The value in publishing, as illustrated by Ben Thompson. (Image copyright Ben Thompson, used with permission).

It’s a tale of two publishing worlds.

Last week, Vox, the publisher of sites including The Verge and SB Nation, landed $46.5M in funding at a valuation of $380 million. It’s just the latest in a series of new publishers who have convinced investors that there’s a profitable future in online media, something that seemed once impossible, given the economic drubbing that online publishing experienced over the last ten years, when the news around publishing seemed to be a never-ending string of announcements of layoffs, buyouts, and closures.

Also last week, Outbrain, an advertising company that specializes in disguised ads at the bottom of news stories, reportedly filed preliminary paperwork for an estimated $1 billion IPO on NASDAQ.

While both might seem like a win for online publishing, it’s not a pairing. It’s a juxtaposition that illustrates the bifurcation underway with large news sites in the U.S.

World One Publishers

Upstarts and stalwarts are using and building smart technology to establish themselves as the media of the future — and often raising lots of capital. This group includes VICE, Vox, BuzzFeed, the Washington Post, Mashable, the New York Times, Mic, Medium, Skift, Vocative, Fusion.net and others.

What unites them is a commitment to creating more and more high-value journalism, while capturing the attention of the supposedly uninterested younger generations. They experiment with new story forms.

They’ve committed themselves to beautiful interfaces; they think about how stories spread on social; and they are committed to figuring out how to continually move up the value chain. Though I detest the word brand, it’s actually a useful concept here. These companies think about how to build a brand — even if they started in as a “low-quality” site and still play with story forms that are low-brow and click-baity.

These sites are optimizing for:

• Reader satisfaction
• Lifetime value of reader
• Long-term relationships with readers
• High value advertising

Their tactics include:

• High-quality content, including good writing, strong visuals, and video
• Original content
• Aggregation that adds value
• Building community around content and brand
• Data-driven development
• Personalization
• Engagement hooks

World Two Publishers

Publishers in World Two can’t figure out how to keep or build reader loyalty – or just don’t care to.

They lack tech development skills. They are stuck chasing Facebook views. The reading experience is filled with distracting junk. At best, they imitate, rather than innovate, when it comes to story formats.

And they monetize by using low-quality ad units and traffic arbitrage companies like Outbrain and Taboola. These show up in a powerful spot – at the end of a story. And instead of trying to build loyalty, these publishers choose to monetize their disease.

And what’s the disease? It’s not the lack of ad revenue (though this is hard). The real disease is an institutional lack of vision of how to serve their audience in the age of digital publishing.

These kinds of sites are optimizing for:

• Short-term profits
• Volume

Their tactics include:

• Clickbaity headlines
• Content that is cynical, fear-mongering, deceptive, porny
• Content that is cheap to create
• Content volume over quality
• Pages stuffed with ads
• Traffic arbitration

Traffic arbitration works like this: Through Outbrain, Taboola, and Adblade, among others, publications sell traffic to advertisers’ websites. That money gets split between the publisher and Outbrain/Taboola.

The advertiser can be another publication that has higher CPMs, either from stuffing a page full of scammy ads (e.g. Digiday’s story Is This The Worst Page on the Internet), or just a scuzzy advertiser like Quibids with fake content. (This is not to say all sites that buy traffic in are scams; there’s legitimate reasons that some businesses and publications buy traffic to their content.)

The model is fairly simple – a news site gets readers in and then sells those readers off to another site that’s willing to pay to acquire new readers, potential customers or just suckers who believe in belly fat pills.

Sometimes the reader goes to a real businesses – such as AARP – that can legitimately try to turn the reader into a customer. But often the reader gets sent to junk sites stuffed with even lower quality ads, often for highly dubious financial and “health” products, promising riches and tight abs.

The Smiling Curve

The divide between these worlds couldn’t be clearer. Not a single one of the World One sites I mentioned — the ones that are clearly the future of media and journalism — use Outbrain or Taboola, let alone any of the lower rent knock-offs like Content.ad, Shareholic, AdBlade etc. (One exception here: Vox has been trying out Yahoo’s new content recommendation engine — but Yahoo’s has the virtue of actually prominently labeling their ads and being judicious in the ratio of ads to internal recommendations.)

The upstarts prize user trust; they sell many of their own ads — including native directly; some even have studios to create native advertising for clients; and most importantly, they all realize that reader loyalty is what wins in the long run.

They understand that media companies of the future can’t survive without an investment in technology – to better understand their audience; to create new storytelling forms; to build ongoing relationships with readers; to catch the zeitgeist faster; to understand how to serve their readers by both informing and entertaining them — including sometimes simultaneously (is this not the lesson of The Daily Show, Last Week With John Oliver, and The Onion?).

It’s understandable that sites like TIME and local newspapers have turned to Outbrain. Tech is not in their blood.

After the rise of the internet, it’s not clear what TIME is supposed to be any more or who it is indispensable for. TIME, alongside Newsweek, was once an authority in our culture that reflected and defined the mainstream of American politics, but it doesn’t play that role anymore. Unable to define its mission, TIME mortgaged its brand to Outbrain for a promised $100M over three years.

Many publications, especially local newspapers, still cling to the view from nowhere. There’s often legacy costs, like printing presses, holding them back. Just as old-school, there’s legacy mindsets in management and editorial, unwilling to change significantly even when faced with falling ad revenue and aging reader demographics.

This illustrates what’s known as the smiling curve. You can — and should — read Ben Thompson’s great analysis of how this dynamic applies to publishing.

The key insight of Thompson’s graph (below) is that in an age where newspaper and magazine’s former market power over distribution is gone (think local newspapers from 1930s to late 1990s), the value in the media ecosystem flows to two sides of the ecosystem: high reputation publishers and writers on one side and the mass distributors of the world on the other.

The value in publishing, as illustrated by Ben Thompson. (Image copyright Ben Thompson, used with permission).

On the left, you have sites like Vox and the New York Times – sites that have high standards and reader loyalty. A real brand, for lack of a more interesting word. On the right, you have the distributors that don’t make their own content, but have immense audiences, often due to network effects. That’s Facebook, Google, Twitter, LinkedIn, and now Outbrain and Taboola.

The aggregators/distributors like Google/Facebook/Twitter on the right capture a huge amount of value, while the high-end, differentiated sites as diverse as Vice, The Economist, Brain Pickings, FiveThirtyEight and MAKE magazine capture the other big value in the ecosystem. (I would disagree with Thompson that the New York Times falls in the middle — it’s clearly on the left, but held down by legacy cost structures.)

The rest of the publishing world finds itself stuck in the trough.

Daily news is commodified. A reader can learn about the latest Congressional shenanigans or celebrity foible anywhere these days. The cost of publishing something and distributing it on the internet is approaching zero. And as the number of page views and places to advertise increase, the cost to reach a sizeable audience moves towards zero.

Vox is clearly on the left, in World One. And Outbrain, well, it’s on the right. If you are an undifferentiated publisher, you face falling ad rates and a non-loyal audience. That leaves you dependent on the whims of Facebook, Google, Twitter and if you choose to be, Outbrain & Taboola.

The difference, however, between Facebook/Google/Twitter and Outbrain/Taboola is the the former don’t reinforce a publisher’s position at the bottom of the trough, while Outbrain/Taboola thrive on keeping publishers there.

Go Left, Young Man

The only way to win here long-term as a publisher is to figure out how to move to the left and how to stay on the left. To figure out how to be high-end; how to be incredibly valuable to readers; how to define and serve a community. In short, how to be indispensable to readers and valuable enough that advertisers want to associate with you.

The publishers on the left are Contextly’s sweet spot. We provide technology to publishers that help them grow loyal audiences in the age of drive-by readers by providing trust-building recommendations that keep readers reading and returning. We do that by providing them with technology that’s beyond their means to build themselves (personalization, evergreen story detection, high-quality related, etc.) and making it dead-simple to integrate.

In a strictly economic sense, bully on Outbrain/Taboola on convincing publishers they are winning by sending readers off their site. And if you are an advertiser or brand who can successfully pay for inbound traffic from Outbrain/Taboola, by all means take advantage of publishers in the trough. But in an ethical and practical sense, my admiration disappears.

Outbrain and Taboola have achieved their economic success by intentionally crafting their ad sections to appear to be real recommendations, without any markers that call out their ads as ads. Neither changed this behavior until they were slapped by industry regulatory bodies for the deception.

Even then, they’ve done the minimal amount possible to mark their ads as ads, while telling the press they’ve done otherwise. For instance, here’s a page on the SFGate website, where the ads are only partially labeled.

Readers hate the deception and low-quality links. Just try a search on Twitter on either company’s name or actually talk to readers, and you’ll know.

For publishers, the clearest sign that they are stuck in the trough is a traffic arbitration module at the end of their stories.

The end of a story is the most powerful place to encourage readers to become loyalists; they’ve just finished reading a full piece and are at a moment of inattention. Putting that module there is essentially giving up on the idea of being indispensable, which means being perpetually at the mercy of Google and Facebook’s algorithms; and always needing to bring in new readers to arbitrage out.

Speaking as a former journalist, it’s sad to see some great publishers fall into the trough.

The left side of that graph is where the fun stuff – the real innovations in storytelling — is happening, and I hope more publishers figure out how to get and stay there.

That will be good news for readers, writers and publishers.