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.

How to launch your own local news site in 10 (not so easy) steps

In response to some of the feedback I’ve gotten about my post on Patch editors working too hard, here are some thoughts on what you can do to launch your own local news site in 10 not-necessarily-easy steps.

  1. Pick your community to cover. Ideally, it’s a community where you already live. More ideally, you’ve lived there a long time if not your whole life. Even more ideally, you’ve been a professional reporter for some period of time in this town.  You know the town, you know the people (sources and business owners) and they know you.  Of course, Billie and I are transplants to Batavia, so we didn’t take our own advice and it’s working for us.
  2. Go to the local chamber and similar business group.  Ask to talk with the president/director confidentially (good ones are very used to keeping business secretes (it should be part of their job descriptions).  Get feedback on whether there’s a need for an online-only news site (there is, they may not agree, but the point of the question is to break the ice, not get permission).  The main goal here is to find out how many total businesses they have in their community area (not just how many members, but members PLUS their prospective member list (good chambers already have this in a spreadsheet)).  Typically, I’m asked, “what should the population be where I want to launch a site?”  Wrong question.  You want to know how many LOCALLY OWNED businesses there are. If the chamber can identify at least 2,000 to 3,000 potential member businesses (of which, they may only have 300 to 600 members), that’s a good start, but you’re not done …
  3. Gather up media where locally owned businesses advertise — the shopper, newspaper, radio stations, phone books, etc.  Create a spreadsheet and record the name of each business and check boxes for each media outlet (also addresses, web address, phone numbers).  This spreadsheet will eventually be one of your sales tools, but right now you’re just counting.  You want to get a count of how many businesses in your target market (again, locally owned) spend money on advertising.  You need to identify at least, at a minimum, 150 businesses.  The next number is also important, but something you’ll have to guess at — are there at least 300 locally owned businesses that might potentially advertise with your web site?  If you can meet these numbers, you can make money with your web site.
  4. Make a spreadsheet and answer your question, “what’s your nut?”  Your nut is what you have to meet to break even on your monthly expenses.  For us, our nut, with rent, insurance, food, debt payments, etc., was a bit under $4,000.  I set a goal of 40 advertisers at an average of $100 per month (ad rates our low in our community) signed within three months.  We made our nut in that third month.  (Our advantage, The Batavian was nine months old when we took over ownership, so it we already had an audience to sell against — you may need six to nine months to meet your nut.)  In response to my post about Patch editors, there was a lot of chatter about the need for health insurance. Here’s what I have to say: Yes, insurance is expensive and it sucks.  But plan and budget and this is an expense you can manage.  The biggest issue isn’t that you can’t make enough money to meet your nut, but how long can you hold on while revenue builds to meet basic expenses?  That’s a different situation for each individual.
  5. Pick a publishing platform. There are multiple free content management systems.  WordPress is the easiest.  Drupal is the most robust and has the best user management tools. (I don’t know much about Joomla or Expression Engine).  My IT guy and I offer our Drupal installation and support for a price, but I’m not here to sell our services, because while we can give you a leg up, there are less expensive options if money is tight.
  6. Prepare to sell advertising.  Build a media kit, have information about the site and advertising ready to give to local business owners from the day you launch.  I’ve mentioned this point before, you should start selling on Day 1 — not because you will sell ads, but because you need to start building relationships, and local business owners will become your most networked connected boosters if they like what you’re doing, even if they don’t buy ads for a month or two.  Remember that spreadsheet I told you to make in step 4?  Use it to figure out which business owners advertise in the most places — these are the people who really understand the importance of advertising and the ones most likely to buy an ad from you.  If you know your community, you will know which business owners are deeply involved in the community and respected by other business owners — target these business owners first.  You need to get two or three highly regarded business owners on your site ASAP.  Discount, discount greatly, but don’t give away.
  7. On the same day you start selling ads, start posting stories.  Cover your community with enthusiasm, from breaking news to community events. Take lots of pictures. Show your community love, and it will love you. There’s nothing wrong with being a booster, but you also need to be a trusted, independent voice.  Care about the things your community cares about and cover it aggressively, fairly and thoroughly. Cover the big and the small.
  8. Equipment you will need: A mobile computer (laptop or iPad), a camera and a police band scanner (if you’re not covering calls off the scanner, you’re not really covering your community thoroughly).  Some recommendations, though they equal added expense. Obviously, each person involved in your site needs his or her own computer.  However, I would recommend you, the publisher, have two computers — your mobile computer and your business computer.  For many reasons, I recommend you keep all your advertising information and bookkeeping software on a computer that isn’t mobile — but it’s not just about not carrying around that information; it’s also about not having a single point of failure for your company.  Also, when you have no staff photographer, a point-and-shoot camera doesn’t really cut it.  As soon as you can afford it, you should get a good DSLR and learn how to use it properly.  People love pictures — more than video — and it’s a great way to show love for your community.
  9. Be prepared to market your site.  If you can afford it, buy refrigerator magnets about the size of business cards.  Give them to everybody you meet, everybody you can.  Attend every community event you can and don’t be shy — hand out magnets frequently.  If you can’t afford that, at a minimum buy those Avery business card templates and print out your own cards with your site’s URL to EVERYBODY you meet.  This isn’t a “build it and they will come” venture.  You’ve got to market yourself, but you don’t need a huge marketing budget.  With a little research and imagination you can find other inexpensive marketing ideas.
  10. Only do this if you have a passion for local news, your community and building a business that might someday — but no guarantee — provide a nice pay day.  Love comes first, money comes second.  If you have a real passion for it, you will succeed.  I’m not pretending that being an entrepreneur is for everybody, but I also believe that a lot more journalists could do it than are actually doing it.  However, this isn’t easy. It’s hard work.  There will be times of frustration and aggravation, people who hate you, feelings of inevitable doom, sleepless nights, lost chances to spend time with family and friends, long hours, money worries, and on and on.  But for the right person, there is nothing better than owning your own business and not being accountable to bosses who don’t really get you, plus if you do this right your community will love you — you will be a rock star. It’s all very rewarding, if you can handle the ups and downs.  But as Jeff Jarvis always says to me, “you’re doing God’s work.”  The U.S. democracy needs more local, independent online publishers. I hope you will become one of them.

You should only work this hard if you own the business

The list of duties for Patch editors in this Romenesko post is pretty much the job description for every local news site owner I know, at least the ones making a living at it.

When I’ve written about the number of hours I put into my business critics have said I don’t have a business model, my business isn’t “sustainable,” and so on.

Of course, this is coming from people who probably don’t want to work that hard, preferring the good old corporatism days of journalism with secure 9-5 jobs, two weeks paid vacation and dental coverage. Those days are disappearing, but the knock against hyperlocal start ups is that they’re not staffed as bodaciously as the newsrooms they may or may not replace.

To the second point, my response remains: Newspapers started small, cheap and with different standards. No newspaper started with staffs of dozens and a raft of Pulitzers. To hold an online-only start up to those standards is just plain daft.

To the issue of hard work, yes it’s hard work to start your own business, and I figure the critics of the online start ups have never dealt much with small business owners.

I deal with them every day, and for any of them that started their own businesses, they will readily tell you of the 100-hour work weeks, the weeks of just barely getting by and the impossibly long to-do lists. The hardships and sacrifices just go with the territory of starting your own business.

But here’s the thing about the work load for Patch editors: They’re not owners. They are expected to do all of the things they would have to do if they owned their own web sites, but merely in service of building wealth for AOL shareholders. Sure, work hard and keep your job is a nice benefit, and as a former corporate employee I think employees have an ethical obligation to help build shareholder value. That’s what they’re paid to do.

I’ve also been critical of corporate employees who aren’t willing to put in a little extra effort to help a project succeed.

However, if what we’re hearing is true about the Patch workload, I can only ask: Why are you doing it?

Patch editors should know that what they’re being asked to do on salary they could do for themselves far more successfully and with some chance of building a valuable business for themselves and their families.

I’m not writing this to wish Patch ill. I am not one to hope for anyone’s failure. I’m writing this for the sake of the seemingly overburdened Patch editors, and asking, “Why not just start your own local news site?”

Jump on in, the water’s fine.

How to beat AOL’s Patch

First, this is not a bash Patch post. I have friends who work for Patch. I think they’re doing some good things.  If time proves me wrong about the advantage of local news site ownership, a Patch victory would be better than the alternative (which is the death of local news, or a win by a soulless aggregator).

Here’s a few of things I like about Patch:

  • They have a strong grasp of what the cost structure needs to be to win at this stage of local online news development. (By this stage, I mean, the current need to minimize costs won’t always be that way.) 
  • Related, Patch leadership gets that you can do a lot more coverage with a smaller staff when you’re strictly online.
  • Patch is putting the coverage emphasis on local original content rather than aggregation (though they do aggregation). They hire people to live and work in the communities they cover.  This is smart.
  • Giving away business directory listing to local businesses is a smart way to start building relationships with local business owners.

My pal Mel Taylor has written an important post about how local site owners could get steamrolled by Patch if they’re not savvy.

If you’re a local site owner — or an aspiring one — there’s lots of ways Patch could beat you.

But Patch also has weaknesses the local site owner can exploit.

If you’re a local publisher, two books you should read — and this applies even if your competitor isn’t Patch, but, say, a newspaper — Clayton Christensen’s Innovator’s Solution, and the first 50 or so pages of Michael Porter’s Competitive Advantage.

If you’re an online publisher, whether you know it or not, you’ve essentially decided to be a disruptor. The web is inherently disruptive to traditional media.

Patch is a disruptive innovation.  Their low-cost expense model and things such as free business directory listings are disruptive tactics against traditional media.

If you’re in business for yourself — whatever your business — you also need to understand the concepts of competitive advantage.  You need to be able to quantify your competition’s strengths and weaknesses and align your business strategies not to try and defeat your competition at its strongest point, but rather exploit your competitors weaknesses.

Because Patch is owned by a behemoth company, it has weaknesses that can be exploited by the the local site owner.

As good as Patch is with it’s cost structure, you can still keep your cost structure lower.   While AOL can afford to lose money on a specific Patch location to try and drive you out of business, if you’re savvy, you have some breathing room.  There’s a lot of infrastructure costs — executive salaries, HR, bookkeeping, legal, etc. — that you don’t have.  Your trick will be to hold on long enough to outlast what will be a growing demand by AOL for Patch to turn a profit.

Further, Patch is staffed by employees with fixed salaries.  If you’re a sole proprietor, you’re salary is what you happen to make this week.  Sure, you’d like to make more, but if you truly believe in what you’re doing, you’ll eat ramin for a week if you must to survive and stay in business.  Patch has fixed personnel costs that you simply do not have.

Which brings us to revenue.

Walmart has been able to reportedly use predatory pricing schemes against local competitors and drive them out of business because they had numerous profitable stores elsewhere.  As far as I know, Patch doesn’t have any profitable locations yet. 

Hold that thought for a minute.

Patch also has sales reps who expect to be paid by commission (I assume — I doubt their sales reps are pure salary — pure salary rarely works in sales).  Reps who are paid by commission are loath to discount, because that means less commission.

So there are two pressures Patch faces that make it hard for them to discount their ads (and I’ll grant, I’m speculating here).  First is, no profitable locations to buttress discounts in other markets; commissioned sales reps who really won’t want to discount.

You, however, as an independent, have neither of these pressures.

Depending on the growth stage of your business, you can afford to beat Patch on rate. In other words, you can disrupt the disruptor.

Of course, the biggest weakness Patch has is Patch isn’t you.  You are truly local. Your business is based in the community you cover, not New York.

You need to be sure your advertisers and readers know this.

If you feel that Patch is a threat, what you need to do as soon as you finish reading this is create a one-sheeter that brags about your traffic, what readers say about you, what advertisers say about you and proclaims your devotion to your local community and that your local business — like your advertisers — is locally owned.

Which raises the next issue: Do you accept only locally owned businesses as advertisers? If you don’t, you should.  You should make it part of your publicly known mission that your goal is to help locally owned businesses grow (another reading assignment, Stacy Mitchell’s The Big Box Swindle).  If your site currently has ad network ads, including Google AdWords, you need to remove that code from you site right now.  If you’re going to be beat Patch, you need to be all about local and only local.  And beat that drum as loudly and as often as you can.

It will never hurt to remind local business owners that Patch is based in New York, that revenue is siphoned out of town, and that you’re the local guy who will always be there.

When a chain shop stats to losing money in a particular market, the corporate CEO will just order the store closed. A local business owner who’s sole source of income faces that challenge, his only option is to figure out how to make money in another way.  That’s part of the local advantage.

Your fellow small business owners will understand that as soon as you start talking about being truly local.

Have you joined your local chamber of commerce yet? If not, do that today.  Part of your job is to be out in the community, even when you’re not selling ads, and be seen as one of the local business owners.

One other important point about advertising:  Right now, Patch’s advertising model appears to be what’s known as "limited inventory."  In that model, you put a few ad slots on a web page and rotate a limited number advertisers though those slots.

The limited inventory model sucks. Advertisers hate it and it limits both your revenue and your options.

I prefer what I call the unlimited inventory model — which consists of putting as many ad slots on a page as possible.  No ads rotate.  Advertisers love seeing their ads on every page view. They distrust sites when they can’t see their ads every time they visit.  

If you follow my example, you will have a tremendous selling advantage against Patch.

The Patch site design is also more newspaper like rather than web like. By that I mean, control-oriented newspapers use a hierarchical home page design with top stories, story blocks and lots of headlines and links.  A webcentric page design is blog-like so that readers can login and quickly see what’s new since their last visit.  This site design also opens up more ad positions that are adjacent to the content that readers are actually reading.

And if you find yourself actually in direct competition with Patch, and you’re savvy about the concepts of disruption and competitive advantage, you will regularly figure out other smart ways to beat Patch.

As I said, while I’m not anti-Patch, but as an independent publisher, I certainly want to offer encouragement to other independent publishers. 

Patch can be beat, but you will need to be smart and work hard to do it. But then, you need to be smart and work hard just to survive in this industry anyway.