May 2010 Archives

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.