In media circles, 2022 started with a bang with Thursday’s announcement that the New York Times Company would buy The Athletic for US$550 million.
The deal, first reported by The Information, came after months of on-again, off-again talks. Yet it still took the industry by surprise and left some bewildered as to why the Times Company would burn more than half its reserves for an all-cash purchase of an unprofitable digital startup.
Though the Times Company’s stock closed down almost 11 per cent Friday, I happen to think it’s the most exciting media business story in recent memory because it’s a rare win for all involved, including readers and the broader media sector.
Let’s break it down.
Why it’s good for the New York Times
Reason #1: Marketing
The Times Company has been a unique example of a traditional news media publisher pivoting successfully to a subscription-first model. Two-thirds of all revenue now comes from subscriptions. The company had more than 8.3 million paid digital subscriptions at the end of the third quarter of 2021, numbers unthinkable just a decade ago.
But the end of the Trump presidency and COVID-era news fatigue have slowed growth, and increased the cost of subscriber acquisition.
The Logic’s comparative analysis of the Times Company’s earnings over the first three quarters of 2021 and over the same period in 2020 shows subscriber growth for the Times’ flagship news product only (excluding the popular Games, Cooking, and Wirecutter products and audio app Audm) has slowed dramatically. It acquired 564,000 new subscribers in the first three quarters of 2021—an impressive number, but down more than half from the nearly 1.24 million subscribers it gained over the same period the previous year.
Meanwhile, the cost of acquiring these new subscribers—the sales and marketing expenses associated with gaining new paid users, known as CAC—has increased from $76.58 in the first three quarters of 2020 to $254.80 in the first three quarters of 2021. (All figures in this column are in U.S. dollars.)
The Times Company doesn’t publicly break out its media expenses by business unit—it’s described in the earnings reports only as “the cost to promote our subscription business”—so this number also includes sales and marketing expenses associated with Games, Cooking, Wirecutter and Audm. But the trend is clear: Subscriber growth for its marquee product has slowed, and it’s getting more expensive to acquire new subs for it.
Enter The Athletic.
As a marketing channel alone, the digital sports publication will have an immediate impact in reducing the Times’ CAC. The Athletic is one of the largest subscription-driven news outlets in the world with 1.2 million paid subscribers in North America and a growing presence in the U.K. and Europe.
According to Times Company CEO Meredith Kopit Levien, there isn’t a lot of overlap among existing Times and Athletic readers—meaning that, at a cost of $55 million a year over 10 years, the Times has bought its way into the homes, or onto the phones, of 1.2 million people with the propensity to pay for great journalism. Add in The Athletic’s existing leads and churned users and that reach likely increases.
Reason #2: Journalism that rebuilds the bundle
When I was a kid we used to get the newspaper delivered to our house. My mom would grab the ‘A-section’ with the main news of the day, and my dad would grab the Metro or City section. My brother would grab the entertainment section. My sister would grab the comics and crossword, and I would grab the sports section. Each of us found something in the newspaper bundle that would be of interest and so the value of the entire publication was self-evident.
As the internet became cheaper, faster and good enough, we no longer had to wait for the newspaper to get our fix. My mom would still read the A-section, but maybe my dad would be downstairs on his Compuserve dial-up reading city news. I would look up my fantasy sports scores and the night’s box scores on my laptop.
The internet disaggregated the print media bundle. My old mentor Clayton M. Christensen would say that the publishers had overshot the needs of their consumers.
But Christensen’s disruption theory also teaches us that what’s old is new again. As technology improves, what was disaggregated again becomes interdependent.
There are at least 1.2 million people paying for high-quality digital sports journalism who may not have been willing to pay solely to read the Times’ global reporting, just as there are people who stump up for the Times’ cooking and crossword apps who may not have been willing to pay just to read Maureen Dowd’s take on the president. The Times is now a viable add-on product for sports readers in 40 U.S. and eight Canadian markets, as well as the U.K. and Europe.
Given the extreme discounts The Athletic offers on its average subscription, the lifetime value of an Athletic subscriber is likely far less than the $458 per subscriber the deal prices them at ($550 million divided by 1.2 million subscribers). But The Athletic expands the Times’ addressable market and if the company, with its expertise in digital circulation, executes properly, the deal should reignite subscription growth.
Why it’s good for The Athletic
Reason #1: A safe landing
The best analogy for taking venture capital funding is the hamster wheel. Once you start taking money with the promise of return on investment, the wheel starts spinning. The more funding you take, the faster you have to run. The Athletic was on a hamster wheel that was spinning out of control. It closed its last funding round in January 2020 for $55 million at a $530 million post-money valuation, according to PitchBook. Then the pandemic hit, putting live sports on pause and impacting sports media more than most. According to The Information, the company hemorrhaged nearly $100 million cash between 2019 and 2020. And according to Levien the bleeding hasn’t stopped, with about $55 million in losses last year.
The Athletic hired boutique investment bank LionTree to explore a sale for a valuation of more than $750 million, or approximately 11.5 times last year’s revenue of $65 million. It was a tall task given the most recent big media acquisition was Axel Springer’s purchase of Politico for five times its yearly revenue.
At a purchase price of $550 million, or an 8x revenue multiple, The Athletic gets to jump off the hamster wheel for a handsome sum, giving early investors like Y Combinator, Precursor Ventures, The Chernin Group, Courtside Ventures and Bertelsmann Digital Media a nice payday.
The Athletic couldn’t have found a more patient corporate parent. Levien said she expects the company to turn a profit in 2025, giving The Athletic team at least three years—an eternity in digital media—to break even.
Reason #2: It’s about local journalism
The Athletic is an international sports-media brand but at its core it’s a local publication. It launched in 2016 catering to die-hard sports fans in Chicago with a sports analytics-driven reporting approach that set it apart from mainstream news outlets. The outlet’s second market was Toronto, poaching Globe and Mail hockey columnist James Mirtle to lead a team of reporters.
The Times needs The Athletic to continue growing in local markets it traditionally has had trouble penetrating. To do that, its sports coverage needs to be indispensable to local fans, whether their passion is the Winnipeg Jets or the Washington Football Team.
This acquisition should make mid-market metro newspaper publishers shudder. The Times can now offer a unique bundle of international, national and local news that offers readers a value proposition better than that of many local newspapers with eroding sports coverage and whose news sections largely consist of wire copy from The Associated Press, Reuters and even The New York Times’ syndication service.
While I’m sure there will be operational efficiencies in combining the two companies that will lead to layoffs, The Times isn’t a hedge fund looking to strip The Athletic of its parts. It is a news organization that understands great journalism can sell subscriptions.
Why it’s a win for readers and for journalism
The Athletic has faced a lot of criticism from industry skeptics that dismissed it as an unserious competitor to traditional outlets. This reached a fever pitch after a 2017 story in the Times in which co-founder Alex Mather said, “We will wait every local paper out and let them continuously bleed until we are the last ones standing. We will suck them dry of their best talent at every moment.”
I saw Mather’s comments as nothing more than a crass quote from a young founder without media relations experience who was in the national spotlight for the first time. But over the years it has prompted schadenfreude any time The Athletic has faced adversity.
That skepticism permeated the reaction to this deal, and reflects a larger chasm in media.
There is a big divide in journalism between those who believe the industry is in peril, with its best days behind it, and those who remain optimistic about the future, with new media companies sprouting up seemingly every week with healthier business models and news coverage that is more reflective of the communities they serve.
It should be no surprise that I’m firmly in the latter camp. As I wrote back in 2017, before launching The Logic:
“It is an exciting time to be in journalism. Perhaps for the first time ever, it is our readers who are determining our fate. The implications of this change trickle down from the boardroom to the newsroom in profoundly positive ways. When you’re assigning stories not for clicks but for loyalty and retention, the journalism and the community will be better for it.”
If the last decade was primarily about ad-driven digital media led by the likes of Buzzfeed, Vice, and Vox, this decade will be driven by subscription media—which I believe offers a stronger foundation for great journalism that serves communities.
A subscription-first publication is extremely difficult to build, but it’s also extremely difficult to tear down.
The Times’ acquisition of The Athletic should inspire a generation of media entrepreneurs to put quality before quantity—and that can only be good for all of us.