The new publishing model (or, "On Rafat, Om, Federated Media, AdBrite, and Blogads.")

My VC pal Fred Wilson is trying to figure out what Om and Rafat are raising venture capital since the whole discussion over the past couple of years has been that media companies don’t need a lot of capital.

Important to note that these are all < $1M (and $1m) investments. These are seed deals done by VCs (which Fred is doing a lot of I understand).

Fred mentions that Nick Denton didn’t need seed, but that’s because Nick was a millionare already and he seeded Gawker himself. Om and Rafat (who worked for me at Silicon Alley Reorter) don’t have the capital to do what Nick did. Mark Cuban (and I) seeded Weblogs Inc, so that’s not a good comparision either(although, it’s important to note that we never spent the Cuban investment–not a nickle of it since we quickly became profitable).

Rafat and Om want to scale their businesses and that takes capital.

They already “make a living” blogging.

Here is the new model:

  1. Start a blog with adsense and make spare change.
  2. Scale a blog to 250k to 1M pages a month and become big enough for Federated Media, AdBrite, and Blogads to care about you (i.e. sell your inventory)–now you’re making a living.
  3. Scale over 1M pages a month and become big enough that you can afford your own sales group and fire Federated Media for taking 40% of your money because your cost of sales will be 15-20% as a stand alone business.

This is exactly what happened at the start of the Internet. DoubleClick used to do ad sales just like Battelle is doing at Federated Media. They got out of that business because the reward for helping a client to phase three was that they fired you–it sucks as a business (I still can’t understand why John got into it… I think he actually wants to help authors, which is noble, but I think as a business it doesn’t scale).

You see, Battelle’s model is predicated on Rafat and Om deciding to stay in phase two or keep their relationship with Federated in phase three–which they are obviously not willing to do. That’s why we canned the Federated Media /BlogAds model when we started Weblogs, Inc. We started out with the reveune share/repping model and Brian and I quickly decided that owning the IP/brands was a much better play.

Another problem for Battlelle is that Google is quickly moving into the repping business and selling display ads. So, Federated Media is stuck between Google coming into their business and their best clients leaving to hire their own sales force–horrible place to be. The margin pressure and cost of signing up clients is gonna be insurmountable I think. Batelle will wind up owning his own portal pages/distribution I think.

The bottom line is that “real” businesses–as opposed to “lifestyle” businesses–own the relationship with their clients (in this case advertisers). No real business is going to give their client relationship to AdBrite, BlogAds, or Federated Media. Maybe for the bottom 20% of their inventory they will keep people around, but that is the .50 to $1.50 crummy inventory business and it really sucks to be in–it’s the Classmates and LowerMyBills market (no offense to those companies, it’s just a bad businesses for publishers to go after).

You have three stages of media companies, and these two guys are now in the third phase, and that is where it gets very interesting. Phases one anyone can do. Phase two is also pretty easy–half the people can do it. Only 1% of people make it to phase three and only 10% of those scale to a $10M a year business. Rafat and Om are the one out of a hundred, and it’s gonna be amazing to see if they can be the 1 out of 1,000.

Bottom line: There is a huge difference between making a living and making a business. Om and Rafat are making businesses, not a living.