16:43 PM

Arrington Should Watch Out Because J.B. Is About . . . Ad Networks Will Roll Up Media Companies

The economics of the online media business are terrible. Decent journalism can't be supported on a pageview model. At least not yet.

There are some rapidly growing publishers in the tech space such as Michael Arrington's TechCrunch, GigaOm, and VentureBeat. They all make heavy use of an advertising network, in this case Federated Media Publishing (FM), founded by John Battelle, the search guru. And there are other online publishers that have become high flyers in fashion, food and woman's sites that also use FM.

FM takes about a 40 per cent cut of advertising revenues, but each deal with its some 200 publishers is private, so its share could be higher. It's a nice margin and well deserved compared with other networks because FM goes out and bangs on doors and sells ads.

But at some point soon, FM's largest publishers are going to be large enough that they won't need FM any longer. They'll do it themselves or sell to a higher bidder. For example FM lost Digg last year to Microsoft.

I was interested to see that FM Publishing recently raised funding that was reported to be as much as $50m.

That sounds like a war chest to me.

If I was Mr Battelle I would start buying up my online publishing partners. FM can monetize its publishers better than they can. FM knows exactly how much traffic, and the quality of the traffic hitting its publishers, it knows their business very well.

By acquiring their publishing partners they get an immediate boost in advertising revenues, they get to keep 100 per cent--nothing needs to be shared. And J.B. is a former publisher he understands how to run a media company.

The math is compelling. Ad networks will start buying up online publishers because: they'll make more money, they won't get dumped, and they can monetise online content far better than the online publishers currently can.

Of course it could go the other way (except where is the publisher's war chest...?) There is more here about the potential publisher strategy.

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Please see: Arrington's Roll-Up The Blogs Strategy Won't Work

Please see Sramana Mitra's excellent recent analysis: Federated Media Needs to Focus

In 2007, FM raked in a revenue of $22 million, out of which $14 million went to the publishers. That indicates a gross margin of 36%. After deducting the operating expenses, what remains is a thin operating margin, not one that should bring forth a very large multiple.

On the positive side, some of the blogs that FM represents are earning over $50,000 per month, although Mike Arrington (Techcrunch) keeps complaining that they don’t sell enough of his inventory.