Over past few days I have been dealing with a flu-gone-wild. It is not exactly the way I wanted to spend my days, but sometimes cold happens. The good news, if there can be any, is that I had a lot of time on my hands to watch a lot of video. In my case it is usually one of the four shows: Wallander, Sherlock Holmes (with Jeremy Brett), Poirot and House M.D. It is mostly House MD, because well, I am a House MD junkie.

As luck would have it, I was watching season one (for probably the 25th time) and came across  probably my favorite episode — DNR– where John Henry Giles, a saxophonist, falls sick. He goes to the hospital. There is a lot of drama, and somewhere along the way he tells Dr. House:

The reason normal people got wives and kids and hobbies, whatever. That’s because they don’t got that one thing that hits them that hard and that true. I got music, you got this. The thing you think about all the time, the thing that keeps you south of normal. Yeah, makes us great, makes us the best. All we miss out on is everything else.

One Thing

When I look back at my own life as a writer, I somehow related to that “one thing” theory. Sometimes I wonder if that is my curse. But mostly I think of it as my blessing. Thinking, obsessing, composing — writing it all down on crevices of my brain before putting it to paper (or computer.) There are days when I fall asleep thinking about a story, only to find the entire story appearing magically which I am asleep and getting up in the middle of the night and writing it all down on a piece of paper that always is next to my bed. It is a process that is all-consuming.

It is that “one thing” that made me read and re-read magazines, books and anything I could get my hands of in the 1980s India and learn how to write. Not just write, but think and write and write. It mattered to me more than anything — love, family, home and even my own identity.

I didn’t do it because I thought I would make some money or get paid to do it. Thirty-five years later, I still do it because I don’t really have a choice, because I don’t really know any other way. Writing, painting, creating –creators don’t do it because they want to make money. Creativity is not a profession, it is a gift. It was, is and always will be a very selfish act.

And the reason why I bring this up is because of the raging debate around writers, freelancers and how they are getting paid. I am bringing this up because of all the handwringing about the changing landscape. When I see all the arguments — whether it is Nate Thayer’s story about The Atlantic editor asking him to write for free in exchange for exposure, or The Atlantic’s Alexis Madrigal’s story of being a digital editor/writer or Felix Salmon’s unvarnished truth about the problems of online journalism – I empathize with each and every one of them. (My colleague Mathew Ingram has his nuanced take on the situation, and is worth reading.)

End of freelance?

Why? Because I sat on all four sides of this table. I have been an unpaid freelancer. I was a mistreated poorly paid staffer. And I was also employed by a magazine that was gorging at the dot-com orgy. And thanks to a lucky set of circumstances, I have been an employer. I have written for the paper and I have written for digital. I have been paid and I have been the payer. I have been a writer and a businessman.

What my changing roles have made me aware of is the reality of today’s media business (something we’ll be talking about at our paidContent Live conference on April 17 in New York). Back in the day when it was an all- print business, the newspapers were always looking for ways to fill pages to support more advertising. More advertising meant more broadsheets to fill and more money to spend on whatever went next to advertising.

Magazines charged a heck-of-a-lot more money than papers. The more ads they sold, the more money they doled out to the writers. If I remember, one of the Red Herring issues in 2000 put Bride magazine to shame. It was full of so many ads that I had to work on four stories for the issue — just to support the advertising. I was not privy to the freelance budget but the freelancers at Red Herring were getting paid quite handsomely. Then, advertising vanished and so did the freelance money and eventually the publications themselves.

In other words, the spending on editorial was in direct correlation with the advertising dollars. Today, the ad dollars are hard to find, both in print and on the web. Sure, more dollars are being shoveled towards online properties, but then there are more zebras around this pond. Media publications are fighting with YouTube, Twitter, Facebook, Google and Amazon for ad dollars. But, then you knew that already.

Frankly, it sucks. Not just sucks, it royally sucks. It boils my blood just thinking about the changes — but change it is and one has to live with it. And that is the biggest reality of our times.  Maybe the reality of this post-blogging, post-Twitter world where words exist for mere minutes, freelance writing isn’t an option anymore. As Felix Salmon so eloquently writes:

The lesson here, then, is not that digital journalism doesn’t pay. It does pay, and often it pays better than print journalism. Rather, the lesson is that if you want to earn money in digital journalism, you’re probably going to have to get a full-time job somewhere.

My personal view, shaped by the my own experience, is that if you are going to take freelance contributions, then pay something — just as a sign of respect (if not the true worth) of a writer’s capability.

We have used freelance writers in the past and have always paid them — not a lot because we didn’t have a lot — but then we came to the conclusion that it didn’t really make sense in today’s always-on, constantly updating media ecosystem. We tried the monthly contract model but in the end decided that we want to adopt an in-house model. Today we have a few guest writers who write because of their love of our site and they do it for free. But we are still a team of our own.

Brave old (new) world

The reasons are actually pretty simple. Our roots are in blogging and we have a certain view of the world. In order to keep a consistent voice (not editorial style), we need to have a team that has an ability to look at the world through the same lens. That identifies us to our community of readers and it also helps us stay true to who we are and what we believe in. And most importantly it allows us to build a metabolic rate that suits us and create products that make sense to us.

We know that advertising isn’t the golden gateway, so we decided to go the way of paid content via our research business. And because we don’t put all our eggs in advertising, it means that we don’t have to be beholden to the heroin of page views and pray at the temple of traffic.  Others chose to do things differently — but we have decided to go down a different path.

Tomorrow, if they take everything away from me — the company, the job, the fame, the money — and leave me with a piece of paper. I know I will be 15 again, I will still write. And I still will have a reason to live. Just like Nate, Alexis, Felix and every other writer who gets up every morning to do that one thing… just one thing.

Considering all possible scenarios — not just the most optimistic ones — let me show you why and how much Pinterest earns.

Madrigal calculates Pinterest revenue from its only known source — affiliate fees from SkimLinks. “So, Pinterest has 10 million users,” writes Madrigal. “Let’s say that the average across all of them is that they buy items valued at $10 in a month through affiliate links on Pinterest. That’s $100,000,000 of sales for which Pinterest would get credit. That’s $3.75 million in monthly revenue, or $45 million of annual revenue.”

There are two problems with this calculation. One, no one verified whether Pinterest generates enough traffic to generate 10 million transactions per month. Two, revenue numbers based on broad assumptions have uncertainties that are not quantifiable. For example, how likely is it that each user is generating $10 a month?

Let’s look at the first problem. What kind of traffic should Pinterest generate to websites to deliver 10 million transactions per month? According to the Top 500 Guide: Profiles and Statistics of America’s 500 Largest Retail Web Sites Ranked by Annual Sales, the average conversion rate of website visits to sales is 4.3 percent. That means Pinterest must garner 232 million visits to result in 10 million transactions.

How does that compare to total traffic to all online stores? Data collected by Complete says online stores receive a total of 662 million visits a week, or 1,434 million visits a month. This means that in order to justify Madrigal’s estimates, Pinterest must account for 16.1 percent of all online retail traffic. That’s a tall order. According to Shareaholic, Pinterest only drives 3.6 percent of referral traffic. It is safe to say that Madrigal’s numbers grossly overestimate Pinterest’s page views, transactions, and hence its revenues.

Regarding the second problem with revenue models based on assumptions, let me clarify that it is not possible to avoid assumptions when it comes to privately held companies. However, we can start with smaller, more granular and better assumptions, and we can use statistical models to quantify the uncertainties in them. Instead of making such assumptions as 10 million transactions per month and $10 average transaction size, let’s build out a model from its components.

Sales from Pinterest links = Number of transactions/year X number of active users X transaction size

Pinterest revenue = Sales from Pinterest links  X percentage of affiliate fees

Each variable in these two equations are unknowns that must be estimated. Instead of assuming an average value for these numbers, we estimate the low and high values that we’re 90 percent confident about.  To be 90 percent confident about an estimate, we need to have a low and high value such that there is only 10 percent chance that the real value falls outside of the range.

Here are the numbers I used based on my research.

(Note: Pinterest has more than 10 million registered users. I generously estimated that they have one million to five million active users who click on product links and make at least one to 18 purchases a year.)

There are two advantages to this approach. First, we are estimating many smaller numbers. And secondly, we are quantifying our uncertainty in our estimates. As we gain more information about any one of the components, we can refine the estimates.

Once we have this range for each component, then we can calculate Pinterest’s revenue numbers using a statistical modeling method called the Monte Carlo method. It’s like imagining living your life 10,000 times to find out how many different lives have certain outcomes. For Pinterest, we’re trying to discover how many different scenarios yield different revenue numbers.

The results are stunning:

1. Thirty-three percent chance Pinterest makes more than $10 million a year
2. Twenty-five percent chance it makes more than $12 million a year
3. One percent chance it makes more than $36 million a year
4. Less than .25 percent chance it makes the $45 million number quoted by Madrigal
5. Considering all possible scenarios, the expected value of its revenue is just $9 million.

A $200 million valuation based on high revenue numbers that have such a low chance of being true is a risky bet. Clearly, the VC firms focused on the most optimistic scenario — regardless of its chances — and didn’t account for the entire spectrum of scenarios. But that’s business as usual in the Valley.

Rags Srinivasan is a management professional who specializes in strategic marketing. He recently published, “To Group Coupon or Not,” and he blogs at Iterative Path and tweets at @rags. 

Featured image courtesy of Flickr user Mykl Roventine.

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