First, a quick review of the media company business model:
Media companies make words and pictures.
Those words and pictures are used to draw a crowd.
That crowd is rented to advertisers in exchange for money.
The words and pictures are the raw materials.
The crowd is the product.
The advertisers are the customers.
The base case usually has the media company creating their own words and pictures although purchasing these items from third parties is also quite common. In either case there is an enormous cost associated with corporate sponsored content creation. Clearly the internet has disrupted the economics of content creation in myriad ways including independent, lower cost user generated content models. That’s a subject for another day in this case let’s look at the less obvious phenomenon of competitor created content.
Using Fox News Channel (FNC) as a case study is instructive not just because they are the largest but also the most financially successful practitioner of this tactic. The process begins with a competitor creating content for the purpose of drawing a crowd (viewers/readers/clickers) that has the size and characteristics that advertisers are willing to pay for. A practical example is ABC’s daytime stalwart ‘The View’. This content generates around 2 million viewers on a daily basis which in turn translates to a certain level of engagement with ABC’s digital offerings.
At the same time FNC posts the ABC content on its digital properties (usually above the fold; an indication of its potential value) and draws a crowd that has the size and attributes its advertisers are willing to pay for. The beauty of this model is that one company (FNC) captures revenue without any commensurate cost while the other company ABC bears all the cost and provides revenue to its competitor. An argument can be made that the revenue FNC receives wouldn’t be available to ABC anyway. Perhaps. Or that the revenue ABC receives is greater than what FNC receives. OK. The real point is that FNC’s breakeven occurs with viewer #1 while ABC’s break even is some number far greater than viewer #1.
Assume Whoopi Goldberg or Joy Behar says something designed to appeal to the show’s core audience. There is a high probability that the same content will elicit a strong response from FNC’s core audience. In both cases the same piece of content has drawn a crowd that can be rented to advertisers. The difference is ABC absorbs all of the cost for the content creation while FNC uses the content cost free. (Obviously broad strokes here). It is true that ABC does generate revenue from this content, however it is safe to assume that the ROI for FNC is much higher than for ABC.
Like all media companies, various FNC competitors invest in content creation in order to draw a crowd they can rent to advertisers. For instance ABC airs “The View” a show that incurs substantial operating costs. Even a cursory glance at FNC’s home page would show a ‘The View’ based story on a virtually daily basis. Often, ‘The View’ based story is placed ‘above the fold’, a sure indicator of the traffic generation potential. The ROI implications become clear as one dives deeper into the microeconomics.
At the risk of piling on MSNBC provides an even more robust example of financial malpractice. Joy Reid, another presenter whose show provides endless above the fold content to FNC is the ultimate example of the content leverage model. In this case FNC gets revenue at no cost while MSNBC gets all the cost with no revenue.
If the definition of success is based on audience size and the audience is drawn in by the words and pictures (collectively known as content) then expending resources to create that content makes sense. Getting the content for free from a competitor makes even more sense.
The circumstantial evidence abounds. Just listen to the reverence when a pundit intones “content is king.” Or, examine the astounding sums paid to create and/or acquire content. In the case of live content (largely news and sports) media companies set up large physical content ‘factories’ requiring substantial capital investments (in addition to sports license fees) that result in imposing breakeven requirements. These investments are largely redundant and fungible. This is where the magic of click poaching becomes an ROI accelerator.
For a variety of reasons Fox News Channel has become the prohibitive leader in utilizing this tactic to its financial advantage. To be clear this has nothing to do with editorial Point Of View (POV). This is a business strategy based on corporate ownership structure and objectives. Tactical success is based on superior execution.
The logical question is: why don’t FNC’s competitors employ the same tactics? The answer is that the two user bases have very different behavioral profiles. There does appear to be a correlation between behavior and ideology but whether there is causation is an open question. Basically left leaning viewers prefer to ban content they disagree with while right leaning viewers prefer getting angry about content that they disagree with. In the media business model anger generates more engagement than ignorance. More engagement equals more revenue. Going back to the case study it is clear that since ‘The View’ audience has already blocked FNC from its consciousness, FNC content will not drive traffic to ABC properties.
To fully understand the context of this analysis one should be aware that while all media companies have the same basic business model the corporate structures and strategic objectives vary at the parent company level.
FNC’s parent company is a relatively ‘pure’ media play meaning that the revenue flows upstream as a result of renting out large, attractive crowds from various properties to draw advertisers. Bigger, more demographically attractive crowds result in higher revenues. Profits are a result of controlling the costs associated with drawing those crowds.
ABC is owned by Disney. That means in addition to the financial metrics described above ABC also acts as a barker channel for Disney’s other lines of business. From a corporate standpoint ABC’s performance is measured as a mix of standalone revenue plus the revenue it drives to other properties. This makes ABC a hybrid revenue generator/marketing expense.
A different hybrid financial model is where to a much lesser extent people like Joy Reid (MSNBC) and Stephanie Ruhle (CNBC) create no cost content for FNC while creating low revenue content for the parent (Comcast Universal). Comcast as a distribution company requires content to drive its transport revenue. Simply put, if you own a pipeline you need to have something to push down the pipe. It makes strategic sense to produce some of the material that uses the pipeline as a hedge against third party supplier uncertainty. Like Disney, the Universal piece of the business benefits from having a captive barker channel to help drive revenue.
The question remains: Why do so many media executives make content decisions with no supporting math. This is a rich field of inquiry, but alas a question for another day. Stay tuned.