The Gawker fracas is a sign of the financial pressure the company is under

IAB MIXX Advertising Week Conference
Nick Denton, founder of Gawker Media, speaks during the Interactive Advertising Bureau (IAB) MIXX 2010 conference and expo during Advertising Week in New York, U.S., on Monday, Sept. 27, 2010. The mobile advertising market may more than double in the U.S. to almost $500 million this year, researchers say. Photographer: Andrew Harrer/Bloomberg via Getty Images
Photograph by Andrew Harrer — Bloomberg via Getty Images

It would be easy to dismiss what has been going on at Gawker Media as just a sideshow, a kind of Reddit-style stew of internal politics and clashing agendas. Anyone familiar with the company knows that founder Nick Denton likes to stir things up from time to time, as much for his own amusement as anything else. But the latest furore over the taking down of a story has a different feel to it. Once you strip away the noise, it seems like a sign of just how much pressure Gawker is under as a business.

Signs of this clash between the freedom-loving, write-anything ethos of the past and the need to generate revenue showed up in the editorial meetings that Denton held in the wake of his decision to remove a controversial story about a closeted gay media executive who tried to hook up with an exotic dancer.

As Capital New York notes in a piece about a meeting on Tuesday, one of Denton’s main concerns was what he called the “Gawker tax”—that is, the amount of money that the company theoretically loses as a result of its controversial content. According to Denton, that sum is the difference between the revenue Gawker generates and the amount that Vox Media pulls in, which he estimated at around $20 million.

“There’s a thing called the Gawker tax which represents the cost of selling these brands that any moment can blow up, they can blow up because of internal dissension, they can blow up because of a story that goes wrong, and they call it the Gawker tax. My estimate of the Gawker tax is the gap between the revenues of Gawker Media and the revenues of Vox Media, the gap is around $20 million a year and the gap is increasing.”

There are other signs that this tension between the business side of Gawker and the editorial operation has been building up for some time: According to a number of reports, Andrew Gorenstein, the Gawker executive in charge of advertising partnerships—who also sits on the management council that runs the company—asked in a recent meeting “why Sam Biddle hasn’t been fired” because of a post the Gawker writer published that criticized brand-related social media accounts.

In a number of internal discussions, Denton has mentioned Vox Media, the company run by former AOL executive Jim Bankoff that is behind sites like Vox, SB Nation and The Verge. The company recently raised $47 million, giving it a market value of about $400 million, and it acquired Kara Swisher and Walt Mossberg’s tech news site Re/code earlier this year. Although Denton said he doesn’t want Gawker to become like Vox, it seems obvious he is measuring his progress in part by how the company compares.

“I don’t want to close that gap and I don’t want to become Vox Media, but the fact of the matter is that it is really hard to sell Gawker, in particular, because likes to pick fights with pretty much everybody. That’s just the reality.”

Gawker often doesn’t get mentioned in the same breath as Vox or BuzzFeed, perhaps because many see it as a personal playground for Denton, who owns about 70% of the company. But it is a sizeable media player in its own right, with net revenues of $44 million and 70 million monthly visitors (according to Quantcast), which puts it not that far behind Vox. At one point Gawker and BuzzFeed were neck-and-neck in terms of their audience, but BuzzFeed has grown dramatically and now gets 110 million monthly visitors.

In the past, Gawker seemed to operate as though money didn’t really matter, and especially money from advertisers. The site gleefully posted offensive rumors and speculation about almost anyone, and in some cases seemed to take particular pleasure in attacking companies. But it seems clear that Denton believes that can’t continue. So what has changed?

Although some Gawker insiders argue that Denton has gotten soft since his marriage to actor Derrence Washington, what seems to have changed is that the Gawker founder is more concerned now about the future financial viability of the company. In the short term, that could have something to do with the fear of a potentially ruinous court decision in the case of wrestler Hulk Hogan’s sex video, but in the long term Denton appears to be worried that Gawker is going to get left behind as the media marketplace evolves.

Over the past year or so, there has been a fairly dramatic shift in the industry: Several players such as Gigaom (my former employer) have shut their doors for financial reasons, while others like Re/code have been acquired. Meanwhile, entities such as Vox and BuzzFeed have grown larger and raised venture financing in order to generate as much scale as possible.

Denton has talked in interviews about wanting to raise funding by selling a chunk of the company, in part to finance the ambitious new headquarters Gawker is planning to have built in the Flatiron district of New York. And now it seems obvious that he is concerned about advertising revenue. It could be that he is afraid Gawker might wind up a victim of what I like to call the barbell effect: Not big enough to have scale, but not small enough to survive without some major changes in the way the company operates.

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