Vouchification

I'm still a bit floored at the sudden surge of traffic to my little blog as a result of getting picked up by Business Insider, Lost Remote and TechMeme. While the traffic is flattering, the reader commentary is what makes it interesting.

Not surprisingly, most of the commentary was anti-Patch and came from either competitors or hyperlocals who probably feel threatened by their ominous soon-to-be arrival in their hometowns. I'll admit it. I too sense Patch's growing shadow on my little hyperlocal - and it's something that motivates my team to do the best work we can to prepare for the coming competition.

But the set of most interesting comments came through Twitter from two Indian developers, Arjun Ram and Brij Singh, who pointed out that Patch, as well as hyperlocal aggregators like Fwix and Outside.in are probably not counting on creating stand-alone profitable businesses, but would be part of a group of websites operating under "portfolio theory."

My Indian developer friends are probably right - and that bothers me a great deal. To explain, I must digress for a moment.

Years ago, when I was a political appointee at the U.S. Department of Energy, I was lucky to have a boss named Dr. Mark Mazur. More than anyone, Mark taught me the value of rigorous, critical thinking - and that if you don't understand something, you need to ask more questions.

When I worked for him, Mark was the Chief Economist for DOE. He'd already been a staffer for the White House Council of Economic Advisors and one of the Senate staffers who authored the big 1986 tax code rewrite. He's had a number of similar jobs since DOE. Today he's in charge of tax policy analysis at the U.S. Treasury Department.

Mark's resume is important only to convey to you the wattage of intelligence I was exposed to every day. For example, Mark once told me, "I love the tax code. It's like a big puzzle. Sometimes I just read different sections just to try to see how it all fits together." Then he pulled out a copy of the U.S. Tax Code and proceeded to break down some obscure section with me.

I try to carry Mark's modest, rigorous system of study to everything I do. On my best days, I am constantly assuming that there is more to know before I can really understand.

So, when Brij mentioned portfolio theory, Mark's training sent up all kinds of flags. Here's why:

Portfolio Theory is a finance term, that suggests that using mathematics, you can purchase a basket of stocks, bonds and other investments that reduces risk and thus produce a steady rate of return. So my managed portfolio ensures that when my automobile stock goes down in a recession, I have a brewery stock that goes up when the jobless drown out their sorrows.

Portfolio theory got a lot of attention in the boom-boom 1990's, encouraging business schools to produce and investment firms to hire "quant jocks" that could produce sophisticated mathematical models to choose investments. The whole math-based portfolio system came crashing down in 2007 when the American mortgage market melted down - largely because much of it was based on rickety, too-complex mathematical models with difficult to understand metrics of success.

The complex math behind the portfolios became black boxes that nobody, even the quant jocks, completely understood. So long as the bottom line stayed in the black, there were no problems. But when some things went bad - nobody knew how to fix it, and everything went bad.

The portfolio theory for websites is similar to that with finance. If Yahoo's video website isn't making much money today, Yahoo's entertainment news section will make up the difference. The different operations subsidize one another, supposedly ensuring a smooth rate of return.

But I see two logic flaws with website portfolios: First, unlike a basket of stocks, websites are not independent, dispassionate actors. A stock will go up or down, regardless of what the investor does. Website portfolios react specifically to the resources applied to them by their holding company.  Second, the subsidization process inherently disguises unprofitable, undesirable products.

Applying portfolio theory - and it's inherent subsidies - to websites also sounds suspiciously like the content model for a traditional metro daily. Some people read it for comics, some people read it for obits, some for the columns and there is an expected "bleed over" as readers jump from their favorite obits to the sports page now and then. Yet, nobody really knows which part of the newspaper really makes money and which part is the dog.

Here's hoping the big portfolio websites, like MSNBC.com, Yahoo! and AOL have much better reader metrics than most metro dailies.

So back to Patch and Brij the developer's comment, that most news sites are operating on portfolio theory. So, AOL's Patch doesn't need to be outright profitable, it just needs to channel a bunch of traffic to other AOL sites, and AOL sites can channel traffic to Patch. National advertisers can make just one buy, AOL, and they'll be guaranteed reach into hundreds of hyperlocal community news sites.

From AOL's pristine Virginia campus, this probably makes sense. But I just can't help but wonder: What's the purpose of creating a business with no plan to make it stand-alone profitable?

The fact that AOL could even consider such a thing is ominous news for my little hyperlocal site, the Center Square Journal, since Patch could easily outspend me, as well as channel in traffic from all kinds of other AOL sites. But it's also bad news for consumers, since there's nothing pushing Patch to build sites locals really want to read. After all, what's the profit motive if they're already getting traffic from other AOL sites?

It has been just over a month since Hunter Clauss and I relaunched the Center Square Journal. As I expected, Hunter has turned out to be a helluva writer and editor, helping to make CSJ into a great news product that more and more people in Chicago's Lincoln Square, Northcenter and Ravenswood Manor neighborhoods read to keep up with their community. Our readership is growing and CSJ is gradually becoming part of people's regular media diets.

Hunter's talent and ability has allowed me to almost totally focus on the business side of CSJ, which is nothing less or more than sales, sales, sales. No, we are not breaking even yet - and I'm not taking any money from the business either - but I am making inroads and learning a lot.

As I've been making my sales calls, a few thoughts about news media have crystallized for me.

1.     Sales work exposes the flaws and reveals the true value of a product.

This is a "duh" statement for anyone who has spent a day making sales calls (or knocked on doors for a political candidate) but it needs to be repeated since it is the bedrock of everything I've learned in the past month.

In the context of news media, I believe that most of the public dialogue about news has conducted by journalists and those with journalist tendencies. The result has been too much discussion about ethics and mission and not enough about product and what consumers - advertisers as well as readers - really want.

When you repeatedly talk with potential buyers of your product you experience a fiery crucible that reveals what's good about your product and what is unneeded. For CSJ I've learned the true value of local, local, local. Advertisers desperately want a channel to talk to the customer around the corner. We do that very well at CSJ. So now we focus on that and little else. You will never again see a story in CSJ that could reasonably appear in any other publication.

2.     News media is a product, not an art. It should not be romanticized.

Again, I think because journalists conduct most of the public dialogue about news media there are too many people who dreamily recall cigar-chomping men hammering out stories on manual typewriters while wearing bad hats. This is a dangerous habit. You should run from these people as if they have the plague.

To cite Bill Wyman again, newspapers and TV news have thrived on the predication that they provide direct access for advertisers. Those days are gone. Despite zillionaires buying the Chicago Sun-Times, Chicago Tribune, New York Times and Wall Street Journal with no clear business model, the rest of the news world needs to keep a clear focus on figuring out where the money is in this business.

This does not mean news media should become nothing but TMZ and Huffington Post. Those are excellent products - in the same way McDonald's hamburgers are an excellent product. Discussions about news media need to begin with the question, "Who are our customers and what can we charge them?" before anything else. Otherwise you invite large scale money hemorrhaging and eventual bankruptcy.

3.     Brand value is everything in news media success

Unlike a Mercedes-Benz or a McDonald's hamburger, news media is an intangible product that requires long-term consumer interaction to obtain a consistent identity. This is a tricky business that requires clear thinking and vigilance on the part of editors, publishers and sales staff to ensure readers and advertisers are getting the same value messages.

For instance, for CSJ I realized that while readers may value the local focus of our publication, so do advertisers - and so I made it part of my sales pitch. Hunter and I talk about what kind of stories we should be covering and I tell prospective advertisers about those decisions. I believe this conveys to them that if they advertise with us, they become part of a publication that provides clear value to the community - just as they do with their own products and services.

The brand value for CSJ readers and advertisers is reliable, high quality, hyperlocal news. This means clear writing, no opinion, hard news that stays strictly within our coverage boundaries. For instance Hunter and I recently discussed whether we should write about openly gay State Rep. Deb Mell's engagement announcement. In an age when most news consumers click through four or five publications a day as part of their news diet, we decided that while Rep. Mell represents a part of our coverage area, hers was a statewide story thoroughly covered elsewhere.

What else could we write about that day? The Food Network taping a show in a neighborhood bakery and a local alderman's reluctance to vote in favor of allowing Wal-Mart to expand in Chicago. Nobody else wrote about those things and we think we brought more value to our readers and our advertisers. Local news, local readers, local advertisers.

4.     Large media organizations are caught between a need to lower prices, a reluctance to eliminate outmoded, expensive media structures and unclear brands

This is important: While Hunter is drawing a salary from CSJ, he is far from getting rich. And I am far from getting paid. We are pouring in our own sweat equity with the hope that we'll eventually create something sustainable.

This is exactly what Steve Jobs and Steve Wozniak did with Apple. What Henry Ford did. Hunter and I are building a new business in the proverbial garage. It is cheap and we have no legacy expenses. It is a tremendous competitive advantage in the news business: We have no shareholders or lenders monitoring our revenues and it provides us with tremendous flexibility with our product and with pricing.

From what I hear from people inside large media organizations and from my own outside observation it seems that leaders at companies like the Chicago Sun Times, Chicago Tribune, the New York Times and the Wall Street Journal know they have not yet hit the floor for advertising prices. Yet they are also reluctant to really cut away at their companies - and they still have not identified their brands.

And no, I don't think news organizations have made the real cuts yet. ABC News' 25% layoffs this past week and plan to create "digital journalists" seems to be the right direction. A few years ago I read about Brazilian TV reporters who would carry small Digital-8 cameras, shoot their own footage, do their stand-ups using tripods and then edit the footage themselves. Yes, it probably looks less polished, but in the YouTube era I think we can expect news consumers to accept rough edits and poor framing in exchange for more news choice.

As for brands, I am puzzled why the New York Times and the Wall Street Journal are preparing to engage in a local news war. If is this where the advertising is, then Carlos Slim and Rupert Murdoch should invest their billions in tabloid newspapers and slim down the Times and Journal to staffs that can be sustained by their national coverage.

Locally, I can't for the life of me figure out what the Tribune and Sun-Times are supposed to be. A brawny city news tabloid for the Sun-Times? A publication of record with "higher end" reporting for the Tribune? Then why does the Sun-Times still pay Lynn Sweet? Why does the Tribune have a tabloid edition and a broadsheet? Pick a direction, slim it down. Go through the crucible.

5.     Revenue is the cheapest kind of money.

It's not a new saying, I know, but I most recently heard Linda Darragh, Director of Entrepreneurship Programs at University of Chicago say it at March's MIT Enterprise Forum here in Chicago. She said it at the end of moderating a discussion about the value of obtaining investors versus bootstrapping a new enterprise.

Almost every successful enterprise (biotech excepted) has had a period of bootstrapping where the concept was proven out by making sales. Successful sales can make an enterprise more attractive to investors - but it also alleviates entrepreneurs from the pressure of investor payback concerns.

And as I said in Point 1, going through the sales process helps you determine what works and what doesn't.

Those who want to create successful news media enterprises should begin not with the question, "Where do I get investor money?" but, "How am I going to make money?"

If you can't provide the answer to that question, no amount of money from the Knight Foundation, Carlos Slim or AOL.com is going to save you.

The great debate about how to pay for the news media future has centered on advertising, foundation financing and subscriptions. But Chicago entrepreneurs Jeff Leitner and Brian Timpone think we should consider a fourth model; something they call "Private Label News".

In a YouTube video they produced called "The Big Idea", Leitner and Timpone pitch directly to potential clients. Who are they? "They tend to be organizations that are best in class and nobody knows it or have a unique take on the marketplace and nobody knows it," said Leitner to me in a phone conversation. "Organizations that need the market place to understand the issue more fully, so the public would know why our client is best suited to help them."

I think of it as being more like "Guiding Light", the long-running, recently-cancelled soap opera that was wholly sponsored by and owned by Proctor and Gamble for over fifty years. As a sponsored television show, P&G paid ABC for the airtime and put on their show. ABC acted as a conduit for the show, whatever the content might be, because P&G paid for it and produced it themselves.

But "Light" was a soap opera and this is news.

I know Leitner professionally, and some months ago he invited me one afternoon to meet Timpone to help them hash out their idea. Mostly we talked about various ways news media companies attempt to make money from their products. The word "journalism" never came up in our conversation. Instead the discussion was entirely focused on how to actually make money from news.

For that reason, there are many who will have a problem with Private Label News. There's also an inherent conflict of interest problem - if I am paying for the news coverage, there's a good chance it might be slanted in my favor. Italy, whose billionaire Prime Minister, Silvio Berlusconi, owns most of his country's news media, is struggling with this problem in a big way, but Berlusconi doesn't seem to have problem with it.

Unlike Berlusconi's Mediaset, Private Label News does not aim to cover the big stories of the day. Leitner and Timpone imagine it will be interesting to those who want the smaller stories of the day to get coverage. As the "Big Idea" video suggests, it would cover industries that have lost their coverage as a result of shrinking news budgets.

"Timpone has been doing this for years on behalf of the U.S Chamber of Commerce," said Leitner. "They want good coverage of the state Attorney Generals offices, [because] AG's are a real battleground on the issues for tort reform debate. That's a real good example of turning the lights on in the gym so people can draw their own conclusions."

The news service Leitner refers to is Legalnewsline.com. It works just like any other wire service, and plenty of local newspapers quote from it. It is hard news, covering a beat that nobody else wants to or has the resources to cover. It has a few small advertisers. The "About Us" page doesn't draw any connection to the U.S. Chamber of Commerce.

Frankly, as a reader, I am not quite sure what to think of this approach. It seems impartial, and I know Leitner well enough to know he is not hiding anything from me. But the average reader would not entirely know who is behind legalnewswire.com - so wouldn't knowing that information change how their news is received?

But then again, think of all the talking points fed to Glenn Beck and Keith Olberman by less than impartial sources. All the effort expended by various PR agencies to influence reporters - the junkets, the personal conversations.

When I first started working in politics, I helped put on a "frozen chicken bowling" event with famed chef Wolfgang Puck in the U.S. Capitol, so Congressmen and the national press would learn how chicken categorized as "fresh" are actually frozen, according to USDA rules. The event was a smash hit, with stories in papers and TV stations across the country. Soon after, the USDA changed the rule on what constituted as "fresh" chicken.

The event was sponsored by smaller local chicken producers that didn't have the resources to freeze their chickens and ship them across the country. My lobbying firm cast it as consumer issue, but for the local producers, it was a money issue.

None of the TV stations mentioned the appetizers handed to them personally by Puck, or that they got to bowl chickens with famous Senators. That must have impacted them, right?

Private Label News is on to something. I am just not sure where it will take us.

Since I co-launched a new hyperlocal news site last month, I now spend a lot of time thinking about hyperlocal business models and their relative merits. And like any trending buzz word, "hyperlocal" is beginning to take on a lot of different meanings. Here I hope to tease apart some the mashed up meaning and bring a little clarity to this little corner of the news media world.

But first a polemic: I am a strong believer in the long-tail theory. In that vein, I believe Hyperlocal is yet one more slice of the tail. It will never dominate news, but it will become a hard to ignore bit player, sort of like 12" club remix records.

There's a lot of talk about hyperlocal these days, because people are still assessing its ultimate value and trying to figure out how it fits in with the rest of the media mix. But in the end, I think the talk will die down and hyperlocal will become just one more part of everyone's daily media diet.

It appears that hyperlocal news is separating itself into three broad implementations I call:

• Aggregation;
• Augmentation; and
• Original Content

Aggregation is the easiest to implement, since it is merely grouping news stories by town, neighborhood or zip code. It is growing the fastest since a robust aggregation hyperlocal site merely needs a good news scraper/spider to pull original content from elsewhere. It also provides the least value. Quite a few Google Ad link farms are aggregation hyperlocal sites.

Examples: Outside.in, Patch.com

Original Content is on the other side of the extreme, where original content is generated by some mix of dedicated or freelance on-the-ground reporters. This is time-consuming and expensive since original reporting requires lots of legwork. It is also of high value to readers, since the site is providing content that is otherwise unavailable.

Examples: CenterSquareLedger.com, MyBallard.com, BaristaNet.com

Augmentation is not exactly a compromise between the two but it does take from both implementations. As the name suggests, it is always a part of some already existing news collection enterprise. The hyperlocal content can be either repurposed news from some existing publication, "directors' cut" versions of stories that didn't make it on TV or in print, a reporters' blog or other stories that were never intended to go on air or in print.

Examples: KOMOnews.com/communities, NY Times: The Local, Chicago Now

In my opinion, all of the above implementations qualify as "hyperlocal" news. There are many who would disagree with me, probably mostly those who run Original Content sites.

Also, while all of the above implementations use the name "hyperlocal", I think it is important to note that they are no more direct competitors than Digg.com and NYTimes.com are direct competitors.

To illustrate, let me compare hyperlocal local news to a more common example.

Aggregation = Aldi

Augmentation = Basic supermarket

Original Content = Boutique butcher shop

Aggregation is cheap and gives you no more value than the basics. Just like Aldi.

Augmentation is meant to be part of a broad offering of content. There's lots to choose from, but not all of it is targeted at your needs. Most of it is produced in a distant factory with little local flavor.

Original Content is made just for you, has lots of local flavor and is quirky. It doesn't always have the most professional methods, but you tend to look the other way because you feel like you have a personal relationship with the people making it.

I also believe that each of these implementations serve different groups of advertisers. Because of the audiences served by each implementation, it is hard for me to see how advertisers would benefit by moving between each group.

• Aggregation is almost a pure Google Ad play or for broad national ad campaigns.
• Augmentation would work well to extend national or regional ad campaigns looking to penetrate certain geographic areas.
• Original Content sites are mostly for regional or neighborhood-based advertisers.

I believe we should expect all of these implementations to grow and peacefully co-exist for some years to come. All are potential money-makers because all of them aim to serve a different audience and can carry different types of advertisers.

The Center Square Ledger has been officially publishing for three weeks now and I think we're starting to get the hang of things. After a frenetic publishing schedule to show new readers that we've got a lot going on, we slowed down a bit. The slower pace doesn't seem to have hurt our daily average readers, which has settled at about 350 a day.

This is a GREAT number from our perspective. Outside of flyering the neighborhood el stops on our first day and hitting the local blog scene, we've really been growing by word of mouth. 350 a day puts us just over 10k a month, which was the dream scenario Patrick and I had when we talked about our launch. This is a real number ­- five digits - that you can show people.

So while traffic is doing well and we seem to be publishing compelling content, revenues are not what we'd like.