Over the past year, Felix Salmon of Reuters wrote a masterful five-part series on the economics of content online. Worth reading for anyone interested in the topic. I link to each part below and excerpt my favorite paragraphs (all Salmon’s words, but emphases are my own).

Part 1: Advertising

Do advertising dollars ultimately end up where people spend their time, he asked, echoing Kleiner Perkins’ Mary Meeker says, or, pace Bernstein Research’s Todd Juenger, is that a “fallacy”?

I’m with Juenger on this one. As he says, “time spent is supply, advertising spend is demand… Just because there is a large and growing supply of Internet inventory doesn’t mean advertisers have a correspondingly large desire to deliver more Internet impressions.” Indeed, as the price of online inventory continues to fall, it seems just as likely that online ad spend will go down (because the ads being bought are getting cheaper) as that it will go up…

Moreover, if you’re running a news site, you’ll be even more sobered to learn that just 2.7% of the time that people spend on the internet is spent on news sites. You think you’re competing against a lot of other news sites to attract advertisers? You don’t know the half of it. In reality, you’re competing against the other 97.3% of websites, andthey are competing against TV. It’s a fight you can’t hope to win, especially since non-news websites are so much better at delivering people primed to buy stuff (search) or delivering large numbers of people in narrowly-targeted demographics (Facebook)…

According to Meeker, some 67% of all ad dollars are spent either on TV or in print. And according to Juenger, ad spend on TV actually went up, between 2009 and 2012, even as Americans’ attention moved away from TV and towards other screens. That makes sense to me, mainly because of the point I was making back in 2009, drawing the distinction between brand advertising, on the one hand, and direct marketing, on the other. TV is brand advertising; online ads, by contrast, are closer to direct marketing….

When people like Meeker look at ad spend, they’re looking mainly at brand advertising. Brands are valuable things, and billions of dollars are spent every year to keep them that way, mostly on TV and in print. And if you have a big national brand, there’s really only one way to reach a big national audience: you need to buy ads on TV. Doing so is expensive, but it’s necessary, and it works, which explains the huge sums of money which still flow into TV every year…

So if the internet is not going to displace TV as a medium for mass-market brand advertising, might it at least be good at direct marketing? Can publishers not deliver certain readers, in certain demographics, to marketers who want to reach them? To a certain extent, yes. But the fact is that Google and Facebook, between them, are extremely good at delivering as many of those readers as any advertiser could ever want: all that Facebook needs to do is turn a dial, and billions of new impressions get added to the stock of global inventory, targeted at any demographic that any advertiser could want. Google, similarly, owns search, especially mobile search. It’s conceivable that some marketers might prefer to reach an audience some other way — but this is a race to the bottom, with a finite amount of demand chasing an essentially infinite amount of supply. That’s a buyer’s world, where the sellers have no real leverage at all…

Some very large proportion of the websites on the internet have a pretty basic business model: “we will publish great content; millions of people will want to read or view that content; advertisers will want to reach those people; and so we’ll be able to sell our audience to advertisers and make lots of money”. There are people out there who have succeeded with that model, but the number of successes is dwarfed by the number of failures, and the amount of scale you need to even get your foot in any media buyer’s door has been rising dramatically for years. By the time you’ve paid for your content and for your ad-sales infrastructure, the chances that you’ll have any money at all left over for your shareholders are slim indeed, and getting slimmer year by year…

All of which means that smart online publishers are looking beyond advertising, to other forms of generating revenues.

[In a recent exchange with Marc Andreessen, during Marc’s tweet storm about online journalism, Felix wrote: “Pot at end of rainbow = advertisers who aren’t buying on a CPM basis.”]

Part 2: Payments (Alternatives to Advertising)

Which brings up a fundamental rule of online subscriptions: there is zero correlation between value and price. There are lots of incredibly expensive stock-tipping newsletters which have a negative value: you’d be much better off if you didn’t subscribe to any of them at all. And of course there’s an almost infinite amount of wonderfully valuable content available online for free, starting with Wikipedia and moving on through the sites of organizations like Reuters, Bloomberg, the Guardian, and the BBC

But there’s another consideration, too: the more formidable the paywall, the more money you might generate in the short term, but the less likely it is that new readers are going to discover your content and want to subscribe to you in the future.

Part 3: Costs

If [Bezos] didn’t want an established property, he could have invested $250 million to create a brand-new journalistic outlet. To put that sum in context, the total amount of money raised by Business Insider, since inception, is $21.6 million; Vox Media has raised $23.5 million; BuzzFeed is on $46.3 million; andHuffington Post raised $37 million before it was acquired by AOL. Throw in Gawker Media, Mashable, Politico, Pando Daily, Breaking Media, Weblogs Inc, and just about any other new journalism company you can think of, up to and including Bustle; you’re still nowhere near $250 million…

The result is that the journalistic outlets seeing the biggest profits are the ones where costs are kept incredibly low. At one extreme lies the Bleacher Report, which was sold for a reported $180 million; it consists primarily of stories written by unpaid contributors, expertly optimized to maximize pageviews at the expense of accuracy or quality. Or look at Summly, which Yahoo bought for $30 million: it produces news summaries entirely by algorithm, with no editorial costs at all… 

Here’s a statistic worth dwelling on: “A senior editor at The Washington Post recently told me that he killed an average of three advanced investigations a year, usually over the protests of the reporters, who couldn’t see that they didn’t have the goods.” Outside ProPublica — and even inside it — how many online-only organizations can say the same?

Part 4: Scale

Henry Blodget: “I do think that over the next five years, what you’re going to see is a lot of consolidation. The fact is, there are way too many digital news and media organizations out there right now. There will be a lot of consolidation. As they come together, you will get huge economies of scale on the sales side, on the tech side, and on some of the other areas as well. And then you’re going to see these companies produce good profits…”…

It’s almost impossible to overstate the importance of the CMS when it comes to the question of who’s going to win the online-publishing wars. As Blodget said on Friday, if you’re going to make serious money in this business, you need serious scale. If you want serious scale, you have to be able to expand not only organically but also by acquisition. And if you want to be able to scale up through dealmaking, you need to have a technology and sales platform which can support large-scale acquisitions…

The difference between the Glam view of the world, which comprises thousands of publishing brands, and the Blodget view of the world, which involves only a relative handful, is that while it’s true that consumers like brands, it’s no longer true that one big brand is going to beat thousands of small brands. Smaller websites can feel much more targeted and personal, and can build up a much more loyal following, than sites which have millions of users. If advertisers can get their ads onto that kind of site, and reach just as many people as they would buying one huge site, they’re better off for it. …

The question, however, is whether Bankoff would want Business Insider to be part of Vox. News is always a tougher sell, but at the same time it confers priceless legitimacy: BuzzFeed, for instance, is investing an enormous amount of money in its journalism, not because that’s a particularly cost-effective way to generate traffic, but rather because it means that both readers and advertisers take the site much more seriously as a result…

Looking at Medium, along with Vox, and Glam, and even AOL, I think I can begin to discern the vague outlines of how digital publishing might eventually be able to deliver the kind of scale and impact that brand advertisers demand from TV and glossy magazines. I don’t know who the winner is going to be. But I do think that Blodget is right about one thing: whoever the winner is, they will have to have some very deep pockets. Winning this game won’t come cheap.

Part 5: News

The most enjoyable part of blogging, in the early days, was putting things up on the internet and seeing people respond to them — by clicking on your links, or linking to you, or engaging you in the comments section. But it wasn’t easy. Twitter and Facebook — and Pinterest, for that matter, and the rest of the social media universe — did two important things. Firstly they made publishing incredibly easy; and secondly they rewarded publishing by giving contributors immediate likes and replies and favs and other evidence that people really cared about what you were publishing. It was the endorphin rush familiar to old-school bloggers, democratized and accelerated…

Right now might also be a very brief window of opportunity for roll-up strategies. The idea behind such things is simple: if you have a powerful CMS, then it makes sense to take existing sites (like, say, the Curbed Network) and move them onto a more powerful system (like, say, Vox Media’s Chorus). Everybody wins. But as web technology becomes increasingly sophisticated, and sites start looking very different depending on the device used to view them, it becomes increasingly difficult to port an entire website over to a brand-new platform. You can’t just import the HTML and tweak the CSS any more. Up until very recently, there hasn’t been the money available to prosecute such a strategy; it won’t be all that long before such a strategy becomes technically much more difficult. (I can’t imagine, for instance, merging the Vox Media and BuzzFeed back ends without enormous headaches and difficulty.) So if you’re going to do it, then you should waste no time.