AI Takes the Write Way

Welcome to The Rundown! Each week we'll identify and break down for you SPACs that are capturing market share and making an impact.

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Digital Publisher BuzzFeed's stock has seen an epic rally in the past week, with most of the gains driven by the company's decision to use Artificial Intelligence tools like OpenAI's ChatGPT to build quizzes and write content. Essentially, investors have been cheering about the potential for improved profitability and content that can be written at scale by using these various tools. This is a welcome change for the media outlet, which has seen its advertising revenues plummet, its site traffic decline across the board, and its balance sheet crumble. Using AI, BuzzFeed plans to turn around its business by personalizing content to drive traffic, increase affiliate revenues and improve its margins. However, with the macroeconomic backdrop worsening, will the digital media's pivot into AI prove to be the key ingredient, or is it just more Buzz? 

BuzzFeed's Existential Crisis 

Before we delve into BuzzFeed's recent AI push, let's take a look a brief look at the company and the circumstances that led to the situation. Founded in 2006 by Jonah Peretti, BuzzFeed is a digital media company that has a portfolio of websites such as , Tasty, and the recently acquired Complex Networks (for $300 million). Over the last decade, BuzzFeed has used its quizzes and pop culture articles to target millennial and gen-z readers.

Other media outlets also saw a boost from the pandemic, as time spent on digital platforms rose significantly, with most stuck at home. However, with the economy reopening, website traffic and time spent online have fallen across the board. Couple this with the macroeconomic uncertainty, which has resulted in a drop-off in advertisement rates and affiliate revenues, and BuzzFeed has seen a slowdown compared to the hypergrowth in 2020-21. Furthermore, inflation has pushed up costs, which has led to widening losses compared to the past few years. 

If all of these factors weren't bad enough, BuzzFeed's SPAC deal left the company with a severe liquidity crunch (the company raised only $166 million vs. estimated proceeds of $439 million that it initially anticipated). As a result, the company now has over $230 million in debt and close to $60 million in cash, leaving it with under twelve months of runway.

All of this brings us to last week when BuzzFeed announced plans to use AI tools, including OpenAI's ChatGPT, to create personalized quizzes and other content to improve its profitability and unit economics. In hindsight, the digital publisher's decision to use such tools is a no-brainer considering the current backdrop. The next big wave in digital media has been quite clear for some time now. Just as algorithms propelled BuzzFeed to the forefront of the digital revolution, we can expect AI to play a major role in shaping the future of digital media in the coming decade. 

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Personalized Content at Scale 

By using AI tools, BuzzFeed will be able to better personalize its content targeting individual interests while reducing the cost of generating content and improving overall margins. BuzzFeed said that over the next fifteen years, AI would create, personalize and animate the content by itself rather than just curating it. Digital Media has slowly been losing its shine over the last five years, as independent creators and industry experts have resorted to owning the distribution themselves rather than working with third-party media outlets to publish stories.

Confidence in institutional media is also at an all-time low, with just 16% of adults saying that they trust newspapers/tv news. Using Artificial intelligence will not only solve the problems with bias, but it can also mean infinitely more viewpoints and perspectives for potential stories, as opposed to the pieces written today to just get the highest clicks. BuzzFeed's adoption of AI, paired with its investments in the creator network (the company plans to have over 200 creator partnerships by the end of 2023), shows a clear sign of where the company is headed next. 

Rather than try and emulate every other large media conglomerate, BuzzFeed wants to target and capture audiences in niche demographics. By leveraging AI tools, it can significantly reduce potential investments and stay lean. Targeted criticism of AI-assisted reporting remains as robust as ever, especially from established media outlets. For instance, tech site CNET and its parent company Red Ventures came under fire from outlets like The Verge, Engadget, and Futurism for using AI tools to write its stories. The site had to issue corrections on 41 of the 77 stories published using AI, with skeptics saying that AI will never replace human writers based on its error rates.

While the argument partly holds true (at least currently), there's no substantial evidence that proves that human writers are better than AI tools consistently. Newspapers, Digital Media Sites, and News Shows on TV routinely post corrections or retractions after publishing and, when questioned, defend their publishing standards rigorously. AI tools are only getting started, and whatever quirks currently exist will probably get ironed out in the next year or two. With better accuracy, more personalization and flavor, and the potential to offer different perspectives, AI articles could not only be more interesting than the current crop of news but also prone to fewer errors. 

Financials and Valuation 

BuzzFeed had seen its market cap shoot up 4x over the last week to $290 million, although this is still a fraction of the company's value when it initially went public through a . BuzzFeed's revenue growth has slowed in recent months (expected to reach revenues of $435 million in 2022), but the biggest challenge is the drop off in margins, with the company reporting a net loss of $55 million in the last twelve months. Considering that the company had only close to $60 million in cash and over $230 million in outstanding debt, it is imperative to cut costs, improve its cash flows and deleverage its balance sheet. 

BuzzFeed has taken several steps to cut costs, improve efficiency and streamline its business over the last few months. The company reorganized its segments, shrinking its news division to make the business more profitable. The media outlet also announced that it had laid off 12% of its workforce, or 180 employees, to cut costs and turn profitable. Finally, it said it was making strategic investors in the creator network (to more than double the number of creator partnerships by the end of the year). The increase in creative partnerships, paired with AI tools, should lead to higher advertising and affiliate revenues while also improving margins. 

Bottom Line 

BuzzFeed is looking to disrupt the digital publishing landscape by tapping into the creator market for distribution and using AI tools from the likes of OpenAI. The company has seen its growth and profitability take a hit over the last twelve months due to a general economic slowdown and a drop in advertising rates. By reorganizing its businesses, reducing headcount, and creating personalized content, the publisher wants to scale its business while staying lean. The recent run-up in the stock and the company's subsequent leap in valuation remains far-fetched, given that it has yet to prove itself on its execution, so investors should wait to see how it all pans out before taking a position.  

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Source: AI Takes the Write Way