The search for profits

Back to my current "top topic" for this week`s column - the question of how to make money running an online content business. Such an innocuous question, yet so loaded: the epic search for profits (not just the breakeven point) is the key reason why bean-counters in online businesses everywhere are prematurely grey and suffer from broken hearts. I`m convinced of it.

The South African model (much like the international one) has shown that investors will pay staggering amounts of money for shares in companies that don`t show any hope whatsoever of ever turning profitable.

There are several ways to tackle this topic, and inevitably the notion of "growth" comes into it. How do content businesses grow? The Web economy at present allows for three different growth paths. One of them is typically less viable (because it`s less scalable) than the others. Let me describe them:

This means circumnavigating the business pitfalls of starting up your own online publishing business, slaving away endless hours - nights and days - on producing your own content, placing your hope in those who will contribute text for free in return for exposure and marketing. Organic growth means realising early on that nobody will pay you for the fruits of your labour directly, and introducing advertising and other ways of monetising your publication. This adds the additional burden of finding effective ways of selling your advertising inventory. It also means that you have to have a huge personality, a virtually unlimited capacity for taking knocks and pretty deep personal pockets, even if your aspirations don`t require you to drive a Benz anytime soon.

This should really be in two parts, but the situation is similar in both cases: someone else thinks that your business has big growth potential in terms of book and intellectual value and invests money. The very brief description is the same in both cases - your investors foot your bills (labour bill, equipment, bonuses, your own salary) in the hope that your company`s value will go up and that when they sell their shares, they will get a positive return on their money. Notice that I didn`t say that profits were necessary in this scenario - in the world of the Web, this is typically not the case.

In fact, when you list your business, the South African model (much like the international one) has shown that investors will pay staggering amounts of money for shares in companies that don`t show any hope whatsoever of ever turning profitable. Both types of investment are very similar; the difference lies in how you convince someone to buy your shares (and give you money in return for an expectation). Investors who buy public stocks are often simply less well-informed about the realities of doing business online right now, hence they will invest more, or more readily.

This seems like an odd way of scaling your business, but it`s also typical of the online world right now. The current media frenzy about the Internet and Internet business (don`t let anyone tell you that this has stopped; it merely subsided a little) has many large-scale media and technology companies racing their competitors for a stake of the online publishing business. "Being big to start with" simply means that you can be successful by already owning and making money from your core property: content. Many traditional publishing and broadcasting businesses are undergoing a Webification phase and nourish their burn rates from what their core business casts off - content that has already been produced for another application. In a way, this is similar to having investors with really deep pockets: publishing content online costs vast amounts of money, don`t believe any hype to the contrary.

So, to the issue at hand: what about profits from online publishing businesses? There are clearly two kinds of profit that can be made from online media. One is the profit that investors make when selling their shares in a business, assuming that it has grown sufficiently between the time when they bought shares and when they sold. That is the primary kind of profit that the Internet industry currently provides. The key realisation here is that because of its incredible, rapid, often breathtaking growth over the last six or so years, the Internet has been a stock profit engine without comparison. No other industry comes to mind that has performed equally well, not even other so-called high technology industries such as financial services, pharmaceuticals or electronics.

But that`s only the intermedia profit - brought about by rapid growth. IT stocks, typically, aren`t thought of as good long-term investments.

Companies that don`t generate any operational profit (the "other kind") don`t pay dividends and remain exposed to market forces. The South African Internet industry is known for its ups and downs; its rate of acquisitions, mergers and inexplicable slow-downs is almost the stuff of legend. People will say things like, "The market will give you cash..." others contend that the market is prepared to invest more cash than they`d ever know what to do with. In a sense, this is a simple phenomenon to understand. If you`ve just come out of several really difficult seasons during which you held your business together with barbed wire and duct tape, you will - naturally - enjoy the fact that you`re swimming in cash that you`ve raised on the stock exchange.

Couple that with the transient, unproven nature of the online publishing industry, and you`re one of many companies that need to find ways of growing naturally, quickly.

So how does one transition one`s Web publishing business to profitability (in short, so that it brings in more revenue than it can spend)? My regular readers will now be disappointed, because I`ll end this column with a few broad strokes of text and metaphors - a cop-out of sorts. The really short answer is: "I don`t know."

I think that Web advertising, in its myriad forms, is much maligned at the moment and can constitute a really good, constant revenue stream. This is following the simple assumption that if print publications and broadcast channels have made the balance work over the past half-century, it might be possible to do the same, online. The catch, as always in this start-up environment, is that critical mass has to be achieved. I`ve still not found that one amazing, all-encompassing book about the economic history of the traditional media (any suggestions welcome) that would clear this up for me: at what stage did newspapers, for instance, actually turn into stable, profitable businesses? Is it a matter of carefully managing the balance between content ("news") and advertising against the overall size of a publication?

Or is it related to owning several publications, to increase reach (niche interests, different political views) while minimising risk (many publications are better than one)? When did the "media empires" that we admire today (eg Ziff Davis, Bertelsmann) turn profitable?

Personally, I`m beginning to get the feeling that too many people in this industry are taking the easy way out. I don`t mean for this statement to sound as if I`m against taking share profits by selling; far from it. One of the fundamental metrics of the Internet industry is that it needs to feed its fast burn-rate, otherwise innovation doesn`t continue at a healthy pace. I just think that the fact that I, like so many others, say "I don`t know" when someone asks how to build a healthy content business is a problem. Our thinking about the issue of profitability has fallen into a loop - we all say what the next person says.

Perhaps it`s carefully building a range of publications and balancing risks and revenue between them. Perhaps it`s about enabling buying decisions - in other words, taking a cut per transaction that your content has helped enable. Whatever it is, searching for true, operational profit should be a core requirement for any good online publishing business. Shareholders, be they private or public, will want to see true returns at some point, not just the fruits of market evaluation.