As Starz CEO Chris Albrecht has bluntly stated, media companies did themselves a historic disservice when they opted to license their library of TV shows and movies to Netflix on the assumption that it made sense to get paid for content that was otherwise just sitting in a vault.
But handing over content to Netflix allowed the onetime upstart to aggregate audiences, huge audiences, and become the world's largest subscription-based video streaming platform. Netflix, of course, evolved from an aggregator to a creator and, in the process, a formidable competitor. Netflix, which only began in 1997, now sports a market capitalization of more than $60 billion, higher than 21st Century Fox (FOXA) or CBS (CBS) , not to mention Lions Gate Entertainment (LGF.A) , which acquired Starz last year.
News publishers might be falling into the same trap.
Snap, owner of disappearing photo app Snapchat, began licensing stories and videos about two years ago from New York Times (NYT) , Vox Media, BuzzFeed, the Daily Mail and others. Content appears on Snapchat's Discover platform, which arguably offers a better display for those stories than what they might get on Facebook (FB) or Alphabet's (GOOGL) YouTube.
Wildly popular with the under-20 crowd, Snap then sells advertising around publishers' editorial content. Publishers also can sell ads for their stories and video on Discover, though Snap is handling the ad sales on Discover at a ratio of about 10 to 1, said Jan Dawson, an independent equity analyst who runs Jackdaw Research. As the social media platform's IPO filing revealed, Snap paid publishers $58 million in ad revenue-sharing in 2016. That came to about 15% of Snap's 2016 revenue of $404 million. (Yes, a company with less than $500 million in revenue already has a nearly $30 billion market capitalization.)
On its first day of trading Thursday, Snap surged 44% to $24.48.
For publishers, the attraction of Snapchat's Discover is similar to how Starz initially viewed is distribution deal with Netflix. That is, until Albrecht ended the relationship in February 2012. Discover's publishing partners send some of their stories and videos to Snapchat, which sells advertising around that content, and then sends the publisher some of the proceeds -- estimated by Dawson at anywhere from 15% to 30%.
"It's helpful for publishers in getting their brand in front of maybe a different demographic on Snap," he said. "And you get a revenue cut as well."
And that of course, is the attraction. Publishers are eager, even desperate, to get more revenue from the digital distribution of their editorial content. As everyone in the business knows, Facebook and Google swallow about 60% of all digital ad spending in the U.S.
New York Times, for example, posts a collection of its stories on Snapchat in hopes that some of its 158 million daily active users will choose to become subscribers of its online edition. In the fourth quarter, New York Times added 276,000 new digital news subscribers, its largest quarterly increase since 2011, when it began offering a digital-only subscription.
Yet there are rumblings that publishers' current arrangement with Snap isn't living up to initial expectations. One common complaint is that the ad revenue share should be higher. Facebook is said to be offering a higher split, Dawson added. Alphabet's YouTube allows publishers to sell ads against their content and also take a large cut of that revenue.
But Snap's ability to reach young people is somewhat unmatched, according to advertising executives. It's the overarching reason that publishers are eager to experiment with Snapchat in hopes that it can gain widespread traction.
"It's always a double-edged sword," Dawson said. "You're putting your content in a new place where it can reach new people, but it means it's not on a platform that's controlled by you. You have less control over the way the content is displayed, and if they decide to change the business model, you're suddenly at their mercy. It's a risk you take if you want to engage in that business model."
Just ask Chris Albrecht.
Snap didn't reply to a request for comment.
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