Vox Media’s acquisition of Recode appears to be a relatively small deal. No dollar amount was disclosed; Vox is trading a little of its stock for a highly regarded but underperforming tech-business site. The deal, though, is part of a much larger trend of media consolidation and tells us a lot about today’s largely me-too strategies. Just as Verizon (NYSE:VZ) prepares to swallow AOL (NYSE:AOL) (which swallowed The Huffington Post), and as Charter (NASDAQ:CHTR) finalizes its deal for Time Warner Cable (TWC), the table is set for more smaller media properties to seek the umbrellas of larger ones.
Bigness comes and goes over time, but this bout of bigness has been gathering steam across all forms of media, as I wrote when Rupert Murdoch made his play for Time Warner a year ago (“The newsonomics of the new quest for big, big, big”). Now, as the whispers of “content bubble” grow louder, the mating of big and small is accelerating.
Our fish-swallowing-fish narrative grew more intriguing this week when the Recode deal took on Comcastic overtones. As Quartz’s (and formerly Nieman Lab’s) Zach Seward pointed out, Comcast (NASDAQ:CMCSA) (CMCSK) is represented in both ends of the transaction. In fact, Comcast Ventures put venture funding into both a 2009 round and a 2010 Series C round for Vox Media. Comcast’s NBCUniversal News Group, meanwhile, took a minority stake in the new Recode when it left its All Things D/Wall Street Journal home at the end of 2013. It would be a quite logical progression for Comcast to buy Vox, if and when the price is right.
Comcast is just one of today’s collection of whales — one of the pipes companies, or companies formerly known as the pipes companies. Such companies used to just deliver stuff — cable programs, phone service — but now, flush with fat cash flow, they’ve caught the media bug. They’ve convinced themselves that media offers diversification in an age where their core businesses are threatened by cord-cutting and other digital disruptions.
Comcast takes the lead here, having bought its way big into media by completing its NBCUniversal acquisition two years ago. That instantly turned Comcast into a big media player, giving it complete control of the NBC television network and TV production studios; the Universal movie studio; Spanish-language Telemundo; channels like MSNBC, CNBC, Bravo, USA, and E!; and partial ownership of Hulu. It has also greatly expanded its regional sports play, hiring numerous journalists. CEO Brian Roberts has long seen the financial value of owning both distribution and content.
Verizon is the latest arrival. While AOL’s ad tech might be the linchpin of the $4.4 billion deal, lots of media comes along with it, with The Huffington Post only the most recognizable.
That would leave their competitors — AT&T and the soon-to-be No. 2 cable company in the country, Charter/Time Warner Cable — asking themselves the same identity questions. Bet on them getting romanced by media as well. Charter will have to digest TWC first — but key investor John Malone is a guy who knows his way into and out of media (Times backgrounder:“The ‘king of cable’ behind a Charter-Time Warner Cable deal”), so expect it to get into the media action some time soon.
Those four companies now position themselves to be the gatekeepers for both our TV watching and, more importantly over time, our broadband access. They are awash in cheap money, good profits, and flowing cash.
Who else among the country’s biggest media companies might have an interest in news and information businesses? It’s a short list, led by those TV companies that have become TV/digital asset companies. Put Disney (NYSE:DIS), 21st Century Fox (NASDAQ:FOX) (NASDAQ:FOXA), Time Warner (NYSE:TWX), and Tegna (Gannett’s (NYSE:GCI) soon-to-be-spun-off broadcast/digital entity) among the possibles.
Hearst, one of the most successful diversified media companies and an investor in 61 digital companies, including BuzzFeed, deserves a place on the list. Time Inc. has the willingness, though its cash is constrained. Then there’s one non-American company that’s rapidly becoming a U.S.-oriented media concern: Axel Springer, already invested in or connected with Business Insider, Politico, and Ozy, among others.
Persistent in the background, there’s our digital ad duopoly of Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB). Both companies, though, seem to have figured out that they can monetize news content quite well without owning it. So far, Amazon’s (NASDAQ:AMZN) content interest seems to be exercised only personally by Jeff Bezos, through his Washington Post acquisition. And don’t forget Yahoo (YHOO), which could still prove to be a buyer — or a seller.
What would it mean if the top names on that list — companies like Comcast, Charter, Verizon, AT&T, Disney, and Fox — ended up owning many of the entrepreneurial news brands that have captured our attention in the last few years? Is this what the Internet revolution has become?
The answer appears to be yes. The web may have opened unbelievable frontiers of human thought and interaction, but it’s driven by the same business principles as all other enterprise. On the Internet, big not only is best — it increasingly looks even more dominant than it was in analog times. For all sorts of reasons, being No. 1 in a market is disproportionately rewarded.
As revolutionary as the web may be, the business models that support digital media businesses there remain stubbornly twofold: that old standby advertising and, to a lesser degree, subscription payment. In advertising, scale matched with high-investment ad tech drives the $50 billion U.S. digital ad industry and enables 10 companies to reap more than 60 percent of worldwide digital ad revenue. (Google and Facebook take half of that by themselves — and their edge is even greater on mobile.) Our short list of big potential buyers wants in on some of that digital ad money, which is still growing double digits each year.
So against that backdrop, bigs buying littles makes sense. Recode shocked most observers when, at sale, Comscore reported it had just 1.5 million unique visitors — even with the significant NBC broadcast and digital promotion it had received. With the acquisition, Vox Media adds a little more gravitas to its portfolio and gets to extend the Recode events model to its other properties. Maybe Vox’s own network effect will help grow Recode faster; maybe the audience for high-quality tech business news is smaller than many of us thought. Especially when that audience is divided up — including by WSJD, the Journal’s tech site that launched when Recode founders Walt Mossberg and Kara Swisher couldn’t come to a new agreement with the Journal. (We can assume some schadenfreude was expressed at Journal HQ as Recode’s business woes became evident.)
The bigger question is whether even Vox Media, with its 53 million unique visitors, is ultimately big enough to win in its marketplace. And as highflying as it is, BuzzFeed must answer the same question — not to mention a spate of smaller sites, from Business Insider to Mashable to Mic to Fusion. (We see a Twitter parlor game already developed as serial entrepreneur Rafat Ali just laid down his prediction; expect more forecasts to follow.)
Those who’ve pumped hundreds of millions in venture capital into these would-be millennial magnets want a highly profitable exit. Most recently, they’ve been anteing up, matching each other’s rounds, all in an effort to build out staff and product and keep audience growth — their primary metric, ahead of revenue or profit — stoked. Perhaps that poker game will keep rollin’ — or maybe we’ll see bluffs called sooner rather than later. You don’t want to be the last one putting money down if the content bubble deflates — and deflation may be more likely than a dramatic burst.
What would deflation mean? Essentially, we’d see the Recode story writ larger, with bigger digital-only operations. Investors would decide that they’ve lost confidence in business-model projections — that promise of profits to roll in one day from those big audiences — and look for a quicker exit. The most likely route: a sale to the biggest fish, likely at prices below what these startups believe they are now worth. It’s good to have lots of cash sitting around when the market turns.
Of course, Vox Media and BuzzFeed could also sell near a top, or what seems to be a top.
Step back from the buying and selling, and take a look at how much these sites’ business strategies have in common. All of them drive huge traffic, adeptly, from social, at a marketing cost close to zero. All increasingly pick up (and seed) traffic from outside the U.S. to spur growth. And each is going intensely vertical. Whether it’s the newly expanded BuzzFeed Life, with food, travel, health, and parents sections, or Vox Media with its topical sites in tech, food, fashion, real estate, sports, and gaming, or The Huffington Post with its myriad sections — all are going vertical.
This is a race to see, in essence, which horizontal(s) can build the most successful verticals first — a race being funded by those venture millions. Why? All these segments define and parcel out audiences that advertisers want. Common sense tells us that not everyone will win at this vertical game — and let’s recall that magazines and newspapers have been playing it for decades in print and are now beginning to make similar moves online. While the vertical strategy has long made sense, it’ll likely produce at least as many losers as winners.