In 2005 a 29-year-old media studies graduate called Jonah Peretti helped to found an online news and comment website called the Huffington Post. A year later he started an experimental side project called BuzzFeed.
The two sites would help create an online media boom, as investors rushed to buy stakes in the belief such outlets were more nimble and more in tune with the desires of readers who grew up on the internet rather than with traditional newspapers and broadcasters.
On Wednesday, HuffPost’s parent company, Verizon Media Group, and BuzzFeed both announced plans to lay off hundreds of staff. The news signalled a collision between the dream of an online media boom and the accountants’ harsher reality: questions over the long-term profitability of digital media companies, and, as a result, concerns over the future of online journalism itself.
“What if there is literally no profitable model for digital news? Or none that actually scales and endures without, say, the established readership base and brand of the New York Times?” asked the MSNBC presenter Chris Hayes, summarising a growing fear among media executives that the current model of paying for journalism on the internet is broken.
The same news executives are coming to terms with the fact that, in the modern world of mobile consumption, most sites are just another form of distraction. Their competition is not just rival scoops – but a vast online ecosystem of entertaining, shareable and social content.
“It’s clear that we have a digital content bubble,” said Rasmus Kleis Nielsen, the director of the Reuters Institute for the Study of Journalism at Oxford University. “There’s no question we’re going to see more cuts, both in legacy media and digital-born ones.”
He said part of the issue was the investors who backed online media startups thought they were investing in fast-growing tech businesses, rather than something resembling a traditional news outlet.
“In some ways, for journalism to succeed as a business it needs patient investors who are content with incremental growth and modest returns on investment.”
This attitude fed into the financial culture of the companies, which often hired staff at breakneck speed. Online site Mic rented glitzy offices in the World Trade Center in New York, shortly before the company collapsed after last year’s changes to Facebook’s algorithm, which hit many online publishers’ traffic hard.
BuzzFeed placed an emphasis on retaining employees by providing generous working conditions such as free lunches, featuring sushi and rock oysters. Vice was famed for the decadence of its parties under its former chief executive Shane Smith, who was in charge when the company was hit with accusations of sexual harassment and misconduct.
Major online media companies, which are often referred to as startups – despite, in many cases, being more than a decade old – are now having to control costs. At the same time, they are being asked questions by investors who are wondering about the true value of their stake.
Disney, which once held talks about buying BuzzFeed, invested $400m (£310m) in Vice in 2014 but has now written the value of its stake down by 40%. Sites such as Mashable were offloaded in fire sales, following substantial cutbacks.
BuzzFeed’s email announcing layoffs made it clear the company would not be seeking to raise any more funds, and the business appears to have abandoned its once-proposed plan to float on the stock exchange.
This is despite the fact the company is hoping to record income of $300m in 2018 following doubt-digit revenue growth, while its UK edition is close to profitability – a performance that would delight many traditional outlets but is not enough for investors.
Even as online media companies have fought off a slew of low-rent competitors mimicking their distribution methods, they have also had to contend with more established outlets learning from their skills in experimentation.
In BuzzFeed’s early days, the company mastered the art of gaming Facebook’s algorithm by building lists and posts based around identity and entertainment issues, which would appeal to readers and encourage them to share. Suddenly, an established online brand could be matched by the use of an organic distribution network: readers themselves.
The result was a run of posts which would reach millions of views, aided by carefully-studied insights – such as the fact that adding the word “actually” to a quiz headline could supercharge its traffic.
Those insights helped to maximise viral reach, with an attention to detail and deep analysis of what prompted humans to share that sometimes belied their apparently frivolous content and headlines.
Gradually, ongoing changes to Facebook’s algorithm eroded some of the competitive advantage in the field. BuzzFeed looked to develop its presence on other platforms and invest in the serious news journalism which saw it publish the Trump dossier and be shortlisted for a Pulitzer prize.
At BuzzFeed, Peretti constantly suggested Facebook would be forced to pay for content, an outcome that has yet to materialise, before seeking to create TV-style programming for other companies. Last year he floated the eye-catching idea of a mega-merger of online media companies to take on Facebook and Google but sources at the company have played down the importance of this.
He told staff on Wednesday they would look to diversify income away from the main website and hoped to be “clear winner in the market as the economics of digital media continue to improve”.
Instead, there has been an unexpected swing back to big traditional outlets, with the likes of the New York Times seeing enormous demand for its subscriptions, at a time when newspapers are closing across the rest of the US.
Some outlets are relying on contributions from readers, a model which has helped the Guardian’s parent company edge towards breaking even after years of heavy financial losses.
Others prefer to rely on wealthy individuals: the Atlantic is benefiting from an investment by Laurene Powell Jobs, the widow of Apple’s founder, Steve Jobs, while MEL Magazine has won plaudits for its coverage of online culture, despite being the corporate branding project of a razor manufacturer.
“The challenges that the establishment players and new players face are very similar,” said Nielsen, who urged competitors not to gloat at the pain experienced by new rivals, with many journalists set to lose their jobs.
“We live in a world with intense competition for attention, for advertising, and for people’s money. There may be schadenfreude – these people were the future once – but this is not in any way good news for traditional players.”
How the online media cuts are affecting online publishers:
Valuation: $5.7bn in 2017
Job cuts: Aims to reduce headcount by 15% through attrition and a hiring freeze.
What’s happening: The company was valued at $5.7bn under its former chief executive Shane Smith but has since seen Disney write down the value of its stake by 40%, suggesting its current value is much lower. Smith quit last year, to be replaced by TV executive Nancy Dubuc. The company is increasingly focused on its in-house ad agency Virtue and the nightly TV news show it produces for HBO.
Verizon Media Group
Valuation: $5.2bn in 2018
Job cuts: 800
What’s happening: The parent company of HuffPost, AOL, Yahoo, and Tumblr was founded in a bid to take on Google and Facebook by creating a new media giant but has struggled to gain market share. After a brief stint under the name Oath, it has been rebranded after its parent company last year took a $4.6bn writedown on its value before announcing substantial job cuts. Employees found out they were due to be sacked via a calendar invite from HR, according to HuffPost’s own reporting.
Valuation: $1.6bn in 2016
Job cuts: 200
What’s happening: Founder Jonah Peretti is looking to grow revenues away from advertising on the company’s main website, with a greater emphasis on licensing deals with third parties and online shopping in a profitability push. The company’s news division has continued to attract attention, most recently with its disputed story that Donald Trump directed his personal lawyer to lie to Congress.
What’s happening: The publisher was known for snappy Facebook videos and boomed while the social network prioritised video but struggled when Mark Zuckerberg’s company changed its algorithm. Mic employed more than 100 people but almost all of them lost their jobs when the company collapsed at the end of last year after burning through tens of millions of dollars in funding. Its assets were sold to Bustle Group at a knockdown price of about $5m.