Media Fortune Fame & Folly

Why The Athletic is burning

The Athletic burned through $95m during 2019 and 2020, reflecting the cost of building a 600-person reporting staff to cover local sports in both the US and Britain, according to The Information. During those two years, it had revenue of $73m: “It shows the challenge for digital media firms of building profitable businesses while investing heavily in content to draw subscribers.”

The Information provided the following financials and projections*:

201920202021*2022*2023*
Revenue$26m$47m$77m$119m$156m
Net cashflow($54m)($41m)($35m)($7m)$15m
Source: The Information

The Athletic has now been operating for almost six years with no prospect of an end to losses before 2023 – and even that debut profit depends on more than doubling revenue in the next two years.

Flashes & Flames has consistently advocated the potential of stylish newsletters like The Athletic to “steal” content verticals from daily newspaper brands. That’s been the motivation for Axel Springer – one of the world’s best legacy media reinventions – to acquire Business Insider, Morning Brew and, now, Politico in the US.

Email newsletters can have obvious appeal especially to millennials who will pay for content that specifically meets their needs (rather than as part of a newspaper-like bundle for everyone). But these targeted newsletters should also have cost-advantages over traditional news brands.

The trouble is that the business model of startups can be distorted by the willingness of investors to provide more cash than they actually need.

Is The Athletic another example (like Vice, perhaps) of digital media whose costs (ie staffing) are a result of “excess funding”? And does this now make it vulnerable to counter-innovation from traditional operators or truly low-cost startups?

In the UK, The Athletic has been competing with national daily newspapers for Premier League football-soccer content. You might think it would be a good time for these legacy brands to fight back with subscription newsletters of their own. The incumbents really could become low-cost rivals.

It’s difficult to get reliable subscription numbers for the Athletic. But the 2020 revenue figures (above) imply something less than the 1.2m paying subscribers once claimed after apparent “growth” to 1m a year ago – a year after that was first forecast. Whether or not, these totals have been reached – let alone sustained – the 50% “launch discount” is still being offered in both the UK and US, six years after launch. That is worrying.

The widespread increase in paid subscriptions and a growing realisation that good journalism is worth paying for is one of the most promising signs for digital media. SubStack is helping to strengthen the trend. But The Athletic’s persistent price-cutting, presumably, reflects some difficulty in actually retaining subscribers.

Reducing churn is all about getting the content right and keeping readers hooked. In an era of unlimited choice and endless distraction, digital media must fight to keep its place (literally) in readers’ lives. But, far from helping to build reader engagement, continually offering 50% discounts might actually increase the churn by undermining the publication’s prestige among existing subscribers.

It’s another part of The Athletic story that doesn’t really add up. Like the supposed problems of pandemic years 2020 and 2021, during which its revenue actually increased by 81% and 64% respectively. Or the fact that it is now chasing advertising revenue as well as subscriptions – and is expecting to increase ads from $3m in 2020 to $31m in 2020. It seems like an odd response to the challenge of subscriber churn.

That’s because the real story is the cost base.

The five years of financials show that annual spending will have increased from $80m in 2019 to $141m in 2023:

20192020202120222023
Total cash cost$80m$88m$112m$126m$141m
Annual change+10%+27%+13%+12%
Source: Flashes & Flames and The Information estimates

A full one-third of the $42m (55%) additional revenue forecast for 2022 will be swallowed up by increased costs. That’s not how it’s meant to be for digital newsletters which have none of the production and distribution costs of traditional media. And this is a business supposedly in a life-threatening fight to stop the losses.

But, if only the $112m total cash costs in 2021 were pegged for three years – instead of increasing by double-digits each year – The Athletic could actually be profitable in 2022. On that basis, it might make a margin of some $44m (28%) in 2023. The maths may persuade a prospective investor that profitability is in sight – if the revenue growth can be achieved.

The Athletic reportedly has sufficient cash for all of the next eight months, after its $145m fundraising last year (at a valuation of $530m). Having reportedly failed to interest a number of media firms (including the New York Times, Axios, and Axel Springer), The Athletic is now exploring a sale of the company at a price of more than $750m (7 x 2021 revenue). Really?

The Athletic