We’re picking up yesterday’s Seinfeld thread where we documented 3 Levels of Risk in analyzing his “Night Guy” routine. Per some discussions that the post generated, we are going to “follow that thread all the way through the sweater” with a case study. Let me know if you want more, but this one was picked since it overlaps with modern media companies quite well (especially well for companies that claim not to be media companies).
Also, we want to clarify the term “risk” since it generated a few questions. We are using it here in the “variance” sense. In other words, we have an idea of the potential risk and reward, i.e. the good AND the bad, of potential outcomes.
To recap, we introduced a model to analyze: the risk of a transaction (Level 1), the risk across a portfolio of transactions (Level 2), and how to think about those risks across time and space (Level 3).
I’ve mentioned it before, but I’ll say it again: I highly recommend Tim Wu’s book, “The Attention Merchants.” The following story comes from that book – however, our analysis is original.
In 1833 Benjamin Day founded the New York Sun, and it quickly became the first mass-distributed newspaper. Before Day, papers were subscription based, targeting people who could pay for their information advantage. Remember, in 1833 we were somewhere between reading books and waiting for the telephone (which didn’t really show up for almost 50 years). Current events were for aristocrats and politicians. Regular people just took in the family and neighborhood gossip.
Day saw the potential demand IF he could only figure out how to get the price from about 6 cents down to a penny (which is what other basic necessities cost at the time). Let’s work through our framework forwards and then backwards.
On Level 1, he figured he could sell papers easily at that price, but he would lose money printing them. If he was able to draw advertisers in, then they would theoretically pay for their listing to reach readers. If that worked, he could potentially offset the additional costs and create a profit.
On Level 2, Day figured out how many daily buyers and advertisers he would need to breakeven. In other words, he found the balance of risk and reward between the two necessary transactions.
On Level 3, Day came up with a plan to draw advertisers in (he actually created ads – for free – to prove to companies that his model would work!), operate at a loss for period of time until he could reach breakeven, and hopefully (his vision) become profitable once his ad revenue + paper sales exceeded his printing costs.
Working backwards, he attached time horizons (Level 3, he spread the location of his risk over time, so he needed cash to lose for a while), to the business he could do today (Level 2, operate at a loss while he found traction) by selling papers and finding advertisers (Level 1, literally sell papers, get advertisers).
It didn’t just work, it worked like crazy. Instead of selling the information to consumers, he was selling the consumer to the advertisers. Wu says this effectively signaled the birth of public opinion AND was the first time that selling people’s attention was a viable business model.
Next, we’ll study a failure via the birth and death of the patent-medicine industry, which Day’s newspaper model enabled. If you’ve never heard the backstory of where “snake oil salesman” comes from, we’re going to discuss Clark Stanley, the “Rattlesnake King,” and the birth of investigative journalism that brought him down.