Backfence shrewdly positioned itself amid all that affluence, but didn’t capitalize on it. But couldn’t a network of grassroots sites that actually connected with their communities pick up a small fraction of that $28 million by year two or three? How about 6 percent? That would be a little more than $1.6 million. Continuing my back-of-the-envelope math, that splits down to about $750,000 for Backfence’s seven communities in the Maryland and Northern Virginia suburbs of Washington, and $425,000 for the three communities in Northwest Chicago and the same for the three in the Bay Area.

By my estimates, the three clusters of sites could break even and maybe squeeze out a modest profit – about $100,000 – from $1.6 million ad revenue (display and paid search).

Here are the estimated expense numbers for each cluster:

• Publisher: $60,000
• Content manager, $50,000
• Two sales reps: $40,000 each (in base salary and commissions that would go higher with bonuses based on sales that top goals)
• Tech manager: $20,000 share of total cost
• Staff fringes and employer taxes: $40,000
• Citizen contributors: $110,000 or $250,000 for $1,000 monthly stipends, with the higher amount for the seven-community metro Washington cluster
• Office rent and expenses: Up to $25,000 (depending on cluster size)
• Computers: $10,000
• Other (including promotion, phones): Up to $50,000 (depending on cluster size)

All this, multiplied by three clusters, adds up to slightly less than $1.5 million. Green-eye-shade folks may argue with some of my cost estimates. I agree a content manager – a good one – is worth more than $50,000. But if the compensation included stock options, wouldn’t there be a lot of talented Internet editors – ones with a passion for building grassroots sites – who would be eager to take the plunge?

Success with even a modest budget would hinge on whether the sites succeeded in connecting with their communities and producing content that users found generally interesting, sometimes significant and occasionally indispensable.

It would also depend on a “feet-meet-the-street” advertising staff that could sell strong visitor/page-view numbers to local and regional advertisers who, for good reason, have been resistant to buying display space on grassroots sites.

The Backfence strategy – expecting its communities to deliver compelling content without any inspiration, mentoring or compensation – was doomed to fail. The result was stories and commentaries that rarely made anyone sit up and take notice. When Backfence announced its impending demise on its homepages on June 29, users, the few there were, paid almost no notice. Boring content meant weak traffic, and the most aggressive ad staff can’t sell that.

We shouldn’t beat up on Backfence too hard. It was doing what most other hyperlocal sites were doing, and continuing to do, which is why so many media opinion makers have turned negative on the prospects for hyperlocal

To succeed, grassroots sites need above all experienced and passionate editors collaborating with experienced and passionate citizens. Experienced citizens aren’t just soapbox ranters. Sometimes they become activists on issues – not as one-off loners but as part of a network of deliberative doers. Working with them, editors can help pinpoint the sometimes elusive themes that shape a community’s identity. Experienced citizens know why one neighborhood school is succeeding and another is failing or why one church or synagogue in particular has a thriving congregation, but mentoring editors can help them to be better communicators.

Backfence expected its contributors to work for nothing. Its founders piously maintained that financial compensation was the last thing contributors wanted or expected. Many people donate their time to their church or congregation, neighborhood school or library and charitable organizations. But why should they work free so a for-profit company can justify its business model and rake in more money?

I propose that regular citizen contributors – working, say, 40 or 50 hours a month – be paid a $1,000 monthly stipend. That comes to $20 to $25 an hour – not a lot, but not an insulting amount, either. If you’re a retiree, a stay-at-home mom (or dad) or somebody looking to close a household budget gap, $1,000 a month for a few hours here, a few hours there, may seem like a pretty good deal.

If Adam Smith and Ricardo were even half right, compensation is also likely to produce higher value content, especially if experienced, passionate editors and experienced, passionate contributors are working in sync finding out what makes their community tick, what makes it proud but also sometimes angry about various pieces of the hometown mosaic.

In his otherwise unpersuasive apologia, Backfence co-founder Mark Potts made the excellent suggestion that entrepreneurial grassroots sites try to hook up with major media companies. Newspapers, struggling to find their place in the Web world, are plunging into hyperlocal, but the results so far are journalistic Velveeta. The missing flavor – the tang – will not be delivered by the creators of Scripps’ YourHub, Tribune’s TribLocal or even the Washington Post’s snazzy new LoudounExtra, but by journalistic entrepreneurs who have the right instinct for connecting with the inner being of communities.

On July 17, Pegasus News, the hyperlocal that covers more than 120 neighborhoods in Dallas/Fort Worth with a sassy brand of “pro-am” user-tailored content, announced it had been acquired by the Seattle-based Fisher Communications, which owns 19 TV and eight radio stations in the Pacific Northwest. With his hands-on editorial strategy, Pegasus founder Mike Orren is 180-degrees opposite what Potts and his let-the-community-decide team stood for – a lesson, perhaps, for would-be hyperlocal entrepreneurs.

On Aug. 7-8, “Journalism That Matters: The DC Sessions,” will gather at George Washington University. High on the agenda will be this imperative: “Define the citizen/media connection. How will the public be involved?”

The Washington conference has attracted more than a hundred participants from academia, corporate boardrooms and, most importantly, the trenches of hyperlocal. I hope it will put aside the millennial rhetoric that thrust grassroots journalism in the media spotlight, but didn’t provide any follow-up support and counsel that proved useful. Instead, I hope the conference will help guide journalists – pro and am – on to a hyperlocal path that is realistic but creative, that balances bottom lines with soaring ambitions.

At this writing, it appears as if the Bancroft family, which owns controlling shares of stock in the Dow Jones conglomerate, may be close to directing its board to negotiate the price of a final sale. Meanwhile, mogul Sam Zell has been buttonholing members of Congress in his effort to get waivers from the Federal Communications Commission that would permit the ownership of newspaper and television properties within the same market.

Both pending sales have met with criticism from activists and observers concerned about media consolidation. The editors of the Columbia Journalism Review spoke for many in the industry when they likened Murdoch to a scorpion, and pleaded, “We hope [the Bancrofts] find a way to keep this American treasure away from Rupert Murdoch, who will smile even as he raises the stinger.” The United Church of Christ and a coalition of civil rights and other groups have petitioned the FCC to stop Zell from obtaining the waivers that would make the Tribune bid possible.

While these issues have grabbed the headlines, the battle lines over media consolidation spill into other regulatory skirmishes over such issues as Internet radio, cross-ownership rules and the Net Neutrality debate. The debate has further intensified with advent of digital television in 2009, because the FCC will be auctioning off the portions of the broadcast spectrum currently used for analog television.

OJR spoke with two experts on media policy who differ strongly on consolidation and a host of other issues.

Mark Fratrick is an economist who has worked on broadcast regulation issues at the Federal Trade Commission and the National Association of Broadcasters. He is currently vice-president of BIA Financial Networks, a Virginia-based consulting firm. Craig Aaron is the press liaison or Freepress.net, a non-partisan think tank on media issues. Here’s what they had to say about the Dow Jones sale and several other issues related to preserving competition in the media marketplace. Their contrasting views highlight the ways in which technological change is creating new competitive realities and reshaping old debates about the tension between the media’s public service responsibilities and the economic imperatives of capitalist enterprises.

Issue: Dow Jones sale

Fratrik thinks Murdoch won’t sacrifice the Wall Street Journal on the altar of either profit or his brand of politics because to do so would be bad business practice. “I don’t think that Mr. Murdoch would seriously alter the quality and integrity of the Wall Street Journal. That integrity, that quality, that brand name is what the Wall Street Journal is. And Mr. Murdoch buys assets in order to improve the value of those assets and the value of his holding company. I find it hard to believe he would put that in serious jeopardy by diminishing the quality of such a thing.”

Issue: Net Neutrality

FreePress.net is one of the key players in the Save the Internet coalition, proponents of “net neutrality.” Net neutrality advocates say broadband providers are looking for ways to force consumers to pay extra fees for high-speed internet access and other premium services. They want Internet access to be treated as a public resource, much as telephony was 100 years ago. In the early decades of the 20th century, industry leaders and public policy makers made universal telephone service a priority, leading to a chain of business moves and legal decisions that culminated in the Communications Act of 1934.

In 2006, the Communications Opportunity, Promotion, and Enhancement (COPE) Act (HR 5252), a bill that provided for some net neutrality protections passed the House but died in the Senate.

Aaron worries that without FCC action, consumers could find their internet access restricted in the same way that cell phones are limited now. “If you look at your cell phone plan, there are a lot of restrictions in place. Network neutrality is not allowed. They [wireless access providers] can interfere with who gets to you and what kind of information you can get. So we’re looking to ensure network neutrality.”

That argument doesn’t sit well with experts such as Fratrik, who describes himself as “very free market-oriented.” In fact, Fratrik exclained, “Net neutrality makes my hair hurt!” Fratrik echoes the industry-led “Hands Off the Internet” coalition, which argues that “Net Neutrality” is “expensive and unnecessary. Net neutrality opponents say that current laws already provide adequate protections for consumers. Further, they say, the changes that Neutrality advocates want would add expense without benefitting consumers.

It’s not easy to find analyses of the issue that don’t lean to one side or the other. Project Censored has accused the mainstream media of largely ignoring the net neutrality debate in 2005 and 2006, calling it the most censored story in its 2007 list. The issue may get more coverage as the 2008 Presidential election approaches, especially since several candidates have already declared themselves in favor of Net Neutrality.

Issue: Concentration of Media Ownership

The Telecommunications Act of 1996 loosened some of the rules on, for example, how many radio stations a company could own, both nationally and locally. To Fratrik, that regulatory relief was essential: “I think that the competitive environment that both radio and television stations now find themselves in… is incredibly remarkable. Without the deregulation of the ’96 Act, … broadcasters would be even in a worse position than they are now.”

The actual development and implementation of regulatory rules in the years since 1996 has been contentious. In a 2004 decision in the case Prometheus v. FCC, the Third Circuit Court of Appeals stopped plans announced by the FCC in 2003 to further loosen caps on the number of radio, newspaper and broadcast outlets that can be owned in one market. In 2006, the FCC announced that it was seeking public comment on how to respond to the order. In 2004, Rep. Maurice Hinchey (D-NY) introduced the Media Ownership Reform Act, which would roll back much of the deregulation of the last two decades, break up some media conglomerates, and re-introduce the Fairness Doctrine. So far, the bill has not made it out of committee.

The transition to digital television brings a new twist to the consolidation debate with the FCC’s forthcoming auction of the analog bandwidth that over-the-air television broadcasters won’t be using any more. Digital television, which will become standard in 2009, also promises to create a host of opportunities for new interactive media services. FreePress.net’s Craig Aaron is worried that, “the way the auction is taking shape, it very well could be that the same companies that already dominate our broadband market – the phone and cable companies. Phone companies, in particular, are in a position to swallow up this spectrum.”

FreePress.net and its allies are urging the FCC to follow “open access rules” that it says will lead to greater consumer access, more innovation, and more marketplace competition. Those rules include requiring licensees to make bandwidth available, at wholesale rates, setting aside a portion of the spectrum for unlicensed wireless services, and ensuring that customers will be able to connect to wireless services without having to purchase a device endorsed by their wireless carrier. They also support passage of the Wireless Innovation Act of 2007, which would turn these recommended rules into law.

Issue: Diversity of Media Ownership

One of the reasons, the Third Circuit ruled against the FCC in the Prometheus case is because it rejected the FCC’s claim that it could loosen ownership restrictions without further eroding the diversity of media ownership. That lack of diversity remains a serious issue.

Aaron and others point to the June 2007 report, “Off the Dial” as evidence of the the persistently low representation of women and people of color among the owners of the nation’s broadcast outlets. According to that report, African Americans, Latinos and Asians own only 7.7 percent of the nation’s full-power commercial broadcast stations, despite representing about one-third of the US population. An October, 2006 study, “Out of the Picture,” found people of color similarly scarce among commercial television station owners. Women constituted just under 5 percent of television station owners, despite the fact that just over half the US population is female.

Fratrik says diversity of ownership and opinion is “always a valid concern.” However, he adds, “how it should be handled is another question, insofar as how you may hamper the ability of certain stations to operate for not allowing groups to acquire properties, troubles me. I think it’s a very good concern; I think it’s an important part of a democracy. It’s also an important part of communications policy. I’m always fearful if that is the primary driver in some proposals.”

Fratrick added, “If you just look at over the air broadcasting as your group of outlets, then there may be not as much diversity as one would like, but on the other hand, I think the broader media environment should be the environment, what we refer to as the media ecosystem that one should look at. Given the thousands and really unlimited number of outlets that one has available, I think there’s a tremendous amount of diversity.

“I think the current regulatory scheme is fine, insofar as providing enough diversity in that broader media ecosystem, that broader marketplace. I’m thinking of satellite radio, I’m thinking of the Internet, I’m thinking of video-on-demand, cable systems, the hundreds of newspapers, blogs – every day there’s a new avenue.”

“Not everybody has a broadband connection to the Internet, and not everybody has cable, and certainly not everybody subscribes to satellite radio. But when I take a step back and ask, what’s available to the American consumer, and what’s available for free, what’s available for a fee, what’s available online, I’m just wondering, what else more can we be doing?”

Aaron has some ideas that he thinks will lead to more diversity among media owners. “Well, he says, “you could lower the ownership caps, for a start. You can create incentive systems for those properties to be sold to under-represented communities.”

The Outlook

While Fratrik doesn’t expect MORA any bill like it to surface any time soon, he adds, “I’m always concerned when Congress talks about this, because I’m always fearful that they may come back and re-regulate, and I think that would be an unwise decision.”

Freepress.net disagrees. Aaron maintains that whether it’s the Internet, the wireless spectrum, cable or satellite, “they’re all a part of the public airwaves. And it’s the FCC’s job to make sure these airwaves are used in the public interest. And the public interest is lower prices, more options, more space to get faster Internet service, to connect their devices and do different things. Unfortunately, the history of media policymaking has largely gone in a different direction, and that’s taken this great public resource and privatized it in a way that it doesn’t serve the interest of everybody, and it does serve the narrow interest of a few big companies.” Aaron insists that the policies he and his colleagues recommend will yield “benefits in terms of new services, new products new competition.”

Whatever your philosphical predisposition, one thing is clear: the decisions taken by the FCC in the coming weeks and months will go a long way toward shaping the media environment for both journalists and news consumers for years to come.

Since when is the Los Angeles Times the only place anyone can do great journalism in L.A.?

Obviously, The Times has done its share. Over the past decade, the paper has distinguished itself with multiple Pulitzer Prizes, as well as engaging daily stories that expose injustices from crooked judges to L.A.’s pathetic Skid Row. Yet failure balances The Times’ recent triumph. Tribune-mandated cutbacks have reduced the newsroom from about 1,200 to a little more than 900. That’s led to the closure of most of The Times’ suburban bureaus and a massive reduction in neighborhood coverage.

Word from the newsroom reports that Tribune wants the newsroom even smaller, to about 800 or so. That’s sparked concern from local business leaders, who fear, along with most Times reporters, that a smaller Times newsroom won’t be able to properly cover Southern California. Times Publisher Jeffrey M. Johnson and Editor Dean Baquet have protested, too. Now, Johnson’s off the job.

One might think that business and government leaders would enjoy having fewer eyes looking into their affairs. Writing in Saturday’s Los Angeles Times, media critic Tim Rutten pointed out that an aggressive local press has helped communities grow, by exposing the inefficiencies of graft and corruption. Rutten correctly credited newspaper managers for helping enrich America, and themselves, over the past half century.

“The astonishing financial success of postwar American journalism rested on a recognition that an educated and increasingly urbanized readership demanded more sophisticated information on a broader range of topics than ever before and on newspaper managers’ willingness to invest in covering them.”

But established newspapers are not, and need not be, the only actors in the news industry. Rutten acknowledged that “the era into which we now are moving will involve new ways of distributing journalism — new combinations of print and online venues and, surely, avenues we cannot foresee.”

If the Tribune Company wishes to cut the Los Angeles Times’ newsroom into irrelevance, that ought to be the Tribune’s right as the LAT’s owner. Johnson and Baquet deserve credit for fighting for their newsroom. But there’s no need for those who have expressed interest in buying The Times to keep their money in their pockets, should Tribune continue to refuse to sell.

Want to protect and improve the quality of local journalism in Southern California? Great. Then go hire some of those folks that Tribune’s about to lay off and start up your own newsroom. Worried about the high cost of starting up a new print newspaper, in an era when print’s losing readers to the Web? Why bother? Simply start a Web newsroom instead. Worried about the loss of influence publishing online instead of in print? Um, didn’t we just say that print was losing readers to the Web?

Many local journalists already have made the switch to online publishing. Just scan the dozens listed on Kevin Roderick’s LAObserved.com, under the headings “Media In or About Los Angeles” and “Selected Blogs and Websites.” Contrary to the attitude of some within the Times building, many blogs and independent websites feature smart, original reporting. And many more would if they could cash a check from the likes of Eli Broad to support their efforts.

Take the $1 billion that analysts have estimated The Times could fetch, divvy it among the paper’s 900-some newsroom employees, and you’ve got a cool million-plus. Per employee. How many sharp, local investigative websites could be funded with that kind of cash? Heck, maybe a little competition might better get Tribune’s attention.

Don’t want to run a charity? Fine. Why not hire a few soon-to-be-out-of-work ad reps to go out and find advertisers for these existing and prospective local indie news websites? I’ve lost count of the number of journalists who want to start their own original reporting news websites but have not out of fear that they won’t be able to sell enough ads to support themselves. They shouldn’t have to. Let the ad folks sell the ads, and the reporters do the reporting. A smart, well-funded local ad network for indie websites, run by experienced local sales reps, could help sustain the quality of local reporting more effectively than any amount of op-ed handwringing will. And make a bundle of cash for its investors, too.

The point is, Los Angeles has a strong, entrepreneurial business community that shouldn’t have to beg to Chicago for tough, local news coverage. If the Tribune Company doesn’t want to fund that the way folks around here think it should, then fine. Now’s the time for Tribune’s critics to put up, or shut up.

The Web is waiting.

From the ONA conference…

MSNBC.com, Roanoke.com, The Center for Public Integrity and NOLA.com won the top categories in the annual Online Journalism Awards, presented Saturday night by the Online News Association and the USC Annenberg School for Communication. Longtime OJR contributor Staci Kramer writes up the ONA conference sessions at PaidContent.org.

The past 12 months have been smoking hot for online media mergers and acquisitions (M&A). Why the sudden interest in online properties that largely have the smell of Web 1.0? Perhaps it’s the belated ascendancy of online advertising, with study after study showing that ad money is now chasing consumers who are turning to the Net over traditional media.

Add to that the desperation of old-line media companies worried that their old-line businesses are getting stagnant, and the situation equals an increased interest in highly trafficked content sites, whether they’re blogs, social networks, wireless content or niche journalism. This isn’t a full-blown flashback to the late ’90s when any e-commerce site could command millions in venture money; it’s more of a mini-bubble focused squarely on online media.

After the recent Web 2.0 conference in San Francisco, the media gave mixed signals on whether a speculative bubble was back with Internet startups. USA Today’s Kevin Maney got an “uneasy feeling” at the confab, due to the reappearance of previous dot-com stars such as Joe Kraus (formerly of Excite) and Mary Meeker (still an analyst at Morgan Stanley).

But two journalists who heard the same spiel recently from IDG Ventures general partner Michael Greeley about a Thomson Venture Economics survey on third-quarter investment trends came away with two very different takes. Reuters’ Eric Auchard’s story was headlined, “Survey Shows Fears of New Dot-Com Bubble Overblown.” Auchard said the survey showed that venture capital money going into Net startups had fallen. But John Cook’s article for the Seattle Post-Intelligencer was headlined “Dot-com lesson feared lost on venture capitalists,” and Cook focused on the early warning signs of bubble trouble.

“We are actually quite nervous that in some of these subcategories valuations have quite significantly ramped up again,” Greeley said, as quoted by Cook. “I think if these companies underperform … you will see a pretty significant correction again.”

John Battelle — who was the program chair of the Web 2.0 conference and is the founder of blog-marketing startup FM Publishing — told me he didn’t think the current situation was a bubble redux, because new companies were being funded with much less money. Battelle says there’s less “public money” in the mix, since most companies aren’t vying for IPOs but instead are seeking to be bought by bigger players such as Google, Yahoo, Microsoft or the mainstream media companies.

With the AOL purchase of Weblogs Inc., the subject has to turn to the value of smaller online publishers and bloggers. Should they sell out, and under what circumstances? FM Publishing offers to be the band manager for more established bloggers, and currently represents group blog BoingBoing, Om Malik’s Broadband Blog, Matt Haughey’s MetaFilter and PVRBlog, among others. FM lets bloggers keep their intellectual property, but takes a cut of ad revenues it sells.

“The question that might inevitably come up is if [an independent blog] were owned by somebody, how would it change it?” Battelle said. “Would an author feel comfortable with that? This medium is just starting to understand its relationship and conversation with marketing and sponsorship. One of the core reasons a media company would be interested in acquiring a blog is that it has more valuable advertising inventory. But if an acquirer were doing it for that reason, and then pushed a bunch of advertising into this space that did not fit the conversation of the site, you could very quickly ruin the site, and the readers could go elsewhere.”

Nick Denton, publisher of Gawker Media, doesn’t believe there’s really been a big rush of VC money or Big Media interest in blog publishing. He told me Gawker’s blogs would cease doing what they do best if they were bought by a mainstream media company.

“Put the Gawker titles in a media conglomerate and they would spontaneously combust,” Denton said via e-mail. “Imagine, for instance, how AOL Time Warner would handle the X-rated party photos in yesterday’s Fleshbot, or a snide report on Defamer about the latest dross from Warner Brothers, or Gawker’s borderline libelous mockery of [Time Warner CEO] Dick Parsons. Without media conglomerates as targets, the Gawker titles would have no purpose. Gawker is not for sale but it is, more importantly, and in a deeper sense, unacquirable.”

Perhaps the safest deals in online media are for the sites that offer tools and technology, rather than pure journalism and content. That’s the interest from VeriSign in buying Weblogs.com, an old ping service started by Dave Winer that lists recently updated blog posts, along with Moreover, one of the original online news aggregators that has moved into monitoring blogs. While a blog itself might be difficult to value, it’s less difficult to understand the value for a trusted blog infrastructure.

I chatted recently with the former CEO of Moreover, Jim Pitkow, who is now a vice president at VeriSign for real-time publisher services, about his views of selling out Moreover and the market in general. I also spoke with Tolman Geffs, an investment banker who focuses on online media M&A who helped with the VeriSign/Moreover deal. Geffs is a managing director of the Jordan, Edmiston Group and was formerly the CEO of Internet Broadcasting Systems. He currently writes a column about M&A for PaidContent.

While the two conversations were originally separate, I’ve edited them together here for easier reading.

OJR: VeriSign is known for running domain name servers and security software. Why the sudden interest in blogs and online news aggregation?

Jim Pitkow: With Moreover, [VeriSign] started looking at it a year ago, the notion of the live Web. They saw that a lot of information was being published and is very time-critical, that there was an emerging infrastructure around the ping structure and time. Fortunately, VeriSign knows very well how to scale systems like this, their DNS service processes up to 18 billion queries per day.

So with ping services, people were seeing 1 million updates per day. This requires a different type of expertise to take it from 1 million per day to tens or hundreds of millions per day. They look at this as a great opportunity. They built their own ping server about a year ago, and started to test it out. Two weeks before they announced the Moreover acquisition, they announced the acquisition of Weblogs.com, which is the oldest and most heavily used ping service, run by Dave Winer. It didn’t match his core capability. By putting it in the hands of a trusted third party, it gives publishers the confidence that their content is going to get to the right places. And it provides the applications on top of it to make sure the content is going out.

You’ll see a lot of blogs lamenting that this isn’t exactly happening. You see people who are publishing information saying, ‘I didn’t see an update on the ping service for hours if not days.’ Or you have people saying, ‘I just posted something but I’m not seeing it on the search engines.’ So when you don’t have this perfect way of showing everything that’s available, it creates this really untrusted, very unreliable infrastructure to contact and communicate and have a relationship with my readers. That’s why VeriSign took an interest in this, it’s analogous to the business model of being an intermediary. And it’s useful to provide information on top of that service.

That’s where Moreover comes in. We’re an aggregator, the oldest stand-alone aggregator out there, and we put huge emphasis on data about the content. So we put an average of 30 pieces of metadata on each article, everything from geo-coding — so you can figure out which of the 11,000 San Joses are being mentioned in the article — company mentions, language identification, all this information on top helps when you build applications on top of the data.

Tolman Geffs: There’s been a lot of interest and buzz around the real-time Web. Google solved the problem of the Web up until a minute ago. But there’s a lot of interest around what is happening right now. Moreover was a pioneer in that area, and has built a very nice business. VeriSign saw this as an opportunity to provide raw and clean information on what’s available and what’s been posted on the Web right now to a broad range of folks who require that information, from the major search engines to the various current awareness projects to enterprises down to individuals and websites.

One of the examples VeriSign had in its corporate blog was the number of blogs created each day, but most of them are spam, fake blogs, with key words embedded in them. One of the first things VeriSign will be able to do is take Weblogs.com’s ping server, and Moreover’s ping server, and clean that feed, use Moreover’s analytic and meta-tagging technology to sort the wheat from the chaff and sort out the valid blog pings so you can get a clean stream of what’s been posted.

OJR: Why do you think the time was right to sell Moreover?

Pitkow: Moreover had received multiple unsolicitied bids on the company. So that’s an indication in and of itself of the market picking up. From an investor’s standpoint, there’s a certain dynamic, when the company is seven years old. When you look at a standard VC’s portfolio, that tends to be on the older side. From a market perspective, the unsolicited bids showed that the business was heating up. The best way to figure out what a company’s worth is to have multiple people bid on it, or have people come to you and say, ‘This is what we’re willing to pay.’

OJR: With all the deals happening, do you feel like the field of blogs and social media are in a bubble now?

Geffs: I can’t speculate on that. There’s certainly a lot of activity around it, but as always, I don’t know if the owners of social networks will make any money, but the guys selling them picks and shovels will. That’s what VeriSign did with Moreover. I think another interesting area that will make money is ad networks that are tapping into the blog world because as a large number of viewing minutes move into blogs, advertising would like to follow. There’s money to made in providing an efficient and reliable way of doing it. Ad networks will be profitable, both from a business standpoint and from my world, from an M&A perspective.

OJR: How do you value an online publishing venture or even a solo blog?

Pitkow: There’s an old joke that it’s not really a sale if you only have one buyer. And that’s kind of the first rule. You have to have multiple people interested to get an idea of your fair value. Otherwise it’s not a sale. It’s somebody saying here’s what I want to buy, and you saying yes or no. A real sale is a competitive process with multiple interested parties and the value is determined by supply and demand, from traditional economics.

If you have somebody interested, try to find someone else who’s interested. And if you only have one person interested, that’s telling in and of itself. The second thing is to consider your alternatives. This is the soul-searching, navel-gazing questions that any independent business owner has to ask — are the benefits of a stand-alone existence superior to those being proposed by the buyout? And there’s a lot of issues that go into that, there are financial considerations, there are autonomy considerations, there are passion considerations, whether you want to work for someone else, or for these people.

Geffs: Well a solo blog, like [PaidContent] for example, is pretty hard to buy and sell because its value is largely tied to its independence, and usually it’s one cantankerous editor. What’s more interesting is something like Gawker Media or Weblogs Inc. and it’s valued different than any traditional publishing company. What’s the likely ability of this to continue to grow its audience and attract meaningful advertising dollars?

OJR: It’s hard to figure the value because there haven’t been many blog businesses before?

Geffs: I don’t think blogs are anything different. All a blog is is a newswire. It’s a single-topic publication, it’s done in newswire format, where you have one story, then another, then another, then another story. I don’t think it’s anything that new, and I don’t think understanding audience growth for that is any different than understanding audience growth for any other online content site or, for that matter, an offline media property. Heck, every year billions of dollars are committed to a TV upfront on a gentleman’s wager on the likely rating of the upcoming season’s television shows. If that’s the point of comparison, then I’m quite comfortable estimating ad revenue growth for online properties and blogs.

OJR: Can you put your finger on what in the market is driving all this interest in buyouts for online media?

Pitkow: There are a few threads. Clearly the success of Google has increased everyone’s awareness that it’s possible to win again as an entrepreneur. The other is that Google is a media company, and that leads people to believe that eyeballs do matter again, which was a laughing point of the first bubble. You just had to get eyeballs and throw advertising at it, and you could win. But with this new market, there’s a deeper sense of maturity, a deeper sense of understanding of the dynamic of the advertising business and the value of providing audiences content in support of advertising. So there’s an efficiency there to enable a better experience than was possible before. That, coupled with the older content companies needing to have a stake in what’s happening in the online ecology.

In a quick nutshell, it’s the efficiency of online marketing, the maturation of the marketplace, and the revenue at risk for not participating in the market now. And that rationalizes purchases like About and MarketWatch.

OJR: Do you think companies are being overvalued?

Pitkow: This is the difficult question. You never know until the historians come in and you have really good hindsight whether you paid a fair price or not. In certain cases, the ROI [return on investment] is immediate, like Flickr with Yahoo, or Overture and Yahoo — that paid itself back in a very short period of time. If you look at things like Skype and eBay, it’s probably going to be harder to pay that off in a shorter time frame. But that’s where acquiring companies make a distinction between what’s strategic vs. what’s bottom line focused. Some people are very savvy and they do stuff that’s strategic and also pays itself back very quickly. Other people are optimizing one aspect of that equation.

The ultimate arbiter of whether these are fair values or not, we do not know. We do know that they are fair because they’re what the market will bear.

OJR: Tolman, you’ve written a little about old-line media companies buying in online. Do you see these old-school moguls like Rupert Murdoch starting to get the Internet now?

Geffs: I would never put it in that tone. I think that these are some very smart folks who were correct in earlier skepticism that early Web audiences didn’t have the scalability required for a good ad or commerce platform. And now we’re saying yes it does. I do believe that Time Warner’s acquisition of AOL will be seen as a strategic masterstroke in time. I say that a little bit tongue-in-cheek, but some folks over there would nod that yes, this is a fairly valuable property.

OJR: Why do you think there’s been a sudden interest in AOL?

Geffs: You’ve reached a point where there is broad acceptance at senior levels that online advertising is both effective and scalable. As recently as 18 months ago, while heads would nod, you were in doubt about one or the other. Either you didn’t believe it was scalable or effective. Now there’s a real belief that they are and that is ultimately driven by the money because advertisers are pushing money into online alternatives because traditional media is expensive. This gives them a new and fairly flexible way to reach a large audience.

OJR: Do you think this is all predicated on AOL pushing its open portal?

Geffs: Certainly, if you have declining subscription dial-up revenues, and you have a corporate mandate to grow, you take cost-cutting as far as you can, and then you have to find new growth. They have decided that new growth will be in advertising, and the calculus has shifted. It is kind of like a publication trying to decide between paid and controlled circulation. When the advertising becomes valuable enough, it makes sense to go from paid to controlled.

OJR: Do you see anything changing as far as the paid content model online? It seems like things are opening up a little bit now.

Geffs: On the one hand, AOL is essentially going controlled, going free, but on the other hand, I will make a prediction that most online newspapers will have to move to at least a somewhat paid model, either fully paid or with large portions paid. The trends in readership show that a greater portion of the audience is moving online, but it’s getting more difficult to support the editorial operation of a newspaper without a subscription revenue base.

I think the idea of everything a newspaper writes being available online for free will be regarded as a thing of the past. AP rip-and-read will continue to be free, but value-added, local, feature reporting, columnists — those will move behind a pay wall. I think the New York Times is moving in the right direction there. You just can’t support the cost of that newsroom and maintain that journalistic quality without subscription revenue.

That’s a broader issue as well that the major media companies are facing. They are reshaping their business models around the Web. Their previous models involved moving their offline content online, so that NYTimes.com is 90 percent New York Times content. The same is true at the IBS sites I used to run. The WNBC.com content comes from WNBC. That’s a good business, but not a profitable enough business [to counteract] the profit squeeze at the parent company. I think these folks will be moving even more aggressively online, and that’s what they’re doing to lift their online revenue growth above the trend line and it will help offset the profit pressure on the core business.

You see that with the New York Times buying About or Dow Jones buying MarketWatch to build their audience significantly. But I think the more profound thing you’re going to see is them looking to either buy or create original content online, because ultimately content is king, and the audience and advertising follows original content. I think a lot of these companies are going to be focusing much more resources on creating original content and original programming online. First we’ll see that in their online channels, and then exploiting it through their offline channels.

Examples would be what Yahoo is doing with their adventure series, what Scripps is doing with original online content loosely based on their cable franchises, but is original online material. It’s the real impetus for acquisitions like About and MarketWatch — the ability to create new content online or buy companies that create new content, and that’s how they will create growth instead of migrating their current offline audiences online.

OJR: In the first wave of the Web, there were online-only content sites like Salon and Slate. I don’t see a lot of startups that are doing original journalism like those sites. What do you think has happened to that?

Geffs: I wonder if the first wave saw folks trying to do offline models online. Starting an online magazine, hiring an editorial staff, a designer, all that good stuff. And now the next wave, they’re going at it in more Web-centric and capital-efficient ways. To be honest, when we started IBS — which is a profitable and successful business — we spent a lot more money than we needed to, and a lot of it was because we thought that was what we had to do, because it had been done like that either offline or in the early days of IBS. If we knew then what we know now, we could have done it for a fraction of what we spent.

I think a lot of those lessons have been learned now. Salon.com would not get funded today, but on the other hand, Wonkette is doing a lot of what Salon.com tried to do, and it’s just one person and Nick Denton provides the infrastructure, and it’s profitable.

But what about the millions of micro-publishers operating online? Do these small firms engage in the same kind of merger and acquisition activity as their giant cousins?

Not as much as one might expect, according to Peter Schiable, president of the Subscription Website Publishers Association (SWEPA). “I’m a little surprised that we haven’t seen more of it,” he said. “Many publishers have floundered, so you’d think they’d be more receptive to a buyout offer. Buyers are there, but sellers aren’t necessarily interested.”

There is some acquisition activity among medium-sized publications, such as the acquisition of ClickZ by Internet.com, but the truly micro-sized publishers don’t often sell their publications unless they plan to leave the business entirely. Rather, they tend to move into cooperative audience-sharing arrangements and mergers. More often than not, what inspires the smaller publisher to move in this direction is a desire to increase productivity.

Jake Ludington got started in online media by publishing the Digital Media newsletter for Chris Pirillio’s Lockergnome and eventually struck out on his own to launch MediaBlab in 2003. Now, he has reached the same point in his business growth that inspired Lockergnome to expand from a single voice with a single newsletter, and he is considering using the same method to expand his own enterprise.

“I know that I’m hitting a point where my available time to create is reaching its finite limit,” Ludington wrote in an e-mail. “The only way to grow the business beyond where I can take it is to bring in more talented writers or to merge with other independent voices who may have strong traffic but haven’t figured out how to turn the traffic into a viable business model.”

These small publishers will often expand from a single newsletter to several newsletters published by various writers under a single media brand. The larger entity functions as a sort of publishing cooperative. Each writer brings an existing audience to the collective, gets reciprocal exposure from the other newsletters in the group and may engage in revenue sharing or may keep the income generated by his or her own newsletter as part of the deal.

That can be a very attractive offer for a micro-publisher that produces great content but has not been able to turn popularity into dollars. “Many independent publishers have traffic that is worth considerably more than what they are current generating in revenue because they are focused on publishing information and don’t have the time to properly address the business aspects of what they are doing ,” Ludington wrote.

As attractive as such a merger might be for publishers that are generating disappointing revenues, persuading them to enter into the agreement is not as easy as one might expect. While some micro-publishers combine forces to grow their audiences and build scale, others are more interested in their subject and the relationship they’ve built with their audience.

One such publisher is AuctionBytes.com, operated jointly since 1999 by the husband and wife team of David and Ina Steiner. Theirs is a micro-publishing venture with an impressive record of success, as they have made AuctionBytes.com the pre-eminent authority on buying and selling on E-Bay. The Steiners have firmly established themselves in their chosen niche, and, according to Ina Steiner, they have little interest in either merger or acquisition.

“We really don’t want to scale. We like being independent and we know that if we wanted to scale it would put us in a different business,” Steiner said.

There are a number of elements that can make selling a niche publication difficult for its founder; first and foremost is deciding the value of the business. Because so many micro-publishers lack a business background, they do not tend to keep the kind of metrics that make it easy to put a dollar amount on the assets of their publishing business.

“For independent publishers, especially smaller operations consisting of one or two people, the valuation process is complicated. Accurate traffic statistics are tough to come by,” wrote Ludington.

In addition, independent publishers will tend to place value on aspects of the publication that make it rewarding for them to produce it. Ina Steiner describes her goals as a publisher as increased credibility, reputation and expertise in her niche. “I see our value as documenting an industry,” she said.

Many niche publishers shy away from mergers and acquisitions because they fear the new ownership will impact the relationship they have developed with their audience. Will the founder of the publication continue to be its principle content producer? How much editorial freedom will they have? Will the new owners bring the same kind of commitment to the subject that the founder does? Will they have the same kind of respect for the publication’s audience?

Additionally, independent publishers place tremendous value on their independence, sometimes more value than may seem objectively reasonable to someone making a cash offer. Many subscribers will agree that independence is the publication’s most attractive feature, and some will abandon an online newsletter they feel has “sold out” and “gone corporate.” The new owners will lose at least some percentage of their newly acquired subscriber base, which isn’t usually a problem. But as the publication grows larger and achieves scale, it will invariably be wholly unable to replicate the unique voice that originally made it popular.

This is a scenario that keeps many independent micro-publishers away from the bargaining table. As Ludington put it, “If you’re independent and making a comfortable living, it can be difficult to accept that by giving up some amount of control you may end up with a bigger audience and more money in the long run.”

In the end, merger and acquisition activity among online micro-publishers comes down to motives. For some of those smaller content producers, the revenue is secondary. The real value of the publication lies in the doing. By staying small, the niche newsletter or Weblog is less like authoritative lecturing and more like an interactive community. The connection between writer and reader can then be closer and much more personal than what most journalists experience writing for The New York Times.

“It’s really about lifestyle. It’s much better to focus on what you do and do it well,” says Steiner. “We really have such a great gig and, if you’re really happy doing what you’re doing … in negotiations, that’s going to up the ante.”