A New Internet Bubble: Why "Content Farm" News Sites Face an Inevitable Crash

If you were looking for a new Internet bubble -- akin to the one that imploded in 1999/2000 -- then look no further than content farms, the online "news" sites that churn out dozens or hundreds of posts per day, hoping that the search traffic will be high enough to make the advertising running alongside it pay off.

I can't prove it, but it feels as if there are far too many news-oriented content farms in business right now. Are there really enough consumers who will respond to ads to pay for all this churnalism, in which freelancers cut, paste, blog and comment on "news" that's still largely generated by traditional media? Among the offenders:

  • Aol's Patch.com
  • Demand Media
  • Associated Content
  • Topix
  • Examiner
  • The Huffington Post
Some might argue that as Patch also produces real reporting it should not belong on that list. But it pays its writers so little -- $125 for five articles -- that the content they produce simply can't be of high quality.

Traditional media is following suit. Forbes, Aol News, and even CBS's BNET are among many whose online staff grind out large numbers of items on the highest-trending topics possible. (UPDATE: My colleague Erik Sherman, among others at BNET, takes exception to my characterization of our work here at BNET. It's true that we're not simply chasing page views like HuffPo, but if you look at BNET's model -- an army of freelancers whose pay is linked to the size of the traffic they generate -- it's clearly not an old media model, and parts of it do look like traffic farming.)

The supply of content is only likely to grow. Demand Media recently filed an IPO and that sale (if it happens) will fund more content. Patch took $50 million from Aol and plans to increase the towns it covers from 344 to 554. It employs 600 writers -- the equivalent of about half the entire staff of the New York Times!

And on the advertiser side, spending was up 17 percent to $6.4 billion in Q3 2010.

But it is not at all clear that that revenue is enough to sustain the growth of new news content. The New York Observer recently calculated Patch's editorial costs alone are more than $10 million a year. Demand Media has never been profitable. And the Huffington Post only makes a profit because it doesn't pay 6,000 of its writers. Henry Blodget, founder of The Business Insider (another content farm, in part) calculated that in order to earn back a $60,000 annual salary, an online journalist needs to generate a whopping 1.8 million page views a month. Suffice to say, most of us come nowhere near that.

The bubble must burst
At some point, the market must "clear" -- the bubble will burst. The sites that can make money from the advertising next to their content will survive, and those that cannot will go out of business. There are already signs of that happening. Earlier this year, Forbes bought and then promptly closed True/Slant, for instance. Some publishers, such as HuffPo, are trying to raise their ad prices by declining to participate in network web ad sales. And a group of hapless old media companies are trying to create editorial guidelines to differentiate themselves from content farms in a sure-to-be-doomed effort to keep ad prices higher on their sites.

But that's it: Mostly, money is still rushing into online news content even though few of these properties have profitable business models. This is not sustainable. Something has got to give. First, it will start to drive down even further the price companies are willing to pay for new content. If Blodget was right about his $60,000/1.8 million views rule, then that might be just enough to sustain a quality content farm business, such as TBI.

However, prices can go much lower (as HuffPo's army of unpaid bloggers proves). Gawker Media founder Nick Denton recently said that he's willing to pay sources for juicy scoops about $10,000 for every million page views those scoops -- such as Brett Favre's penis pictures -- bring in. Apply that price to Blodget's $60,000 rule and soon writers could find themselves looking at "salaries" of $18,000 a year.

So here is what must happen: A crash must come. The worst, least-useful sites will go to the wall. A handful of good ones will dominate the post-crash landscape. At that point, they better figure out a way to raise advertising prices in the long-term. Their survival will depend on it.

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Image by Flickr user photoclinique, CC.