AOL is rolling out its Patch.com “hyperlocal” network around the country. Having watched similar efforts since Microsoft launched Sidewalk in the 1990s, I remain skeptical.
Look, we all agree by now that the Internet’s changed the economics of the publishing business. One of the ways that’s happened, however, makes it much more difficult to create a workable business model for a national network of local websites.
Why? Let’s try this question for an example: How much money does Howard Owens at TheBatavian.com have to ship out at the end of the month to his national corporate bosses?
Of course, owner-operated sites like Howard’s don’t have to share any of their earnings with a national corporation. Nor do they have to pay for national and regional bureaucracies that oversee the network of local sites. Everything a local news website publisher earns goes right into that local news website.
That gives independent publishers a huge cost advantage over their corporate competition. So why did the newspaper industry evolve toward national corporate ownership?
Because of the economies of scale that used to exist in the newspaper business. A larger chain could get a better deal on syndication contracts. It could centralize design and IT work and share national bureaus, reducing duplication of effort. It could employ a national sales team, earning more income than individual, local papers could get on their own.
But the Internet’s changed those opportunities. Syndications and bureaus don’t matter anymore: Hyperlocal websites are all about original local content. Readers can go elsewhere on the Web for national content. Open-source publishing tools have eliminated the need for extensive in-house IT and design departments. And no one realizes better economies of scale in advertising sales than Google, with which even the smallest hyperlocal publisher can work and earn significant revenue.
What’s left? Essentially, the stereotypical “Walmart” strategy: An attempt by a large national interest, with significant investment capital, to price out the competition by subsidizing the operation of a local news sites until its local competition drops away. But this only works if the business can undercut local advertising rates during its start-up period, then have the market power to raise them once the competition goes away.
I’ve not heard anything to suggest that is Patch’s strategy, but with barriers to entry remaining so low online, there will always be another generation of start-ups to challenge a business’s market power. To survive long-term online, you have to keep your operating costs low.
That provides a huge advantage in the local space to locally-owned and operated websites, which don’t have to support a national or corporate management structure.
Maybe Patch will succeed where other “national local” plays have failed. I’ve not said anything about the quality of Patch’s journalism, or of its competitors. Perhaps Patch might find an advantage there. But my reading of the economics of the local publishing business online leaves me skeptical about Patch’s long-term prospects.
About Robert Niles
Thanks for the shout out.
The other thing to keep in mind about newspaper chains is they were built by acquisition of profitable local enterprises. When E.W. Scripps bought a newspaper, he wasn’t just buying a name plate, he was buying cash flow.
When successful publishers grew by start up, their start up papers were in adjoining markets to already successful papers.
A national online chain might succeed in some markets, will probably fail in others, and those failures will hurt the whole chain.
That said, the one thing I’ll say for Patch is they are doing some things right, having learned from the failures of efforts such as Sidewalk. And the timing is a little more right than a decade ago. They’re operating more like a start up than a MSM conglomerate. So I’m not completely writing them off.
Howard Owens
The Batavian
I hope that I made clear in my last graf that I’m not dismissing Patch, either, even as I remain skeptical. The economics now favor a smart, sharp independent in the local space. If I had the choice between being Patch’s local correspondent or going it alone, I’d run my own site. (But I’ve been a solo publisher for years. Of course I think that way!)
You are spot on. The way I characterize a site like Howard’s or my own (www.sunvalleyonline.com) are “too small to fail” (hat tip to Fred Wilson which is where I first heard that expression). As long as the site can generate a modicum of revenue or it’s simply a labor of love, there is essentially a bottomless well of more sites that will be there to compete locally.
Having been responsible for city roll-outs in the aforementioned Microsoft Sidewalk, I can tell you the way a site like Howard’s or mine have approached the market is radically different. As Howard points out, timing is also a factor but I’ll always bet on the scrappy entrepreneur over employees. I’ve been both and the passion and energy is required to get these hyperlocals sustainable virtually requires an entrepreneur owner/operator. At the same time, I wish Patch well. It doesn’t do us good to have more scorched earth in the hyperlocal arena. In all seriousness, I’m anxiously awaiting some kind of breakthrough thinking as Tim Armstrong is a bright guy. To date, the only breakthrough revenue source I’ve seen in the local arena has been Groupon.
One thing I can assure you, having worked for literally the deepest pockets in the world, the corporate bosses won’t have as much patience as they initially tell you when it comes to seeing revenue/profits. As has been proven over the last 15 years in hyperlocal, it’s “easy” to create quality content, spend lots of money, etc. Quite a different story to build a sustainable business. Shameless plug: That’s the purpose of entities like GrowthSpur whose sole purpose is to help hyperlocal sites become economically sustainable. Of course some such as Howard, Debbie, Tracy, and others have made that happen but that’s been the exception and thus the need for assistance.
Skepticism about the prospects for Patch are probably justified.
Aol lost $1 Billion last quarter. Part of that was writedowns for Bebo and ICQ, but it should also be noted that both advertising and subscription revenue was down 27 percent.
Efforts in the national chain/franchise model for local online news have been pretty much uniform failures. These include the shutdown last month of the San Diego News Network, the stagnation of WikiCity which was bought by the Omaha World-Herald, and the failure of efforts such as Loudon Extra by The Washington Post. Each of these has had a somewhat different business model but what they all share is that, except for the anecdotal, there isn’t much information available about why they didn’t gain traction.
Somehow, a WalMart-like model for local news, in whatever variation, doesn’t seem to be the answer. Corporate templates, whether for brick-and-mortar stores or web pages, almost always lack a sense of unique place. What’s interesting to consider is that it’s also at odds with a much older model for local news, call it the William Allen White model, in which a newspaper is tasked with providing a mirror to a community instead of a predominantly syndicated or wire-service window to a larger world.
It seems to me that the sustainability of local news going forward is also going to be dependent on two separate things which do not necessarily require economies of scale. The first is that the level we’re at in providing information via a website is somewhat similar to the early days of motion pictures when it took some time for the camera to move out of the proscenium arch it had inherited from the stage. We don’t know yet, for example, how technologies such as semantics and expert systems are going to play out. We’re making this stuff up as we go along.
The second factor is that the Internet has broken the delicate symbiotic balance of a prior news-advertising-circulation schema, and both online advertising and paywalls are probably never going to provide revenue streams to support local news at an adequate level. So a key question becomes this: What kind of new revenue streams can be generated which are still at least somewhat dependent on news as a critical element?
Here is what it can feel like to be up against those deep pockets. But the best thing about this post were the comments.
We can only hope that in the case of Patch, passion eventually trumps scale. Oh, and not having to answer to those big corporate investors:
http://www.lostremote.com/2010/08/05/patch-dispatch/
What about all the successful ad networks out there that link all these niche sites? If you look at the Patch sites, you’ll see evidence that they’re already selling national ads across them. Sure, local revenues stay local. The beauty of creating a network of sites is that you can sell an additional layer of regional and national ads across it. In fact, some jaundiced folks might opine that AOL, CBS Sportsline (MaxPreps, 200+ college/university athletics sites), SBNation, BlogHer, Federated Media, NetShelter, Demand Media, American Independent Media, Allbritton, etc. aren’t creating news sites, they’re creating ad networks.
Mike Fourcher at BusinessInsider questioned Patch on the basis of apparent revenue capability vs. apparent expenses (http://www.businessinsider.com/aols-patch-revenue-model-makes-no-sense-2010-5), but as that piece points in the update section at the end, AOL probably has other revenue cards up their sleeve, because they can do the math too. For example, the potential for social couponing and other direct transactional revenue has only been scratched so far. Standalone hyperlocals will be at a serious disadvantage against Patch if it gets into that game.