investment. Buzzfeed can’t get close to the revenues it promised to support its business plan for world domination across an expanding range of verticals. Its CEO, Jonah Peretti, recently floated the idea of merging Vice, Refinery 29 and his own Buzzfeed.

If BuzzFeed and five of the other biggest companies were combined into a bigger digital media company, you would probably be able to get paid more money.

Jonah Peretti, CEO Buzzfeed.

Disney has significantly written down the value of its holding in Vice. 'Merging' verticals back into core brands, laying of staff and cost-cutting are the flavours of the day.

What has gone wrong?

When Facebook and Google win around 85% of all new digital advertising revenue, little is left behind for any media owners, new generation or old.

Social media platforms are behaving as monopolists always do – with the arrogance of absolute power. As Facebook thrashes around to stem the tide of its own bad news stories it cares nothing as its algorithm changes rip pages from the business models of its ‘content partners’. Facebook certainly has no intention of sharing its core revenue streams unless some yet-to-be-invented global regulator forces it to do so.

Some brands like Lad Bible still achieve phenomenal reach, driven by Facebook owned social platforms. But the stories that drive that reach are a febrile mix that at times show a Trumpian level of connection to the truth.

Native advertising remains in growth but the margins are far thinner than expected. Being a creative agency as well as a media owner is hard. The agency discipline is about deep client relationships and creative perfectionism. Media companies are production machines, churning through content and ideas, constantly pitching for one-off briefs rather than enduring clients.  

Video remains in demand with attractive yields. The problem is distribution when social channels don’t want their feeds littered with commercial messages. Well, not unless the revenues flow directly into their own coffers.

Which leaves the affiliate gold rush. Almost every media company, new and old, now has an affiliate strategy. When typing ‘Best anything you can possibly think of’ into Google, the list of media companies new and old offering their opinion is quite remarkable. Affiliate revenues are creating profitable businesses (look at Future or Wirecutter) but the pressure is building on those with less reason to be the trusted recommender of the ideal toaster.

But it is the maths of compounding that is doing most to suck the life out of the new generation of pure play digital content businesses – as well as the old generation fighting equally hard to prosper on digital platforms.

Despite the terrible news flow demonstrating how unworthy Facebook’s management is to control such powerful data about 46% of the world’s internet connected population, revenue growth is still powerful, if slowing. During the first three quarters of 2018, Facebook’s revenues have grown year on year by 33% to $17 billion. This is a slowdown from the near 50% compound achieved previously but is still more than $4 billion of additional revenue won from the global, digital advertising market.

Google’s advertising in the first 9 months have grown, year on year by 'just' 23%. But that is $15bn of fresh advertising revenues won.  

And now there is a new, global giant with an equally potent, data-driven advertising proposition. Amazon does not report its advertising revenues, placing them in the bucket ‘other’, which will be worth around $8bn this year. Analysts suggest that $6bn of this is now advertising revenue and project that advertising revenues will grow at least a further $10bn over the next 3 years.

Einstein said that compound interest is the 8th wonder of the world.

The compound advertising growth of the three global oligopolists has equally powerful but more brutal implications.

That they will win at least $30bn of fresh advertising revenue in 2019. Probably significantly more.

That only a few of the strongest, free media providers will be able to survive the pressure of this growth.

That if your content isn’t good enough for consumers to pay for it, a business model that goes well beyond advertising is critical.

Unless global government intervenes to break the oligopoly.