Why Patch will never be profitable

Patch faces to huge obstacles on its path to profitability: The first is expenses; the second is revenue.

Expenses: Tim Armstrong is absolutely right that a great deal of the expense of a print publication can be wrung out of local news coverage. Not only do you get rid of industrial age presses and trucks along with paper and ink, it also takes a lot less staff — because of the efficiencies of online publishing — to cover a community.

Reportedly, AOL is spending $160 million a year on Patch. That’s a lot of money, and I don’t just mean because that’s more money than a lot of us will ever see in a lifetime. I mean, it’s a lot of money because the Patch content model shouldn’t be that expensive.  That means Patch is spending about $190,000 per each of its reportedly 864 sites.

In the one-reporter-per-community model, expenses should be $140,000 or less per site. (I’m also including in that some expense for sales and support.)

Of course, Patch isn’t spending $190,000 per site. It’s spending less than that, and the remainder of its $160 million annual expenditure is going to overhead.  Some of that is legitimate, such as infrastructure, programmers and technical support. By legitimate, I mean, there is some level of expense on technology for every local news site.

But some of that money is part of the unsustainable expense of running a large chain news organization.  For Patch, it’s regional editors, regional sales managers, supervisors for the regions, executives over them,  HR departments and legal and regulatory departments (necessary for a publicly traded company).

These are all expenses that the local independent site doesn’t face and raises the bar much higher for Patch overall to become profitable.

It’s a major factor of expense that advocates of “scale” in local news often overlook.  News isn’t a widget. It isn’t a washing machine or box of software. It isn’t an industrial product. In industry, scale is vital because the largest part of the expense of making the product is just turning the machine on.  In news, each new piece of product (a news story, say) costs essentially the same amount of money as the previous piece of product. There is no expense savings in producing more product, there is only more expense.

The same analogy applies to each individual news org you create (each of the 864 Patch sites).  In trying to scale a national news organization, you’re not saving money by scale. You’re scaling up your expenses, both in local staff and then in the national and regional staff (as pointed out above) to run the company.

Expense is the Catch-22 of trying to scale local news.

This expense was masked in the newspaper industry because every newspaper that is now part of a national chain was a HUGELY profitable, family owned newspaper at the time it was absorbed into a chain.  That profit helped feed the beast of corporate overhead, thereby masking the real expense of creating the chain.

In fact, the problem for newspapers today isn’t so much that individual newspapers lose money; it’s the fact they’re still saddled with the expense of being chain owned.

Revenue: According to Ken Doctor, Patch executives claim 1/4 of its 864 sites is making at least $2,000 per month, and Doctor is somewhat rhapsodic over the figure. He sees this bit of revenue growth as a “rocket launch.”  In reality, $2,000 is nothing.

With The Batavian, we went from practically no revenue in March 2009 to more than $4,000 a month four months later.  And that’s with one person covering the news and selling the ads, and in a market that is far more economically challenging than any Patch has launched in.

The successful independent sites I know are all doing at a minimum $10,000 per month.

Clearly, Patch is struggling to sell local ads, which should be the bread-and-butter of its strategy.

If somehow, every one of the 864 sites managed even just $10K per month, that’s still only $106 million a year in revenue, far short of the $160 million in expenses weighing down the chain.

To achieve break even, each Patch site needs to do more than $16,000 per month in total sales. That is a very achievable number with the right business and sales model (which I don’t believe Patch has, but that’s another topic).

So the problem Patch faces is burdensome and unnecessary corporate overhead expenses and a failure, so far, to generate any meaningful amount of revenue.  Patch should be much further along on the revenue side than it is and that spells trouble for investor patience.

CLARIFICATION: Shortly after posting, I should add.  I think each of Patch’s 864 markets is capable of generating at a minimum of $500,000 in annual revenue. I just think time will run out on Patch before the chain breaks even.  Also, as Patch generates more sales, expenses will increase.  That will further delay the break-even point.  If Patch were to survive, fix its business and sales model, achieve maximum velocity, we’re probably looking at a company with $250 million in annual expense and $500 million in annual sales (at the current size of the company).  I assume investors would be happy with that performance.  I just don’t see how they sustain the losses to get there.

This entry was posted in Uncategorized and tagged . Bookmark the permalink.
  • Gerard DeMarco

    Clear, concise, succinct, intelligent. Howard doesn’t have to make the argument of why his model is so good. You see it every day: The Batavian is one of the best news sites in the entire country. We are extremely fortunate to have it around. And as long as Patch is around, we’ll all have a model of how NOT to do it.

  • http://pulse.yahoo.com/_HOFWXLJATWG57C6T5L4SJCPTLE Perry Gaskill

    Howard,

    Interesting analysis. My own back-of-envelope has tended towards a $14,000 per month expense for each Patch site, with that number split out as $5,000 news side, $5,000 local ad side, and $4,000 corporate overhead. Getting an accurate estimate is difficult because of a middle tier of regional people.

    For what it’s worth, my personal opinion is that Patch is probably doomed, and one of the unfortunate things likely to happen is that nobody will ever really understand why and how that came about. Aol has never been particularly candid about the problems it’s been having with Patch, and most anecdotal indications have pointed toward a combination of things rather than a single fatal flaw.

    Too much corporate overhead is probably part of it; there are also more subtle gears that don’t seem to mesh. One example is the Southern California market where Patch has some reasonable unique visitor counts, but has a low number of monthly visits and page views per unique visitor. Something that points to an engagement problem.

    It’s probably also fair to say that Patch’s structure for ad rates doesn’t make sense given such an engagement problem.

    No offense, but I’m also not sure I agree with your statement that, “each of Patch’s 864 markets is capable of generating at a minimum of $500,000 in annual revenue.” The statement isn’t demonstrably false, but does seems to ignore the idea that meeting such a minimum is going to be dependent on certain threshold variables.

    To use again the Southern California market as an example, the population counts for Patch site locales range from 4,000 (Ramona) up to 149,000 (Corona del Mar). Somehow it seems a stretch to assume that each site is capable of generating the same base amount of revenue. As you have pointed out in the past, at least part of the ability of a locale to support an online news effort is dependent not only on the population count, but also on the count of businesses serving that population. Yet another variable is to what extent those businesses have control over a discretionary ad spend.

    Regards,
    Perry

    • http://howardowens.com Howard Owens

      Perry, I was speaking in general/average terms, and on the assumption that AOL has picked economically viable locations. If they successfully executed on the four or five or more possible revenue streams, I think that’s a realistic target in a small, viable market.

      • http://pulse.yahoo.com/_HOFWXLJATWG57C6T5L4SJCPTLE Perry Gaskill

        No worries, Howard. Your original post was a good analysis. My comment on it was purely for the purpose of constructive feedback with some additional nuance. Sorry if it might have seemed overly critical. That wasn’t the intent.