Online, the equation changes dramatically. Observers sometimes underestimate the expense involved in running a high-quality, high-traffic online publication. But the barriers to entry are radically lower than in print or in broadcast. While a number of aspects of the online ad market have favored advertisers over publishers, simple audience fragmentation goes a long way toward explaining why news outlets have seen their revenue squeezed so tightly. Today, someone wanting political news or movie reviews has dozens of alternatives to choose from or stumble across.

Thus both revenue and costs are lower online. To be more precise, the cost curve has been stretched out. The steep initial investment required to launch a media business is gone, and that has opened up opportunities for low-cost local or topical sites that aim to build an audience in the thousands or tens of thousands. This is the niche occupied by many moderately successful blogs as well as community sites like Baristanet, with modest ad income and even more modest expenses.

At the other extreme one finds large-scale media properties that have substantial technology or editorial costs but that amass enough sheer traffic to turn a profit. The dominant example here is Google, whose 175 million monthly users in the U.S.—generating billions of page views per month—allow it to capture more than 40 percent of the entire U.S. online advertising market. Even considering only “display advertising” (that is, excluding search ads), Google accounts for 13 percent of ad spending. Yahoo and Facebook, the display ad leaders, each claim an additional fifth of the market.

However, most legacy news producers operate in the large and difficult middle of the cost curve, with traffic too low to compensate for the fixed expenses of news production, despite the savings that come from publishing online. In 2010, total operating expenses at The New York Times Co. ran to $2.1 billion, about two-thirds of the $2.9 billion total for Yahoo Inc. Of course, somewhere between a third and a half of the newspaper’s expenses would disappear if it no longer printed a paper edition. But Yahoo has many times more monthly visitors (roughly five times as many, if one counts traffic only to nytimes.com). And while monthly visitors to all Times properties generate fewer than 2 billion page views, Yahoo serves out a staggering 100 billion pages each month.

Justin Smith, president of Atlantic Media Co., argues that these dynamics explain both the opportunities the Internet affords and the stark challenge it has posed to established news providers. “There is a whole wave of new journalism models that have been developed at a fraction of the cost of traditional media,” he says. “Traditional media players are way too set in their ways for reducing cost. They can’t sustain the revenue to support their costs.”

That is not to say, however, that any online venture that falls between a small community blog and Google is doomed to fail. In addition to running The Atlantic, Smith is a founder of Breaking Media, a collection of sites aimed at specific—and affluent—professional communities. Its properties cover law (Above the Law), Wall Street (Dealbreaker), fashion (Fashionista), green transportation (AltTransport), and accounting (Going Concern). Above the Law is the most successful of these sites, with a monthly audience of more than 700,000 unique visitors. Smith won’t say when the company might turn a profit, but his formula depends on pulling together sizable audiences at minimal cost—each site has just two journalists, with ad sales and administration centralized.

Henry Blodget’s Business Insider site is pursuing a similar strategy, on a much larger scale. Blodget has disclosed financial details about his media company, reproduced below, in what was an unusual move for a private firm. “We’re a private company, and we’ve never disclosed any of that stuff, either. But I’m honestly not sure why,” he explained on March 7, 2011. “So we’re going to try an experiment. We’re going to disclose that stuff. Then we’re going to see if something horrible happens to us.”

The statistics tell an interesting story. With forty-five full-time employees, including
twenty-five in the editorial department, Business Insider is hardly a grass-roots effort. In
2010 it cost almost $5 million to run. But unlike many sites of similar size, Business Insider managed to turn a tiny profit in 2010—about $2,127, or as Blodget put it, about enough to buy a MacBook Pro.

One factor accounting for Business Insider’s survival is that the site targets investors and financial professionals rather than a general-interest audience. But that also means it must fight for readers and advertisers with the rest of the financial press, including giants like Bloomberg and Reuters and lower-cost sites like paidcontent.org and Breaking Media’s.

Bill Grueskin, Ava Seave, and Lucas Graves are the co-authors of "The Story so Far: What We Know About the Business of Digital Journalism." Grueskin is dean of academic affairs at the Columbia University Graduate School of Journalism. Seave is a principal of Quantum Media, a NYC-based consulting firm. Graves is a PhD candidate in communications at Columbia University. For further biographical details, click here.