It’s telling that Chris Dixon, in a blog post explaining Andreessen Horowitz’s $50 million investment, goes out of his way to explain that BuzzFeed is not really a media company, but a technological one:
We see BuzzFeed as a prime example of what we call a “full stack startup”. BuzzFeed is a media company in the same sense that Tesla is a car company, Uber is a taxi company, or Netflix is a streaming movie company. We believe we’re in the “deployment” phase of the internet. The foundation has been laid. Tech is now spreading through every industry and every part of the world. The most interesting tech companies aren’t trying to sell software to other companies. They are trying to reshape industries from top to bottom.
BuzzFeed has technology at its core. Its 100+ person tech team has created world-class systems for analytics, advertising, and content management. Engineers are 1st class citizens. Everything is built for mobile devices from the outset…BuzzFeed takes the internet and computer science seriously.
The issue is that, generally speaking, media companies don’t make for good venture capital investments. VC firms like Andreessen Horowitz aren’t looking to fund nicely profitable companies; they are searching for home runs, the one or two investments that make a fund profitable despite lots of failures. This means a focus on companies that can scale. Marc Andreessen told Adam Lashinsky in Fortune:
We describe it is we invest in Silicon Valley style companies. So we invest in the kind of companies that Silicon Valley seems uniquely good at producing at scale, you know, large numbers over time.
What makes technology companies – software companies, especially – different from media companies is the distribution of costs. Even before the Internet, for a software company, almost all of the costs were up-front fixed costs: you spent money primarily on salaries to develop a piece of software, and you spent that money well before you knew whether or not said software would sell.
The payoff, though, was that the software itself had minimal marginal costs: it cost basically nothing to produce one more copy (discs and packaging, basically). Thus, the vast majority of revenue for every single copy sold went straight to the bottom line. Moreover, most software is universal: it can be used anywhere (although localization can add to the fixed costs), and it’s useful for a long period of time. That results in the sort of scale that Andreessen was referring to.
Media companies, on the other hand, have traditionally differed from technology companies in three ways:
- Created content had a very short shelf life, which leaves a very small amount of time to recoup the fixed costs that went into its creation
- Media’s marginal costs (paper, ink, delivery) were higher than the marginal costs for software, at least in relative terms
- Media was generally limited in its geographic availability
In this pre-Internet world, media did have an ace-in-the-hole: their significant up-front costs often resulted in geographic monopolies that made them the primary option for advertisers. This made media companies interesting investments for hedge funds, but the limited upside meant they were much less attractive to VCs.
Fast forward to today, and the Internet has seemingly made the differences between technology and media companies even more stark:
- Packaging is no longer necessary, reducing the marginal cost of software to zero
- Multiple new business models have emerged for software, such as attracting massive user bases for free which can then be monetized through advertising or premium services1
- Media, meanwhile, has lost its local monopoly, and advertisers have fled for platforms that have more scale – there’s that word again – and better targeting
So why on earth is Andreessen Horowitz investing in a media company? Or is Dixon right – is BuzzFeed really a technological company that can use software to succeed in everything from listicles to hard news to now, their own movie production company? What has changed since Andreessen wrote in his post introducing Andreessen Horowitz:
We are almost certainly not an appropriate investor for any of the following domains: “clean”, “green”, energy, transportation, life sciences (biotech, drug design, medical devices), nanotech, movie production companies, consumer retail, electric cars, rocket ships, space elevators. We do not have the first clue about any of these fields.
I suspect what Andreessen and company have come to realize in the five years since that post was written is that because of the Internet media is more like technology than it might first appear, and that what Andreessen Horowitz cares about is not the software but the potential scale.
- Like software, media has zero marginal cost
- Multiple new business models have emerged for media, such as attracting massive user bases for free which can then be monetized through advertising or premium services
- The addressable market for media is the connected population of the world, and content is itself self-selecting when it comes to effective targeting
These are all points that are overlooked by those in the media kvetching about the death of journalism: everything that is hurting traditional media companies – zero marginal costs, “free” expectations, unlimited competition because of global distribution – are opportunities for new media companies unencumbered by traditional thinking.
So, for example, as Dixon writes about BuzzFeed:
Internet native formats like lists, tweets, pins, animated GIFs, etc. are treated as equals to older formats like photos, videos, and long form essays.
And why shouldn’t they be? The only reason to treat a tweet differently than a pull-quote, or an animated GIF differently than a photo, is if you are worried how they will appear in print. Remove those shackles and you realize there is no difference at all. What Dixon didn’t say, though, is that this sort of liberation also applies to monetization, and that includes native advertisements. I’m quite bullish on native advertising, and I think the ethical concerns are overstated. Specifically:
- “Native” advertisements are how every medium monetizes free content: newspaper ads are stories and pictures, magazine ads are beautiful imagery, radio ads are jingly voice-overs, TV ads are scripted stories, so on and so forth. Still, it took each of these mediums time to figure it out – they all went through their banner advertisement stage, i.e. ineffectually using an advertising format that worked on the old medium.
In the case of the Internet, content consumption is primarily about either the timeline – think Facebook, Twitter, or even blogs – or the irresistible atomic unit that spreads on social media. We should expect – and applaud – advertising adapting itself to these formats.
Newspapers in particular have been the most conscientious about maintaining a “wall” between the business and editorial sides of the businesses. Newspapers, though, as I noted above, were de facto monopolies. So while it certainly benefited journalists that they need not worry about how the newspaper made money, there was absolutely a political benefit to trumpeting the objectivity and impartiality of the editorial side. Newspapers could declare themselves to be above reproach even as they made money hand over fist.
The situation is far different on the Internet. Anyone anywhere has access to everything on the web,2 which means there are no monopolies on either the news or on advertising. Quite the contrary, in fact: the Internet is the closest thing in human history to a true marketplace of ideas, and the currency is user attention. Ultimately, well-functioning markets are a much better police of ethical lapses than self-rightous arbiters.3
Moreover, the truth is that bias lurks in any author, or in any ownership structure, something that is of particular concern when it comes to the consolidation of traditional media. One can absolutely make the case that an organization like BuzzFeed, with clearly labeled native advertising, is a lot more trustworthy than any reporting that may come out of an organization like NBC (which is owned by Comcast). Oh sure, NBC journalists will object to that statement, but how can we every truly know?4
This is what makes BuzzFeed so interesting: absent legacy, media absolutely benefits from Internet economics as long as you can figure out effective monetization, and it’s possible BuzzFeed has done just that, and, just like their product, they have done so by abandoning that which primarily mattered in the old medium.
This begs a deeper question, then: what is a technology company? I actually don’t buy the idea that BuzzFeed has some sort of magic algorithm that makes what they do possible, and if that’s the basis on which Andreessen Horowitz is investing, then I have a bridge they may be interested in as well. However, the entire premise of this blog is that product is only one part of what matters: so does channel, distribution, advertising, business model and the addressable market. And that is what makes BuzzFeed a “tech” company: the world is their addressable market, and they make money by scaling for free.
Obviously data centers and the like cost money, but again, those are fixed costs, not marginal one: each additional user is “free” ↩
Obviously lots of markets are not well-functioning; I’m not an absolutist here. However, when it comes to what is read online, it is much more of a level playing field than almost anything you can compare it to. That this blog is read at all is testament to that; hopefully, the fact I am monetized by my readers is a competitive advantage ↩
To be fair, the same criticism applies to Andreessen Horowitz’s involvement in BuzzFeed, and this aspect makes me just as uncomfortable as Comcast owning NBC. Moreover, it certainly is convenient that Marc Andreessen sits on the board of Facebook, BuzzFeed’s most important channel ↩