‘The model can’t hold’: Publishers face content studio growing pains

“What I realized was that even though we had the editorial prestige, we didn’t have the scale, infrastructure, resources, technology to execute on that,” said Salmanpour, who now runs content marketing at ‎Hearst Digital Media. “When you’re answering these RFPs you have to be as creative as possible. And it’s a case of whiplash because whatever’s hot and new probably has to be included.”

This is branded content in 2017. Many publishers have looked to so-called native advertising as the silver bullet for publishers as display ads lost effectiveness, so they’ve fired up content studios to create campaigns that mimic editorial. Ad tracker MediaRadar found more than 1,000 sites selling native advertising, up from 218 publisher sites in 2015. For some publishers, native is now the biggest source of their ad revenue.

Margin squeeze
But the growth obscures just how hard the content studio business is, due to high content creation, overhead and distribution costs as well as rising competition. If running a display ad on your own site is nearly all profit, the margin on a branded content campaign could easily be half that, said Paul Rossi, president of The Economist Group.

“If you look at the real challenge of native advertising, it’s really more about the margin than the revenue,” Rossi said.

The way many publisher studios are set up is part of the problem. It takes expensive staff and equipment to create branded content that looks and feels like real journalism and manage the campaigns through the multiple steps of approvals required. And agencies are raising the bar, demanding premium multimedia content that can run across the publisher’s site as well as social media, which adds to production costs. Shooting a video in your test kitchen is one thing, but shooting on location will eat up profits quickly.

“It’s totally different from your standard RFP,” said Anna Fertel, associate director at The Media Kitchen. “They have to find a way to sell a brand-new idea, which is definitely challenging.”

Publishers have adopted some parts of the ad agency model but not others. Unlike agencies, publishers tend not to work on a retainer basis. So they’re always waiting for the next branded content proposal, and these programs tend to be big but infrequent, which makes it hard to project the revenue. Publishers don’t hire and fire like agencies do to match the flow of the work.

“Most content teams I’ve seen are set up like newsrooms,” said Melanie Deziel, who used to work for The New York Times’ T Brand Studio and now consults to publishers’ content studios. “There’s not this feeling of disposability.”

Rising social distribution costs
In theory, what the client pays for media should be high-margin. But increasingly, publishers can’t get enough scale for the campaign on their own properties, so they need to buy distribution off-site, typically from Facebook or content marketers like Outbrain. That erodes margins quickly. In a typical scenario, a client might give a publisher $500,000 to create a native ad program. Of that, maybe $100,000 is being earmarked for content production, and the remaining $400,000 for distribution. A report last year by Polar, which helps publishers scale native ads, found that 79 percent of publishers use paid distribution to get scale for branded content, with about half using paid social on all their campaigns.

And brands know they can save money by buying the off-site distribution themselves, not to mention compare proposals across an ever-growing number of publisher studios, which puts pressure on publishers to cut their prices. Marketers are also gaining confidence in creating the branded content and buying the distribution themselves. A 2017 Content Marketing Institute study found that 42 percent of marketers planned to increase their content marketing spend and that 73 percent expected to produce more original content in 2017 versus 2016.

A publisher can get to as high as a 75 percent profit margin on branded content by, say, using a regular stable of freelancers and by getting smarter about buying distribution and volume discounts from those distributors, one former publishing exec said, speaking anonymously. But it takes time to hone those efficiencies. The first year that publisher made a big push into branded content, the profit margins were zero; the second year, it was around 25 percent, this person said. Compare that to 85 percent for display or preroll video. That would be OK if publishers didn’t have expensive newsrooms to pay for.

“The challenge for the industry is, these are businesses that are self-funded,” said Sebastian Tomich, who oversees the Times’ T Brand Studio as svp of advertising and innovation. “You’ve got to make the margin of a creative agency, and then some. Someone’s got to pay the journalists.”

Deziel said a survey of publishers she did showed that profit margins on native ad programs ran anywhere from 5 percent all the way up to 80 percent, depending on whether publishers include the media spend as part of the native ad revenue or put it in another bucket.

“Studios that are much larger tend to have lower margins,” she said. “Those that rely on paid social tend to have lower margins. Anyone that has a slim team and higher organic reach tends to have higher margins.”

Sales, meet content
Other publishing vets talk about internal struggles that content studios wrestle with. It takes a certain kind of salesperson to sell branded content — someone who’s creative, gets storytelling and is comfortable working on a long runway — skills often lacking in seasoned digital sellers who are used to being able to hit their numbers quickly.

“It’s just not a natural thing to have a creative arm inside a sales organization,” said Stephanie Losee, who helped launch Politico’s branded content studio and is now head of content at Visa. “There’s a natural tension between a product that salespeople can sell that requires an enormous amount of attention and input to execute and another product that’s much more straightforward. That requires a new kind of salesperson who has as much a creative mind and an ability to read a room as make a sale.”

To grow profit margins, publishers are pushing more white-label content that can run off the publishers’ site; and sponsorships of already-planned editorial content, which command higher margins, according to Polar. In the case of the latter, the revenue is lower and the advertiser has less control over the content, though.

“Most content teams I’ve seen are set up like newsrooms. There’s not this feeling of disposability.”

The Daily Beast, for one, realized it couldn’t make enough profit on branded content if it adopted the standard agency model. So it hired a few editors and farmed out the content creation to a network of freelancers who are subject matter experts. “We can get really good content in a fraction of the cost,” said Mike Dyer, president and publisher of the Beast, who is departing to lead marketing at Intel.

For one recent six-figure campaign, the Beast created a media plan that included content creation and promotion on its own platform, plus standard display advertising. Using freelancers and charging separately for the content creation and display ads helped the Beast achieve a profit margin that was three to four times as high as that of display-only campaigns, Dyer said.

But that approach has its challenges, too. It’s hard to find freelancers who not only have intimate knowledge of the publisher’s own style but are capable doing work for a brand. Branded content can go through multiple reviews by the client, so it’s much easier to have someone on deck who’s trusted and accessible. Dyer acknowledged those downsides, but said the economics make it worthwhile: “What we lose in efficiency, we make up for in sheer business value.”

Others, like the Times, Hearst Digital and The New Republic before it, are trying to charge on a retainer basis so revenue is more predictable. But it’ll take time.

“It’s kind of a mind shift. It’s not the way marketers are used to working with publishers,” Tomich said. “They’ve always gotten the ideas for free. It just takes a while. But it is coming. The existing model just can’t hold.”