Internet businesses are finally profitable. In some cases, Internet companies are wildly profitable with operating margins of 35%. It’s not just Google that has scaled. 10 years ago, Internet companies went public without revenue. Now, companies such as OpenTable are at 15% + operating margins just a year after IPO. It’s not just Internet platform companies that achieve great scale. 24/7 Wall Street believes that Gawker keeps over 50% of its revenue as operating income.

The key to publishing economics is securing a critical mass of size, quality, and engagement of an audience that is built and served affordably. The bottom line: it’s easy to start an Internet publishing business, but difficult to scale. Ultimately, those publishers that can surpass a million monthly unqiues have a good opportunity to scale a profitable entity. Below the million audience threshold, you’ll need to decide how much capital to commit to growing your blog.

Internet Publishing Economics – Audience

  • Large traditional publishers are finally reaching large audiences including the New York Times (32.5 million uniques), The Tribune (24.7 million uniques), USA Today (16.7 million uniques), and The Washington Post (16.7 million uniques) in May 2010 according to ComScore.
  • On the smaller side, 1 million unique is typically seen as a critical milestone for aspiring publishers. Even smaller than that, it’s difficult to garner any advertiser attention at less than 200,000 to 400,000 monthly unique users.

Internet Publishing Economics – Revenue

  • Internet publishers have traditionally received the bulk of their revenue (often 80% of total revenue) from advertising.
  • For established Internet publishers, I have generally seen annual revenue per user of $2 to $5. Occasionally, for strong brands and special audiences, that has stretched towards $10. For less established Internet publishers, it might be difficult to get to $2 initially, especially if you rely on ad networks while you ramp up your user base and sales efforts.
  • Typical CPMs (price per thousand ad impressions) are in the $8 to $10 range, skewing upwards to $20 for premium, targeted advertising opportunities, and all the way down to $1 to $2 for run-of-site ad network impressions that are un-targeted. There are always outliers, but this should serve as a good reference for typical publishers.

Bootstrapping a Startup

  • Let’s say that you are leading an Internet publishing startup and your first milestone is to get to 200,000 monthly unique users. At this point, your annual revenue run-rate could be $400,000 if you are able to attract $2 in annual revenue per unique user. As a check, let’s assume that you are only able to secure an average CPM of $5 since you are in growth mode. Assuming 2 ads per page, that means that you’d need 40 million page views at 100% sell-out over the course of the full year. That’s 3.3 million page views per month or the equivalent of 16.7 page views per unique user. This compares to Gawker, Mashable, and MacRumors which are all closer to 8 – 10 page views per unique user per month.

Internet Publishing Economics – Expenses for an Early Stage Startup

  • In the above scenario of achieving 200,000 monthly unique users, $400,000 in annual revenue is likely best-case (and don’t be surprised if you are closer to $100,000!). That doesn’t leave a lot of room for expenses. You will face the following tough choices …
  • Content: You’ll want a high quantity of indexed pages to get spidered by search engines. But you’ll also need high quality and unique content to keep users coming back. Today, there are a surplus of great writers available, so choose your talent wisely and make the most of your limited budget. To make your content more scalable, build or license content databases and be sure to enable user generated content.
  • Marketing: SEO and PR are the two most common marketing expenses for startup publishers. These are generally worthwhile and can be had for between $500 and $7,500 per month each. You get what you pay for and monthly expenses will likely set you back $3,000 per month range for each. Beyond this, you should secure resources to build your community profile and make sure your team is as active as possible in building relationships and partnerships. Have a side budget to market on high affinity sites. Depending on how aggressively you want to grow, you can also put aside a traffic marketing budget. Traffic referrals can be had as cheaply at $0.10 to $0.20 per referral if you search hard.
  • Technology: Great content back-ends and web launch projects can range from thousands of dollars by plugging into WordPress or other similar tools, to hundreds of thousands of dollars. We know of several properties that were launched in the $10k to $50k range and would suggest this approach for bootstrapping.
  • Staff: Startups are running lean this day. An entrepreneur recently told me that the goal in Internet world is to scale to over $1 million revenue per employee. You’ll need enough competencies in content development, marketing, business development, and site management to operate the site. Initially, we would suggest an employee count in the single digits until you start to scale the business. If you look at Gawker’s sites, they list their primary contributors. Even with audiences in the millions, they still keep a lean staff and leverage interns. If you have minimal funds, try to get your team to accept reduced salaries in exchange for equity upside.

Image by Andrew Beierle from Stock.Xchng