No. 303: Newsletter Economics

On newsletter economics. Perhaps, digital media growth was intended to be slow and methodical. It could be said that the best models for media are devoid of venture capital. Without it, publishers would have to grow their audiences reader by reader, transaction by transaction. For many newsletter-driven media companies, this has been the method. Building a moat around a product once involved volume by way of Facebook and Google; today it means building a world without either. Customer acquisition principles in the realms of direct-to-consumer products and independent media are quite similar. Capital efficiency and acquisition independence are the aims of each industry. The races are long and unceremonious but the benefits of organic growth remain the treasure at the end of the rainbow.

In 2016, WIRED published an article entitled The Blissfully Slow World of Internet Newsletters. In the article, it discusses a few of the pivotal email-driven media publications of this era (2015-2019):

This isn’t a new digital gold mine poised to monetize all our eyeballs. Sure, there are some professional-class newsletters. Ben Thompson’s Stratechery costs $100 a year. Lena Dunham’s Lenny Letter has 400,000 subscribers; theSkimm, a news summarizer, has over 1.5 million. But from what I’ve seen, more newsletters are in the long tail—publishing for audiences from the single-digit thousands to the dozens. They’re engineered not for virality but originality: It’s a chance to listen in while someone thinks out loud.

Today, nearly every major digital publication has a newsletter strategy. Condé Nast just announced that they’ll be launching a new vertical called “Vogue Business.” And they aren’t the only ones. The power of the email medium is two-fold, it’s independent of the aggregators and it helps to develop 1:1 relationships with community members. Stratechery’s Ben Thompson is the authority on aggregation theory. In his view, brands and publishers are not truly safe unless they can operate independently. In today’s member letter, he wrote:

What is clear, though, is that the only way to build a thriving business in a space dominated by an Aggregator is to go around them, not to work with them. In the case of publishers, that means subscriptions, or finding ways to monetize, like the Ringer, beyond text. For web properties it means building destination sites that are not completely reliant on Google. 

The Buzzfeed Lesson

For many in the media industry, “going around” an aggregator means that newsletters are a key component for the hedge against the duopoly of Facebook and Google. In a recent blog post by David Perrell wrote: “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.” While Amazon is competing against the duopoly in product discovery, the newsletter media industry and its enablers (Mailchimp, Substack, Memberful) are helping media companies compete for readership loyalty. There are essentially three types of newsletter products:

(1) a newsletter that provides a traffic driver to an existing site. A great example of this is Digiday’s recent foray into a thrice-weekly retail newsletter called the Digiday Retail Briefing led by Hilary Milnes. For Digiday, Milnes and team take extra care to present unique perspectives and exclusive editorials within the email product.

(2) a newsletter that operates as testing ground for future digital verticals. Look no further than today’s news that broke in the Financial Times: Vogue Business will start primarily as a newsletter, published twice a week and edited by Lauren Indvik, former editor-in-chief of Fashionista.com. There are 21 employees working on the venture, including six writers. The project is rumored to be a newsletter-driven, B2B media publication for those interested in fashion, beauty, and luxury retail. Like Paul Munford’s Lean Luxe newsletter, the publication hopes to attract the hearts and minds of modern and traditional brand insiders.

(3) The newsletter that is the medium.

Lean Luxe Founder: Paul Munford

While each publication is unique, for media companies like Stratechery, Loose Threads, Lean Luxe, TheSkimm, and 2PM – the primary product is the email. And the economics of these businesses have one similarity – the readers support the product in some way or another. At Lean Luxe, Founder Paul Munford supports his weekly letter by partnering with short-term, audience-focused brand sponsors. These aren’t outside advertisers. Rather, they are businesses that already exist within his ecosystem, amplifying their presence by way of his newsletter feature. Here’s what Munford had to say in a short Q&A with 2PM:

When did you see a need for a newsletter? how do you go about addressing this need?

The newsletter was the priority from day one. I chose this path because I knew that I wanted to own the relationship and have a direct line to the consumer — that that was the most fundamental thing going forward for all companies, media or otherwise.

I think plenty of media co’s are still grappling with this concept, the balance between their true customers and focus being between the end user (and that relationship) versus the advertiser. I never thought that was sustainable and have always viewed that as such a limited business model considering what you can do today as “media” operation, and how your role can now be rethought or rebuilt around that idea of more than just content.

How does your audience support your work?

The audience supports my work by reading, by sponsoring, by spreading the word, by emailing thoughts, tips and ideas. And generally being engaged with the Lean Luxe brand – as limited as it is – in a way that’s meaningful.

Any thoughts on traditional publishers infringing on your space?

No big thoughts really and I mean that.The competition makes me shrug a lot; I like to shrug. They’ll just mostly be focused on content-only products as the big thing, perhaps with some events mixed in. But they won’t bring a distinctive point of view, they won’t be building out an engaged and powerful community, and in many, many places they’ll simply be dropping the ball.

Not remotely worried – especially since I don’t consider media or publishing to be the core competency of Lean Luxe. It’s part of the package, sure, but it’s not the future model and really just serves to spark conversations between folks. For us, media is important, but it’s more of a means to a larger end, not an end goal in and of itself. It’s just a complement to an overall larger thing we’re building.

Lean Luxe also benefits from a few key innovations: a partnership with Lightspeed Venture Capital and a Slack channel that is one of the retail industry’s leading sources of banter and discovery. To receive an invite to the Lean Luxe chat, you must be an active subscriber for several months. And recently, Nike partnered with Lean Luxe to brainstorm new direct to consumer products. Munford’s company has yet to raise any outside capital. In category No. 3 of newsletters, this is in contrast to TheSkimm.

See: The Indie Digital Publisher List

While, TheSkimm has the benefit (and responsibility) of nearly $29 million raised – their profile is still closely aligned with the third type of newsletter product, for now. Founded by Danielle Weisberg and Carly Zakin, the media company has attracted the attention of many of the titans in the industry, to include: Oprah Winfrey, Sarah Blakely, Google Ventures, Homebrew, and RRE. The original newsletter has provided a platform that now includes its own native app, podcast series, and calendar technology that syncs directly to your calendar of choice so that you don’t miss the cultural events that are important to its readers (I am one of them).

The blissfully slow world of 2pM

For newsletter-driven companies like 2PM growth experience has been slow and methodical. I had the idea for the newsletter in December 2015. Initially, it was for a few dozen or so friends who wanted a digital destination for curiosity and research. We all shared a desire for a distraction-free newsletter that tracked the ways that media, branding, logistics, commerce, and data science were intersecting and amplifying one another. At the time, every publication – regardless of its intended focus – was broadcasting the American political discourse. And between the distraction of politics and the heads-down grind of working in hyper-growth industries – there wasn’t a place that helped guide executives and executives-to-be back to the bigger picture.

What is happening now in the context of everything else? What will happen next? How do we prepare? How do we respond?

I was quietly building 2PM while also focused on operations in the real world – building commerce operations for content providers or partnering content providers with commerce solutions. About two years into the slog of building a worthwhile audience, I launched the Executive Membership at 2PM. By then, 2PM became a 60-70 hour per week job between writing original content, curating meaningful and valuable letters, and updating 20-50 database data points per day. A paid membership allowed the top 10-15 percent of our engaged audience to support the whole. When I re-platformed to WordPress in the beginning of 2018, it allowed me to begin building a suite of tools for members to track commerce and commerce-adjacent industries. And it added a community of industry leaders looking to collaborate and build with one another.

In addition to traditional publishing, I felt that maintaining an operational advantage was important. When 2PM publishes, it is necessary that the perspective is that of an operator within the community, not just an observer. The addition of agency executive Meghan Terwilliger solidified this core tenet of 2PM’s product voice. To amplify this perspective to our published data an editorial, 2PM launched invitation-only Growth Partnerships in Q3 of 2018. This allowed 2PM to partner with leaders of the industry throughout logistics, agencies, brands, and financing.

The primary constraints to growth and sustainability are: audience loyalty, revenue, and retention. Each newsletter addresses these needs in their own ways. As Perrell recently wrote, “content and commerce are converging.” For newsletter-driven media companies, quality and effort are differentiators. Platforms like these can rarely withstand days of failure because the communities are small and value and consistency are the priorities to them.

As the digital publishing industry continues to shed jobs and pivot away from aggregators like Facebook and Google, newsletter media’s principles will influence the traditional media’s largest companies: (1) slow and sustainable growth, (2) community, and (3) subscription-based revenue. Teams will be leaner, capital will be more efficient, and platforms will answer to the community – not advertising partners. The blissfully slow world of internet newsletters may produce the blueprint that addresses digital media’s chief concerns. Namely: who is our loyal audience? And how do we achieve a path to profitability?

Read your No. 303 curation here.

Report by Web Smith | About 2PM

No. 298: Retention is the new currency

Contributor. The much mused about sharing economy jump started by disruptors like AirBnB, Rent The Runway, Netflix and Uber is running past its adolescence. In 2019, both Uber and its rival Lyft expect to go public.

According to Fortune, Uber alone could be valued at as much as $120 billion, higher than the valuations of Ford, General Motors and Fiat Chrysler combined.

It’s also close to double Uber’s valuation at a fundraising round two months ago and would be the biggest debut since Alibaba went public in 2014.

AirBnB, too, is expected to file as early as 2019, bringing some of the biggest disruptors of the last decade to Wall Street. But their impact has already been felt beyond their Silicon Valley offices.

The sharing economy has given rise to the subscription economy:

  • An economy preferred by investors for it’s stability.
  • An economy loved by consumers for its accessibility.
  • An economy coveted by entrepreneurs for it’s long-term customer relationships.
2PM, Inc. contributor: Tracey Wallace

The rise is thanks to the ubiquity of internet access and smartphones in the U.S. across nearly all segments. “Customers, the ultimate endpoint of any business, are today just as connected as the employees of any large enterprise,” writes Ben Thompson on The Stratchery.

This gives consumers and businesses alike endless access to on-going services that don’t function like gym-memberships of old. Instead, modern subscription models are gym-like in execution and participation.

  • They are based on service, not product: The product is the means not the ends.
  • They build convenient communities of like-minded individuals with end-goals in mind: Think Shopify users want to be seen as successful entrepreneurs. Spotify users want to be seen as having the best playlists and musical tastes.
  • They rinse and repeat the experience: The service begets the product, the product begets the goal, the goal begets the service.

Retention is the new currency

Costco – perhaps the longest standing subscription business around – has perfected the model. Amazon evolved it online with Amazon Prime. Giants like Apple and Google are touting their subscription services as differentiators for their products.

  • Google is offering six month free YouTube Premium subscription for all Google Home devices (and varying YouTube Premium subscription access for nearly all Google devices).
  • Apple is packaging their streaming music service and phone care services into single packages –– selling you a full suite of services that beget a product.

The success of the model is clear. You need only look at Dollar Shave Club on the consumer side to see the impact on the industry (or look at newer DNVBs like Quip following similar paths). Or, on the B2B side, look at the stock prices of Adobe (up 770% since 2012), Microsoft (up 320%) or Autodesk (up 360%), which have shifted to offer internet cloud-based software for a monthly or annual fee.

Indeed,  many DNVBs are putting their own spin on the subscription model business. In retail alone, there are more than 5,000 brands offering clothing, cosmetic or the like “subscription boxes” each month.

“It is totally faddish right now,” says Robbie Kellman Baxter, a consultant with Peninsula Strategies and author of The Membership Economy. “Most of them are going to fail. How many ties does dad need?”

But in technology, the rent-rather-than-own trend is holding stronger. In health care, too, it is growing in popularity with brands like SmileDirectClub and MDVIP, a direct primary care service, gaining more and more subscribers.

In media is where we will see the most pronounced shifts. After all, subscriptions are the easiest way around an unforgiving advertising world inhabited by Google and Facebook’s duopoly.

That duopoly began hitting media brands as early as 2015, when many considered the “gold standard” of online content to be free and commoditized. Many digital media brands have yet to recover from this mistake.

According to CNBC:

Vice Media has been the gold standard, earning a valuation of $5.7 billion in June 2017. Earlier this month, Disney wrote down some of its investment in Vice by 40 percent, suggesting a declining overall valuation.

Buzzfeed has built itself into a company that tops $1 billion in value. Still, Buzzfeed missed its 2017 revenue forecast by up to 20 percent, the Wall Street Journal reported last year, pushing back hopes of an initial public offering indefinitely. Vox Media, the owner of sites including SBNation, Eater and The Verge, also missed internal revenue forecasts and is not planning to go public any time soon, said people familiar with the matter, who asked not to be named because the company’s financials are private.

Separately, media companies including The New York Times, The Wall Street Journal, The Washington Post, New York Magazine, Quartz, Bloomberg, Business Insider, Vanity Fair and Wired have all returned back to media’s subscription business model roots by completely paywalling, introduced paywalls or hardening their paywalls beginning in 2018.

We’re living in an environment where Facebook, Google, and Amazon are sucking up so much of the advertising revenue,” says Sterling Auty, software analyst at J.P. Morgan. “Subscriptions and ecommerce are an antidote to that.”

These media companies are looking to lower their reliance on Facebook and Google algorithms and return to their service roots through subscription payments –– adding yet another monthly subscription to consumers’ bank accounts.

On paid subscription tolerance

According to eMarketer, 71% of U.S. consumers with internet access subscribe to at least one streaming video service. However, the number for all other verticals drop dramatically beyond video.

This leaves ample room for other verticals to grow their subscription services, especially as consumers become more accustomed to the model and testing out various offerings. Paid subscriptions through Apple’s App Store reached over 330 million last quarter. That’s up 50% year over year and includes both Apple and third-party services like Netflix.

Consumers are downloading. They are trying. They are testing. And there will be winners. Some analysts like Eddie Yoon, a consultant and author of the book Superconsumers, see the subscription economy as a 20-year trend –– just now beginning to hit its growth stage.

But there are caveats:

“All brands will try to offer subscriptions, but only a few will take,” he added. “Consumers will push back if they feel overwhelmed with subscription services,” Yoon says. “People won’t tolerate a world where everything is subscriptionized,” he said. “For the things that you really care about, you’ll definitely subscribe.”

The experience economy edges in

This is where the experience economy matters most. Subscription business models create desirable P&Ls, forecasting models and enable brands to act in the best interest of their most dedicated subscribers (rather than advertisers), but fail to provide the experience and you’ll lose your list and your recurring revenue.

Ben Thompson from The Stratechery pulled out this quote from Bill McDermott, the CEO of SAP, on this challenge on an investor call:

There are millions of complaints every day about disappointing customer experiences. This is called the experience gap. Businesses used to have time to sort this out, but in today’s unforgiving world, the damage is immediate, disruption is imminent. This has shifted the challenge from a running a business to guaranteeing great experiences for every single person.

It’s best here to remember that subscription and membership are separate things. Membership provides experience and community. Subscription just gets you access to something behind a gate.

Take a look at Peloton, for example. The company has long argued that it’s bike ($2,000) and subscription program ($39 monthly) are a bargain compared to regularly attended SoulCycle classes. And SoulCycle is hard to beat. Similar to fitness organizations like CrossFit, Inc., it has a hardened fanbase and community.

But where Peloton succeeds is its content –– the ability to stream classes on your bike, forgoing a trip to a physical class. All for substantially lower costs than regular in-person classes anyway. Peloton reports its churn at less than 1%.

“You have to do delightful things and leave money on the table,” says Peloton CEO and co-founder John Foley. “The monthly service is what you really buy. That was the flaw with the old models. It was just hardware.”

Of course, not every company can be a Peloton. The subscription model itself does not lower the cost of doing business. It cannot, on its own, generate demand.

“As subscriptions proliferate, investors need to dig deeper into the dynamics of their models,” says Aswath Damodaran, a finance professor and valuation specialist at New York University’s Stern School of Business. “Many venture capitalists and public investors are pricing user-based companies on user count, with only a few seriously trying to distinguish between good, indifferent, and bad user-based models.”

What’s next in the subscription era is a dwindling down to those brands, media packages, and services which can offer the experience worth paying for –– the service that begets the product, and the product that begets the consumer’s goal. A subscription model, alone, won’t be enough. Consumers will seek membership and the benefits that come with it: experience, community, and camaraderie. For the product companies, the software companies, and media companies that figure it out – the prize is recurring revenue and stability until the next preferred model comes along.  

Read the rest of your No. 298 curation here.

Additional reading. Member Brief: The Subscription Economy

By Tracey Wallace | Edited by Web Smith | About 2PM

Editor’s Note: Tracey serves as the Editor-in-Chief at BigCommerce and a public speaker. She is launching a DtC pillow brand, this spring. She is a paid contributor of 2PM, Inc.