Diversifying away from an advertising-first business model, without jeopardising your advertising business

Advertising is, without doubt, an important revenue source for media companies - and will continue to be in the future.

The News Sustainability Project (involving 450 publishers) found that print and digital advertising are the first and third largest revenue streams for news companies (28% and 22% respectively).

However, an advertising-first business model is precarious and lacks resilience - as evidenced by the downfall of media companies such as Buzzfeed (who are now placing their bets on its commerce business). There are a number of factors which are exacerbating the vulnerability of these models:

• Platform competition: a significant proportion of advertising budgets are already (and increasingly) spent with large technology platforms. This has become even more prevalent as incumbent companies place greater focus on advertising revenue (Amazon and Apple) and new social media companies emerge (TikTok). This is by no means a new factor impacting the industry.
• Sensitivity to exogenous shocks: marketing spend is one of the costs to be cut in periods of economic uncertainty - as evidenced during the Coronavirus pandemic and subsequent cost of living crisis. This makes advertising, as a revenue line, unpredictable - lacking the forecasting reliability of other streams (e.g. subscriptions).
• Made-for-advertising websites: there’s already evidence that GenAI is enabling a new era of “made-for-advertising” websites that contribute to $13bn in ad spend wastage each year. As this phenomenon grows, marketers may choose to roll back advertising spend - especially via open marketplace programmatic - a problem for many advertising-only media companies. This is an emerging factor, beginning to have a meaningful impact on the credibility of the industry.
• GenAI Search: new search experiences (e.g. ChatGPT, Bing or Bard) are likely to significantly reduce traffic to media websites. Content that used to be easily monetised via ads - for example, what time a popular TV programme is on television - will no longer be economically viable. Whilst this may be a good thing from the perspective of the user experience, less so for advertising-only businesses. This is a future factor that requires immediate attention from media executives.

A company's ability to diversify away from an advertising-first model is undoubtedly informed by the type of content that they produce and their location. However, many companies have successfully evolved their business model - including the FT - and several principles can help you to do the same. The imperative for these companies is to undertake activities that can both support the continuation of your ads business, whilst positioning you in a way that allows you to explore opportunities for revenue diversification. Diversification does not have to be a zero-sum game for advertising. Here are our key recommendations:

Media companies need to focus on building strong, direct relationships with their audiences through the production of differentiated content that meets a clearly defined user need. Media companies need to place significantly greater emphasis on value metrics (quality reads, repeat visitors, engagement) as opposed to volume metrics (page views, unique visitors). This will likely mean: 1) deprioritising commoditised content that users can find elsewhere / or could be automated via GenAI (e.g. a UK local news outlet reporting on a global sporting event); and 2) producing fewer pieces of content that are specific to your audience needs.

Whilst these changes may result in fewer ad impressions in the short term, there are a number of notable long-term benefits:

• An increase in repeat visitors will ultimately drive up ad impressions
• You will increasingly own your distribution channels and become a destination for your audiences - as opposed to being reliant on social algorithms or search interfaces as a source of traffic - which are undergoing significant change.
• Engaged audiences are much more likely to subscribe, less likely to cancel their subscription and have a higher overall lifetime value.

If you are not already building direct relationships with your audiences - start now. There are many, many benefits of authenticating your readers and collecting login information:

• First-party data is growing in importance - As online tracking becomes more limited due to browser changes (such as Chrome deprecating third-party cookies or Apple’s ITP), publishers are perfectly positioned to collect user data and monetise it through advertising. Privacy regulation is also limiting publishers' ability to bring users back to their sites (e.g. pixel retargeting) - thus increasing the importance of an email address and login information to drive loyalty. The rise in consumer privacy expectations also provides an opportunity for media companies to differentiate themselves from the rest of the market and build trust with consumers.
• There’s an opportunity to increase ad yield (CPMs) by virtue of the fact that you have data on the individual. For example that could be demographic data - e.g. what industry they work in; or behavioural data - e.g. what content they like consuming. Typically, we hear that publishers can increase their Ad CPMs by up to 50% where they have demographic data available.
• Evidence shows that “known audiences” are far more likely to subscribe - the New York Times (in their 2022 Investor Presentation) stated that, on average, registered users convert at rates more than 40x higher than anonymous users.
• Knowing your audiences also allows you to better understand their interests, needs and backgrounds - thus helping you to create complementary revenue streams - e.g. eCommerce or events.

The News Sustainability Project has data to support this recommendation - 68% of “very profitable” publishers (average profit margin of over 10%) recorded logged-in audiences of over 7.5% in the last six months. For comparison, only 12% of loss-making publishers (negative profit margin) recorded a logged-in audience of over 7.5% - in fact, 63% recorded 0 to 4.9% logged-in audiences.

One of the major blockers for media companies transitioning from an advertising-only model is fear of the “paywall” - a critical part of an access model. Paywalls can (if poorly executed) lead to devastating drops in impressions and advertising revenue - something that many media executives cannot accept.

However, over the years, we have learned that a fit-for-purpose access model can serve the needs of advertising and subscription teams, but it is important to follow some key principles:

• Consider a registration wall, as opposed to a paywall, to gauge the value that audiences get from your content. If people aren’t willing to provide their data in exchange for your content, they’re very unlikely to pay for it.
• When transitioning from an advertising-only model, avoid a “big bang” event. In practice, that means that your first paywall should be very open (i.e. a large proportion of your content remains available for free / there is a 10-article limit on free reading). Before launch, the paywall should also be A/B tested with a segment of your audience to ensure that it is working as intended and to measure / model out the implications on the business.
• Avoid thinking of your website as the only opportunity for advertising revenue - newsletters, podcasts and events - are all tried-and-tested mechanisms for boosting advertising and subscription revenue, without having to adjust your access model.

To successfully transition from an advertising-only model, it is important to prioritise other revenue streams (for example, subscriptions or eCommerce). This can lead to organisational tension, especially when the majority of revenue is coming from an area that is getting less attention and investment.

At FT Strategies, we use the North Star methodology to align the organisation behind a single goal. This provides a renewed source of focus but also allows you to acknowledge the continued role of advertising in the business - e.g. hitting an overall revenue goal.

Premium publishers that have successfully diversified their revenue mix and future-proofed their advertising business place greater emphasis on creating a great reader experience than incremental advertising revenue. In 2019, the Financial Times set an example by turning off the ability to buy its ad inventory on open exchange programmatic to reduce data leakage, improve page load speeds and grow deep, direct relationships with marketers; this has helped the FT to consistently grow its advertising revenue and subscriptions business over the last 4 years and is now being replicated by other publishers - including Bloomberg Media.

For many publishers, open marketplace revenues are considered incremental - helping to monetise otherwise unsold inventory. However, there is an (often hidden) cost to this approach: lower CPMs as a result of less scarcity, low-quality reading experience and the opportunity cost of self-promotion (e.g. advertising your own new products on your sites).

Transitioning from an advertising-only model is by no means simple, however, converging environmental factors (GenAI interfaces, made-for-advertising websites and the deprecation of third-party cookies) have made it more important than ever. It is critical to understand that transitioning from advertising-only, doesn’t necessarily mean reducing the size of your advertising operation. We pride ourselves in helping companies explore new revenue opportunities, whilst optimising the advertising business that already exists.

If you’d like to learn more, get in touch.

George is Head of Insights and Senior Manager at FT Strategies. Before this, he has spent the last four years guiding the FT’s data strategy as it balances revenue and risk. Most recently, he founded and continues to lead a cross-departmental FT team focused on the future of marketing & advertising in the context of restrictions on online tracking.