First, the pivot to video. Then, the pivot to podcasting. Now, the pivot to subscription.
Media companies are struggling. They’re missing revenue targets and laying off employees. Cash is drying up. Runways are shrinking.
Mic raised $60 million and grew to 165 employees, but sold for $5 million. In 2018, Vox missed revenue targets by ~15%, Verizon Media Group laid off 7% of its staff, Buzzfeed laid off 200 employees, and Condé Nast plans to paywall all digital content after reporting losses of $120 million in 2017.
To combat these challenges, satisfy investors and grow top-line revenue, the media industry is hungry for new business models, predictable revenue streams, and increased customer lifetime value.
Here’s the bitter truth: subscription will only work for a small number of differentiated media companies, like The New York Times and the New Yorker. Most media companies don’t have the culture, the personnel or the brand affinity to pursue a subscription model. Once the promise of subscription media fades, media companies will make their next move: the pivot to owned commerce.
What is owned commerce?
Owned commerce is beyond selling a few hundred t-shirts and hoodies with your logo on them. We’re talking about launching, acquiring or licensing entirely new brands, with the same target demographic these media companies are targeting. Think Fuck Jerry’s What Do you Meme, Tasty’s One Top, or Fat Jewish’s White Girl Rose. They’re just the tip of the iceberg for what is about to come.
Before we discuss owned commerce, let’s talk about what’s happening at the intersection of media and commerce. The democratization of logistics and manufacturing, propelled by emerging digital shopping channels, has sparked a Cambrian explosion of DTC companies.
Since World War II, the best consumer product companies monopolized the creation and distribution of products. In manufacturing, distribution and advertising, they benefited from economies of scale. Large factories drove down manufacturing costs. Through distribution partnerships, they bought up shelf space in big box retail stores. By advertising on mass media channels, brands stayed top of mind for consumers. The big got bigger. Only the largest brands could endure expensive advertising funnel inefficiencies. As the saying goes, “We know half of our advertising works, we just don’t know which half.”
Nestle spends 2% of their annual net revenue on research & development. Pepsi, 1%. Procter & Gamble, 3%. Kraft-Heinz, 4%. Rather than investing in Research & Development, big companies invested in advertising. As CircleUp, an investment platform for early-stage consumer brands noted:
“Big consumer companies are slow to adapt to changing consumer tastes because they spend so little on researching what those tastes are.”
By controlling the production and distribution of products, the big consumer companies ensured their continual success. Startups couldn’t compete. The barriers to entry were too high. As Charlie Munger said:
“You can get advantages of scale from TV advertising… If you were Procter & Gamble, you could afford to use this new method of advertising. You could afford the very expensive cost of network television because you were selling so damn many cans and bottles. Some little guy couldn’t. And there was no way of buying it in part. Therefore, he couldn’t use it. In effect, if you didn’t have a big volume, you couldn’t use network TV advertising — which was the most effective technique. So when TV came in, the branded companies that we already big got a huge tail wind.”
Like a bear in the winter, the big players adapted to their environment. With colossal advertising budgets and an arsenal of widely appealing products, they took advantage of mass media. But now, the environment is changing. Many of the hallmarks and core capabilities of multinational consumer product companies are now headwinds, not tailwinds.
Plummeting logistics, manufacturing and advertising costs have sparked a storm of digitally native brands. With the internet’s unlimited shelf space, monopolizing brick and mortar shelves is no longer a defensible strategy. Enabled by low startup costs and targeted digital marketing on Google and Facebook, hundreds… thousands… of small internet-native brands are springing to life. They have low overload, elegant design, and hyper-efficient customer acquisition strategies.
Scott Belsky, the Chief Product Officer of Adobe’s Creative Cloud, calls this The Attack of the Micro Brands:
“This mass of micro brands with massively efficient marketing are, in aggregate, having a much bigger impact than anyone thinks. Using hyper-targeted marketing, just-in-time manufacturing, and social media, these brands find and engage their audience wherever they may be.”
From mascara to mattresses, a direct-to-consumer brand has flooded every industry. There are no more first-mover advantages. The lallapalooza of digitally native brands is a gift and a curse. It’s easier than ever to start a company, but harder than ever to scale one. Competition among consumer product companies has increased, thereby increasing customer acquisition costs.
Digital CPMs are rising. Companies, big and small, are investing more in digital marketing. Advertising inventory on Facebook and Google is saturated. As any economics professor would tell you, when demand for something rises faster than the supply of it, prices rise. Competitive bids for scarce inventory, addressed to the same audience, drives up demand for the same real estate within a feed or a story, causing ad prices to skyrocket.
Spend is up. Impressions are down. Prices are up.
Advertising on Facebook became 70% more expensive between 2017 and 2018, while ad spend on Facebook grew 40% during Q2 2018. Cost per click is growing 23% month-over-month and 85% year over year.
What’s Going to Happen Next?
“Sizable, loyal audiences will be of the most coveted “products" over the next decade.” — Web Smith
Companies will pivot to owned commerce. Why? Media companies believe they will have a competitive advantage over traditional DTC players because they understand how to connect with their audience better than product-first DTCs.
Many DTC companies have tried to launch media properties with varying success. For example, Casper launched Van Winkle, the brand’s standalone online publication, in 2015, but quickly shut it down after struggling to deal with the site’s independence from the brand.
Media properties believe years of experience engaging with their audiences will give them enough insight to begin launching products and creating new brands. However, just like the many media pivots previously, only a few players will succeed in the pivot to owned commerce. More specifically, only the media brands (and influencers) who truly have brand loyalty will be able to successfully launch owned commerce brands.
True brand loyalty means that people would miss your company if it disappeared. The best heuristic for the differentiation of a media company is “Need vs. Feed.”
If you need a company, you seek it out or opt-into communication from it. “Need companies” are the email newsletters you subscribe to, the creators you talk about with friends, the podcasts you listen to weekly, and the writers who who’ve blown your mind so many times that you’ll never miss a word again. They have extremely loyal audiences. Many have direct relationships with them. Readers become followers and followers become customers, brand evangelists, and voluntary product advisors.
“Feed companies” are the opposite. They’re undifferentiated. They try to be everything to everyone. But in reality, there’s nothing to no-one. Most feed-discovered content is interchangeable. To be sure, there are exceptions, such as Casey Neistat and Kylie Jenner.
If you want to know if a company is a Need or Feed company, you can ask a simple question: Are you looking for their content or is the content finding you?
Those media brands who do truly have brand loyalty know more about their audience than “Feed” companies. Instead of having many viewers who stumble upon your content through a google search, “Need” companies can leverage their frequent interactions with their customers by gathering lots of data on their wants and needs.
Data-savvy, audience aware publishers are armed with a treasure trove of expertise. They know what types of content people resonate with, what kinds of products people interact with and the frequency with which they do both.
The Netflix Approach
So how will media companies with loyal followings determine which owned commerce products to launch?
First, publishers build audience intelligence by promoting other companies’ products. After seeing the data on what performs well, they will launch and promote their own. I call this “The Netflix Approach.” It’s enabled by a combination of owning and knowing audiences.
First, Netflix acquired large volumes of streaming rights through partnerships with media companies, such as Starz and Disney. The user experience was excellent, so Netflix attracted passionate brand loyalty. As their pockets deepened, they expanded their user base. Informed by the data they acquired by streaming content from other studios, Netflix augmented licensed content with its own original shows, such as House of Cards.
Backed by data and informed by human creativity, Netflix matches the efficiency of Silicon Valley with the artistry of Hollywood. Speaking of the success of House of Cards, Netflix’s Chief Content Officer Ted Sarandos said:
“It was generated by algorithm. I didn’t use data to make the show, but I used data to determine the potential audience to a level of accuracy very few people can do…We’ve been collecting data for a long time. It showed how many Netflix members love The West Wing and the original House of Cards. It also showed who loved David Fincher’s films and Kevin Spacey’s.”
Today, Netflix favors its own, original content. Almost everything on the Netflix home page is an original. At the end of 2018, Birdbox, a Netflix original movie was viewed by 45 million people over its first seven days. Astoundingly, Netflix spent almost nothing on marketing or promotion.
As Matthew Ball, the former Head of Strategy at Amazon Studios wrote:
"The reality is that the most valuable real estate in the world is the top fold of Netflix home page. And Netflix not only controls it, they don’t rent it to anyone. You can buy a billboard, Amazon’s homepage, Facebook, Snapchat. Not Netflix. It’s only for Netflix. And it reaches, if Netflix chooses (actively or via algorithm) to promote the content, millions more than any ad placements – and more effectively, as it’s bottom of the funnel (audiences are in the mood to watch and just a click away). But you don’t see the “spend” on the P&L.
This is a huge advantage as it creates several virtuous cycles where Netflix can outspend on content and make more of it, yet de-risk viewership and payback because it simply out-reaches everyone else."
In summary, Netflix followed a six step process: (1) Create a brand people love, (2) gain early revenue traction by selling other companies’ products, (3) collect data on user behavior, (4) create owned products based on data insights, (5) sell those products to your existing audience, and (6) iterate and improve those products.
In the pivot to owned commerce, publishers will implement “The Netflix Approach.” Using their existing audiences as guinea pigs, they’ll advertise products for other companies. In turn, they’ll acquire engagement data and learn about their audiences. Informed by user behavior and emerging trends, they’ll launch their own white-label products. Once the products are launched, they’ll use customer data to iterate and improve their offerings.
The Pivot to Owned Commerce
The publishers of today are the commerce companies of tomorrow. Publishers with organic reach can launch and test products without paid media. Intimate customer touch-points remove the need for focus groups. With shopping experiences that are native and true to the brands DNA, they can scale fast, with relatively low investment. They can A/B test every ad, evaluate customers with engagement data, and use real-time data to iterate and improve creative. By diversifying their revenue streams, they’ll decrease business risk and increase their revenue multiples.
Powered by organic distribution, “Need Content” publishers are armed with competitive advantages that cannot be bought on Facebook, Instagram, Google, or Amazon. Brand loyalty, trust and credibility can’t be bought. It must be earned over time. Influencers and media companies have spent years building relationships with their audiences and know their audience better than any competitor possibly could. All media companies will follow the herd to owned commerce, but only “need content” publishers with trust and credibility will succeed.
Content and commerce are converging. Publishers who appeal to owned audiences will win the upcoming pivot to owned commerce.