If Ads Don't Work, Can Publishers Strike Subscription Gold?

A new crop of startups wants readers, rather than advertisers, to fund internet content.
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Tony Haile spent seven years trying to save the internet from click-based hell. As CEO of Chartbeat, a software and data provider to publishers, he showed editors, in real time, which stories were “trending” on their sites. He hoped the information would convince media companies and advertisers that their primary way of doing business online---through banner ads, sold through split-second digital auctions for fractions of pennies---could not last. At industry conferences, he presented chart after chart showing the emerging duopoly of Facebook and Google, the commoditization of quality journalism, and the perils of clickbait content strategies.

It was hard to disagree. Analysts estimate that Google and Facebook captured all, or virtually all, of the growth in digital ads last year. Elsewhere, readers don’t look at display ads, let alone click on them. The average clickthrough rate is a measly 0.05 percent, so publishers covered their sites with increasingly obtrusive ads. In 2016, the use of ad blockers increased by 30 percent, according to PageFair, which tracks the data. Meanwhile, advertisers are increasingly concerned about paying for fraudulent clicks from bots or seeing their ads next to offensive content. Despite these challenges, Chartbeat’s solution---selling ads based on metrics like time spent and engagement---failed to catch on.

"Change is remarkably slow," Haile says of the publishing industry. "[It] was like I saw someone on the street having a heart attack and I was going up and telling them to eat vegetables. It's a good long-term plan, but it wasn't going to get us where we needed to go fast enough." In 2016, he stepped down as CEO of Chartbeat.

Now Haile is back with a new company that’s tackling the same problem very differently. Rather than lobby advertisers to pay more to appear near quality content, he wants to convince media consumers to pay. Scroll, his subscription-based startup, plans to launch early next year. "I guess I'm a glutton for punishment," he says.

Scroll is part of a growing class of venture-backed companies that see subscriptions as a way to absolve the internet of its original sin, advertising. Many are aimed at smaller publishers. But these newcomers arrive as major media brands, including Spotify, The New York Times, and The Washington Post report growing revenue streams from subscriptions.

Ever since the first banner ad ran on an early version of Wired.com in 1994, advertising has been the dominant way to make money from internet content. As the 1998 book Burn Rate outlines, “Wired’s stature in the Internet community, and Time’s stature in the advertising community nearly overnight made advertising part of everyone’s plans for the Web.” Publishers gave the product away for free to amass scale, then sold ads against clicks. In 2016 advertisers spent $72.5 billion on digital ads in the US.

In the ’90s, no one foresaw the fraud, commoditization, ad blockers, brand-safety issues, or clickbait battles that now trouble the industry. The swirl of problems, combined with the media industry’s revenue struggles, has conjured descriptions of an industry that’s “off the rails,” facing a “moral struggle,” and in danger of a “subprime advertising crisis.” Even industry insiders join the self-loathing. Consider a recent Advertising Week conference panel titled “We Must Be Able to Do Better Than This.” One venture capitalist has called digital advertising “a prank the tech industry played on the media industry.”

Hence the renewed interest in subscriptions, despite the model's mixed past record. Paid social networks like App.net and Diaspora flamed out despite hype, while subscription content startups such as Andrew Sullivan's The Dish struggled or remained niche. The newcomers include Patreon, whose software platform allows bloggers, YouTubers, and podcasters to collect pledges directly from their fans. The site now has more than 50,000 creators, some of whom earn six figures a year. (Patreon takes a 5 percent commission.) “If you’re an aggregator like Google or Facebook, then ads are a great way to make money, but if you are a person who has a blog with 20,000 readers every month and you monetize it with ads, you make maybe $150 a month,” says CEO Jack Conte. “That’s a basketball stadium full of people waiting to read your next thing, and you only get $150. It’s been clear that doesn’t work.”

In September, Patreon raised $60 million in new venture funding from Thrive Capital, valuing the company, founded in 2013, at a reported $450 million. Conte says investors are excited about subscription businesses because the revenue is predictable, and companies like his have shown that the model can work. “The idea that people want to pay for content is no longer a question. It’s a proven theory,” he says.

Thrive Capital partner Chris Paik says Patreon’s pledges work better than paywalls for sites with small but passionate audiences. Patreon subscribers don’t gain access to exclusive content---they subscribe because they want to support the creator. Twitch, another Thrive Capital investment that sold to Amazon for almost $1 billion in 2014, used a similar model.

San Francisco-based Scribd started 10 years ago as a free document-sharing site, amassing 100 million monthly visitors to its document database. That’s a sizable audience, but it’s a rounding error for Facebook and Google. After trying “just about every business model” from advertising to a la carte payments, CEO Trip Adler says subscriptions have proved the most effective. Now 500,000 subscribers pay Scribd $8.99 per month to access books and articles through its app.

It took Evan Williams almost two decades and three companies---each aimed at giving people tools to communicate their ideas---to learn the same lesson. His first startup, publishing platform Blogger, sold to Google early in its development. The second, Twitter, is responsible for some of the most incredible and horrible content on the internet, supported by a $2.5 billion advertising business. The third, Medium, started as a fancy version of Blogger before expanding into ad-supported journalism and content creation. Medium was an early partner in Chartbeat’s experiment selling ads based on engagement. In January, Medium morphed again, laying off one-third of its staff and adopting a subscription model.

Williams acknowledges that Medium has had the luxury of time (five years) and money ($132 million raised) to find a business model. Its current approach---putting a portion of its content behind a paywall and asking people to pay $5 per month---is no sure bet. But Williams believes it’s inevitable that people will pay for digital content, noting that “the whole world is going this way.” He hopes Medium’s ad-free content and personalized recommendations will persuade readers to pay for the service. Without sharing subscription rates, he says “the signs are good that it’s working.”

Other startups chasing subscription gold continue to crop up. SubStack, which offers subscription software for publishers, plans to launch with its first client this month. DoubleBounce, a payments platform for internet creators founded by a former Chartbeat employee, launched last year.

Haile’s Scroll may be the most radical of the pack. The company plans to charge $5 a month to read content from its partners without ads. The fee is intended to compensate publishers for forgoing ads on those pages. The model is similar to Spotify, where anyone can stream music on the site for free, but 60 million Spotify Premium members pay $9.99 per month to listen without ad interruptions. Haile’s cofounder, Sachin Doshi, was VP of content and distribution at Spotify for five years. Scroll is in the process of inking deals with 40 publishers.

Yes, these are many of the same publishers that didn’t heed Haile’s warnings at Chartbeat. This time, he says, the publishing industry is more open to change and eager for additional revenue sources to supplement advertising. “There’s a growing understanding that the idea of monocultural approach to revenue among publishers is not the future,” he says. “You’re going to need a bunch of different ways to make money as you go.”