Warren Buffett famously said: “Only when the tide goes out do you discover who’s been swimming naked.” That was his 2007 warning as the banking crisis squeezed the world’s economy. It fits perfectly in the media market of 2020. Among the most obvious naked swimmers are the traditional companies with lossmaking digital services funded only by the dying profits of print; and lossmaking digital natives kept afloat by endlessly optimistic investors. Nobody now doubts that the tide is going out on so much lossmaking, advertising-funded digital media: If you haven’t yet managed to become profitable, how can you possibly do it now?
The most celebrated naked swimmer of all may be Vice Media, the company which is worth a mere fraction of its peak $6bn valuation and perhaps not even the $1.5bn investors have given it. Perpetual lossmaking tends to have that effect.
Founder Shane Smith once predicted that Vice would make $450m EBITDA on revenues of $1bn in 2016. It missed the target by miles. In 2019, Vice revenue reached $600m – but, again, not a dollar of profit. Vice has lost some $200m in the past two years, and is certain to be lossmaking still in 2020.
Smith and co-founders Suroosh Alvi and Gavin McInnes launched Vice 26 years ago as a counter-culture free magazine, originally called Voice of Montreal. After moving to Brooklyn in New York in 2001, it evolved into a multi-platform media group with international television channels, a huge online presence and marketing services.
Vice seemed to ride the phenomenal early 21st century growth of online video. It piled up advertising and sponsorship revenues from companies targeting young audiences which could no longer be reached effectively through TV. Vice was the perfect media platform at the perfect time. The longevity of Richard Branson’s Virgin group seemed to provide encouraging context for the burgeoning youth-focused company.
Vice moved quickly to create news content and social commentary, and stepped up to reporting from North Korea, Iran and Russia, initially for the 2006 online TV series Vice Guide to Travel. The sideways, devil-may-care video commentary was followed by spikey political coverage from Afghanistan, India and Spain in an Emmy-winning series for US cable channel HBO. It was fresh, raw and exciting.
But the biggest leap in the company’s fame (and potential fortune) came in December 2013 with the launch of Vice as “a global news channel”. This almost coincided with the fresh outbreak of hostilities in the Middle East whose impact on Vice was compared with that of CNN at the start of the First Gulf War, when only the Time Warner-owned network had reporters in Baghdad. As if to emphasise the dramatic media change in the intervening 24 years, the last Iraq war was characterised by astonishing internet footage behind enemy lines by a Vice reporters embedded with the ISIS terror group. The media upstart became famous.
It left the rest of the media scrambling to catch up. Or to do what broadcasters like the BBC did – pay to replay Vice’s own footage. Its five-part series on ISIS was viewed by tens of millions on YouTube, complete with ads.
Vice News became “an international news organisation created by, and for, a connected generation”, which told followers it was: “Bringing you an unvarnished look at some of the most important events of our time and shining a light on under-reported stories…we get to the heart of the matter with reporters who call it like they see it.”
Vice’s European head of news told admiring TV executives at the Edinburgh International Festival: “Vice News isn’t TV news. We are building it out of an already engaged online audience in their 20s. We are in a different space. People are moving away from the old fashioned forms of TV news, whether that’s news bulletins or 24-hour [rolling news] TV. We have responded to that.”
In 2016, Shane Smith was back in Edinburgh to claim that “the secret of our success can be traced to the day we changed our content. The business grew and the audience exploded and we made more money”.
Over the years, he had subtly shifted his target audience from fellow Gen Xers (born in the late 1960s and 1970s) to millennials (1980s and 1990s). He said: “The over-all aim, the over-all goal is to be the largest network for young people in the world.”
He was eulogised by Disney’s Bob Iger and fellow investors Rupert Murdoch, Tom Freston, and Martin Sorrell. But Vice was, arguably, always much better at self-promotion and raising investment than managing its business. It drew criticism for blurring the line between journalism and advertising, for hyping its online audience figures, for extravagant spending, and for a notoriously sexist culture in the years before MeToo.
Just imagine a media company where employees were asked to sign a “Non-traditional Workplace Agreement” that included the words: “Although it is possible that some of the text, images and information I will be exposed to in the course of my employment with Vice may be considered by some to be offensive, indecent, violent, or disturbing, I do not find such text images or information or the workplace environment at Vice to be offensive, indecent, violent, or disturbing.”
Perhaps we should have expected it from the publisher whose magazine covers had once featured lines of cocaine and headlines including: “Retards and Hip Hop”; “Pregnant Lesbians”; “80s Coke Sluts.”
If Smith thought his Workplace Agreements were reasonable employment practice, he was stung by criticism of the Vice journalistic method. Columbia Journalism Review said Vice was altering screen shots during the editing process in pursuit of more entertaining or impressive scenes. In a 2011 documentary on Libya, a reporter’s voiceover claimed that he had been on the frontline during a military offensive, but he didn’t make the trip at all. Then there have been constant whispers that content has been “impacted” by commercial considerations. Not a good look for the cool media company purporting to be authentic and unpackaged – unlike the rest of the mainstream media.
The shonky conduct and messy financials did not prevent Vice from raising more than $1.5bn from enthusiastic investors including Disney, Viacom, 21st Century Fox, Hearst, and WPP. But, by October last year, when it acquired the women-friendly Refinery29, Vice was losing its swagger.
The $400m acquisition was negotiated by former A+E TV boss Nancy Dubuc who had taken over from Shane Smith as CEO in 2018, at the urging of restless Vice investors. The deal and the new CEO’s own strategy were endorsed by James Murdoch who invested $25m of his own cash in Vice Media, six years after he had first persuaded his father Rupert to back the company. Soon after, Dubuc announced hundreds of lay-offs: “We’ve had to make hard but necessary operating decisions.” Vice needed to “operate more nimbly, focusing our energies and investments on core strengths”.
She isn’t banking on getting more digital advertising. Vice has learned the hard way that you can’t beat Facebook, Google and Instagram. It shares with BuzzFeed and HuffPost the ignominy of failing to stop the losses after 15 years of extravagant forecasts and spluttering growth.
The irony is that Vice Media enters this formidable fight for its future just three years after TPG invested $450m in the company, then valued at $5.7bn.
It had been another big investor coup. But the cash came at a cost: Vice agreed to guarantee TPG quarterly dividend payments, totalling almost $400m in shares and cash during 2020-24. In addition, Vice apparently would have to make quarterly equity payments of more than $10m if it didn’t meet aggressive profit targets. TPG also had the option of selling its shares back to Vice Media at a premium if the company hadn’t completed an IPO within five years, according to the Wall Street Journal which has seen the documents.
Given Vice’s failure to achieve any profits at all so far, it was a bold deal which almost defined Smith’s hubristic, do-anything, go-anywhere strategy. He simply never expected the TPG payments to be made because the high-flying company would soon IPO or be sold. He was banking on it.
But Vice had been living on the edge and, just a month after the TPG investment, it laid off 60 people and shut down two of its websites. Smith stepped back to let Nancy Dubuc sort out the mess.
Last year, she managed to renegotiate some of the terms with TPG. But, while the revision may have given Vice breathing space, the new arrangement could still leave the private equity firm as the largest shareholder.
It’s been a hell ride so far for the new CEO who has had to: cut the Vice headcount by more than 20%; raise $250m in lifeblood debt from George Soros and others; reform the sexist culture, including settlement of a $1.9m class action law suit; and turn the company into a proper employer that manages its cashflow and pays its bills on time.
But the problems keep piling up.
Vice lost its much-vaunted weekly documentary on HBO, and the half-hour “Vice News Tonight” which had averaged only 550k viewers. Vice’s seven-year partnership with the premium cable TV network HBO is over. It felt like a significant moment, but there have been plenty of others for the once-mighty media company that has spent a decade doing almost whatever it wanted.
The problems have, of course, been multiplied by the pandemic which has led to widespread reductions in advertising spend around the world. Dubuc is now working to cut annual costs by some $40m and is also seeking to address the imbalance where digital media accounts for 50% of Vice costs but only 21% of revenue. It all underlines just how difficult is the task of producing any kind of profit at what once seemed to be the richest digital media company of all.
Perhaps Vice’s biggest strategic mistake was the 2016 launch of the Viceland cable TV channel. The channel was launched in the US in a joint venture with A+E (the Hearst-Disney owned network which invested some $300m in Vice Media). In more than 40 countries, the channel is operated in joint ventures with domestic broadcasters. The US launch was marked by a typical Shane Smith declaration: “We are bringing millennials back to TV”. But the Canadian version was dropped after three years of poor audiences and revenue. In the UK, Vice TV has an audience of under 600k. That’s the been the story almost everywhere.
Viceland always seemed like an odd move at a time when the Vice strategy (and the moves of legacy broadcasters themselves) was focused on the abandonment of linear programming by an online-fixated generation. It is easy to conclude that the launch of what has now been renamed Vice TV was part of Shane Smith’s elaborate strategy to build an all-encompassing network that the best legacy companies needed to acquire. So, perhaps, that’s still the rationale for continuing to operate the channel.
Even last year, Vice people were still saying: “As the media industry consolidates and fewer players control the information and entertainment that the world consumes, Vice will always be there with a megaphone for the more than half of the people on this planet under the age of 30 who crave independent world-class content.”
CEO Dubuc has now restructured Vice around five lines of business: Digital, News, Vice Studios (film and TV production), Vice TV, and the in-house ad agency Virtue.
She is clearly preparing Vice Media Group for sale but its valuation is unclear, to say the least. In 2016, Shane Smith had predicted the company would be worth $50bn by now. A year later, TPG valued it at $5.7bn. But – even with the acquisition of Refinery29 – Vice Media may be worth less than $2bn or 3 x 2019 revenue.
Journalists have had fun sniping at Vice as a company with scarcely concealed flaws. Everybody loves the 2009 story (recounted by New York magazine) of how Vice won the brilliant Creators Project from Intel. The $25m native advertising deal was snared after Smith and his people (and many of their friends) had given Intel bosses the first-hand impression that Vice was a much larger business. It was a location scene straight from The Hustle.
But, for all the hype, Vice has consistently produced some truly distinctive journalistic and marketing content for relatively large digital audiences. And the company continues to be a pioneer of native advertising. It claims to reach a global audience of 380m people online and 170m on TV. Its magazine is distributed in seven countries. Despite the losses, Vice is an established global brand for millennials.
The impression that Shane Smith was focused exclusively on an enriching exit is the hallmark of (yet another) company that could have become more successful if only it had bootstrapped its development. The investor cash took away the startup hunger and strategic focus that had made Vice an early digital success. The rich kids were spoilt.
The future of Vice Media will surely be as part of a larger media group. For most of the last decade, that had looked like Disney which invested some $500m in Vice. But, if it hadn’t already become too shocked by the financials, the family-friendly Disney may have been frightened off by those Non-Traditional Workplace Agreements. It still has a 26% shareholding but has written-off most of its investment.
Nancy Dubuc is thought to be focused on a possible acquisition by the newly merged CBS-Viacom. Vanity Fair says: “A deal for Vice makes sense for CBS-Viacom to consider, at the right price. CBS skews toward an older demographic, notwithstanding its recent streaming efforts, and Viacom, with Nickelodeon and Comedy Central, skews toward a younger demographic. With its vaunted (and possibly oversold) cache of 20- and 30-somethings, Vice would be a nice fit in the middle of the two of them.”
But others are watching and waiting. Could there be a Murdoch family reunion with News Corp (Rupert & Lachlan Murdoch) swallowing Vice (with James Murdoch as a shareholder and director) seven years after its initial investment? Perhaps the newly-private, KKR-funded Axel Springer is already thinking it could make Vice profitable, as it did with Business Insider? Covid could make it a relatively low-price consolidation.
When Vice Media does eventually change hands, the “obituaries” will note that the company needed only a fraction of the cash that investors were once so happy to lavish on the boys from Montreal. And the tide went out.