THE NEW ECONOMY™
Meet the New Economy, Same as the Old Economy
September 14, 2022
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NEW YORK TIMES + THE ATHLETIC = A MICROCOSM
On January 6th, 2022 (only two days after the SPX reached its all-time high), The New York Times (NYT) announced that it would purchase The Athletic, a subscription-based sports news outlet, in an all-cash deal valued at $550 million.
The Athletic reportedly grossed about $65 million in revenue last year with 1.2 million paying subscribers and generated $55 million in operating losses. Back of the envelope math suggests the NYT paid ~$460/subscriber while each subscriber paid on average $54/year.
If that’s not bad enough, the chef’s kiss is the Athletic was hemorrhaging cash with -85% operating margins and the NYT still paid 8.5x (!) revenues. To nobody’s surprise, shareholders did not like the purchase price and the stock traded -11% the day following the announcement.
From NYT’s perspective, the deal had “land grab” mentality written all over it. The market valued top-line growth and subscriber count above silly, extraneous things like valuation and cash flows back in January. Funny how fast things change.
“The purchase is consistent with our long-held belief that deploying capital in service of our digital growth strategy is the best way to maximize shareholder value.
… which means that we are now in pursuit of a goal meaningfully larger than the 10 million total subscription targets.” – Meredith Kopit Levien, CEO, January 6, 2022 – M&A Call
For what it’s worth, we have been subscribers to The Athletic for years and have been pleased with the product and value proposition. The whole idea since its inception in 2016 was that readers would directly support quality sports journalism via a subscription fee and the “antiquated” ad-based revenue model would soon be rightly discarded like the dinosaur it was.
Earlier this week we opened the iOS app to see the following notification.
Eight months later, amidst a rising cost of capital, the NYT decided it would no longer fund unlimited losses and would be introducing “premium advertising” onto the platform. Adding an advertising component to the monetization strategy was seemingly always part of NYT’s integration plan. After all, the business has been around since 1851 and almost always generates positive FCF.
New York Times FCF Profile - Bloomberg
MEET THE NEW ECONOMY™, SAME AS THE OLD ECONOMY
We understand the obvious reason for rolling out advertisements on The Athletic, but something about this struck us as odd and we couldn’t quite put our finger on it at first. Then it hit us.
The Athletic sold early adopters and employees on a specific corporate vision predicated on the existence of a New Economy™. Sports journalism was about to be revolutionized in a way that had never been done before and they declared themselves the trailblazers, determined to show industry veterans how “stuck inside the box” their way of thinking was. Except none of it actually happened.
The founders claimed their outlet wouldn’t be advertising-driven like every other one of their competitors. It would be solely subscription-based because that was the way of the New Economy™.
“We will wait every local paper out and let them continuously bleed until we are the last ones standing,” Alex Mather, a co-founder of The Athletic, said in an interview in San Francisco.
“The advertising business model does not align with quality,” Mather said. “It’s hot takes instead of objective analysis, it’s short-term instead of long-term, it’s serving sponsors instead of users, it’s thinking big instead of great.” “It really comes down to the business model,” he added. “That is our core belief.” - Source: New York Times
Of course, all of that is easy to say when you’re marketing a dream not bound by economic rationality and VC investors are lining your corporate coffers with unlimited dry powder. But, all of a sudden, the cost of capital rises, VC investors prepare for an exit and the acquirer does not share your belief in funding perpetual losses.
From a purely revenue model standpoint, monetizing both advertisements and subscriptions, The Athletic is now most similar to traditional legacy newspapers (delivered via the internet). We would argue this monetization strategy is a step backwards from the free online advertising-driven sports journalism websites they sought to disrupt when originally launching the company.
Turns out, the New Economy™ is a lot like the Old Economy.
OTHER EXAMPLES
Netflix. Previously offered tons of original and third-party content, no commercials, and encouraged users to binge watch almost unlimited content. Today the company has decided to roll out an advertising tier, third-party content is getting pulled from the platform constantly, and new episodes of original content will be released on a weekly schedule instead of dropping entire seasons at once. From a consumer standpoint, the product offering is beginning to sound a lot like traditional cable.
Uber / Lyft. These two services originally disrupted the traditional taxi industry by offering transportation at a fraction of the cost with a much greater supply of drivers. Now, not so much. These platforms are often far more expensive than licensed taxis. In Toronto, most people in my immediate circle use multiple apps to source the cheapest and fastest ride, and anecdotally, there seems to be a consensus the Beck Taxi app is the most competitive.
Casper. Casper, and other bed-in-a-box companies, were determined to revolutionize the mattress industry by offering products direct-to-consumer instead of wasting money on physical store locations. Investors were worried these new start-ups would take meaningful market share from traditional mattress manufacturers such as Tempur-Sealy, Serta, and Sleep Number. Except, Casper has recently done a complete 180 and now has three standalone locations in the Toronto area alone.
WeWork. WeWork’s charismatic CEO and Founder, Adam Neumann, and its largest investor, SoftBank, were set to revolutionize the commercial real estate landscape. We have briefly written about it in the past but, suffice it to say, pretty much everything went wrong. Selling greater fools on hopes, dreams, and narratives can only get a company so far. WeWork was merely a commercial tenant with a bunch of uneconomical subleases. In fairness, this mess first blew up prior to this year but the SPAC market reinvigorated investor appetite for risky SPACs and the company was gifted a new lease on life (pardon the pun), only for the stock implode all over again.
WE LOSE MONEY ON EVERY TRANSACTION, BUT WE MAKE IT UP ON VOLUME!
Many “disruptive” business models are beginning to look a lot like the traditional competition they originally displaced. Pivoting your business model from a growth-oriented land-grab-at-all-costs mentality towards a more rational profitable-unit-economics-above-all is difficult to execute from an operating and corporate culture standpoint.
The real competitive advantage, if you can even call it that, most unicorns possessed was an ultra-low cost of capital. Plenty of high-growth, money-losing businesses turned that advantage into an inefficient and bloated cost structure for the sake of growth. Now, saddled with excessive headcount (especially in their sales & marketing departments), these disruptive irrational competitors find themselves at a cost disadvantage relative to their more traditional, rational counterparts.
It's important to distinguish between true innovation, which we acknowledge exists, and narrative-based innovation, which is nothing more than slapping lipstick on a pig. When we reference the New Economy™ we are referring to the latter, and it appears to be a mirage built on a smokescreen of ZIRP.
Yesterday the market was down -4.32% as inflation came in hotter than expected and investors are starting to whisper about the next Fed rate hike being 100 bps instead of 75 bps. In the grand scheme of things, it doesn’t matter all that much to the bigger picture at play. The point is that the cost of capital will continue trending higher. As such, irrational competitors will be forced to behave more rationally.
Said differently, the higher interest rates go, and the longer they stay there, the more the New Economy™ will like look like Old Economy.