I’ve been asked a lot recently why Digital Media companies end up being distressed/bankrupt. People seem to get why retailers end up dead, why e-commerce doesn’t make it, but don’t understand why Digital Media can take a hit.
To paraphrase, “all distress tastes like chicken”.
Distressed digital media companies face two main categories of issues, like almost all distressed companies: balance sheet issues and profit and loss (P&L) issues. In this article, we discuss the primary reasons that lead digital media companies into bankruptcy.
Not Invented Here Syndrome will kill a business:
Zero Interest rates created horrible incentives. A lot of money was shoveled into digital media. These companies had to show that they were doing “SOMETHING” with the money, so they started building their own tech stacks. Repeat after me: You do not need to build your own content management system or video streaming service.
These in-house projects can often be expensive, costing millions of dollars in employee salaries, development, and maintenance. Instead of realizing that they could rely on more affordable and more effective technologies like Youtube, Vimeo, or WordPress, digital media companies continue to invest heavily in their in-house technologies, leading to financial distress. CTOs and Dev teams can’t tell the CEO that their are better, cheaper alternatives, because they’ll lose their jobs. Off to bankruptcy they go.
The current playbook for fixing most revenue generating distressed media companies is:
- Move everything over to wordpress VIP.
- Save millions of dollars a year in AWS costs and dev ops salaries.
Stop Paying so Much
A lot of these companies also have salary structures that are relics of the tech bubble. Not just for developers but for everyone on staff. I’m all for paying people well, but if the company is about to collapse, what’s the point?
Companies may have hired employees at inflated market rates during boom times, and later fail to adjust salaries to more sustainable levels. Struggling companies may either have to replace high-salary employees or negotiate lower salaries.
Oh, the algorithm, the algorithm
This is a harder problem to fix.
Lots of media companies have risen and fallen on the back of an algorithm and a platform. For example, companies may have heavily relied on a Google algorithm, and when the algorithm changes unexpectedly, they face drastic declines in revenue. Similarly, companies that relied on free organic Facebook traffic suffer when Facebook updates its algorithm to decrease traffic.
Jacob of A Media Operator (go and subscribe, it’s a great newsletter), hit the nail on the head with these traffic declines from when Facebook changed what they chose to show users in the FB Feed:
- NYT went from 3.5m to 688k visits
- Vice went from 1.1m to 255.7k visits
- BBC went from 8.3m to 1.8m visits
Less traffic means less revenue. It’s one thing to have multiple legs of traffic and lose one of them, it’s another to get hammered on your main source of traffic. The BBC is government funded and will be fine, NYT will be ok for now, but Vice as we know is already a goner (in bankruptcy as of this article).
Less traffic means less revenue, and a dwindling PL where you don’t really control the traffic is hard to fix.
Balance Sheet Issues
I’m going to briefly touch on balance sheet issues. If you’re in theory profitable but have excessive debt, you can try and fix things with creditors or take the company through bankruptcy. If you’re losing money and have excessive debt, it goes back to why you’re losing money.
If the business was never tenable in the first place, just shut it down. If you’re actually doing decent income but have inflated costs, see my note about costs above.
An AI Generated Conclusion
Digital media companies can go bankrupt due to a variety of reasons, including P&L issues like not making enough money, overspending on in-house technology and employee salaries, and balance sheet issues such as excessive debt. To avoid bankruptcy, digital media companies should carefully manage their balance sheets, analyze the effectiveness of their spending, and consider the advantages of existing technologies instead of developing costly in-house solutions.