Journalism needs new business models. Hunterbrook Media’s is a bad one

The news media’s quest for a holy grail to replace the advertising revenue that used to be its mainstay has had some success. A new funding emporium is slowly emerging, with fresh money from foundations, sugar-daddies and sugar-mommies, spinoffs and special events, readers now called “members,” advertisers now called “partners,” and even state and local governments discovering a sudden fondness for their shriveling hometown press.

And now we have a news organization that makes its money by betting on the fallout from its coverage.

Meet Hunterbrook Media, an investigative business news startup launched in April with a staggering $100 million in funding. It is co-owned with an investment house that tries to profit from the bad news Hunterbrook unearths.

Here’s how: Suppose your reporters learn that a company whose shares are traded publicly is doing questionable things. Maybe it makes promises it can’t keep, claims income or prospects it doesn’t have. Maybe it’s run by frauds or incompetents or is about to suffer a major reversal. Exposing any of that will probably drive down the company’s share price.

So far, this is routine for the prestige business press. Its job is to make sure reputations are deserved and market values are warranted. And it’s routinely fed by a sturdy industry of research analysts who hunt for stocks that are heading for a fall.

That’s the world of the short-sellers, who bet on that fall. They borrow shares in companies they believe are overvalued — promising to return them to the lender later on — and sell them. Then, after the stock price falls, the short-seller buys up the shares at the new reduced price, gives them back and pockets the difference.

Shorts have long stoked negative coverage of targeted companies in the business media, which are hungry for the good stories that make for bad press.

What’s new is for the media to wet their own beak, which is precisely what Hunterbrook wants to do. With a scathing story ready to run, it alerts its allied investment house, Hunterbrook Capital, which can take a short position in the target’s shares, betting that the story will crater the stock. (Surprisingly, as long as the reporting is based on publicly available information, that doesn’t violate insider trading laws.)

Hunterbrook seeks to monetize its journalism in other ways, too. Anticipating its inaugural investigation published in April about the leading U.S. home loan originator United Wholesale Mortgage, Hunterbrook reasoned that the company’s doings might be grounds for a class action. So it shared its findings pre-publication with a top litigation firm, Boies Schiller Flexner, and reached out to other law firms about possible securities fraud.

Hunterbrook argues that this journalism makes money that should be shared with the people who earned it.

“There are so many people and organizations that benefit from the work of good media, who are capturing a lot of financial value from it, except for the people in the organizations who are actually doing it,” said co-founder Nathaniel Horwitz, among a constellation of blue-chip financial and editorial people associated with Hunterbrook. “I think there’s an opportunity to reinvest that value in the people who are actually doing the work.”

Well, putting cash in the reporter’s tip jar seems worthwhile. And even if we might prefer taking the traditional, winding road by which the marketplace has incentivized journalism in the commercial era — strong coverage brings more (or richer) readers who bring more advertising money — that route is no longer a robust option.

So has Hunterbrook hit on a legitimate new model for journalism to pay its way, or is there a problem?

Yes, there is a problem. Several of them.

First, although Hunterbrook applies careful and skillful journalistic technique, it isn’t journalism. That’s because journalism’s standing as a profession means that its primary duty, regardless of who signs the paycheck, is to its client — the public.

The risk management expert, CIA intelligence analyst, PR adviser, private investigator, financial consultant — all produce incisive reports on contemporary realities, using documents, source interviews, in-person observation. In that regard, they’re just like journalists.

But they aren’t. They do it to serve their private clients; the journalist does it to advance the state of public knowledge in the vague but evergreen hope of civic betterment.

Hunterbrook has built its editorial strategy around a signature business goal: Tipping off its financial partners so they can invest shrewdly and benefit from preferential access to the information its reporters have turned up. Playing that angle profitably is what defines editorial success. Public illumination, if any, is a side benefit.

Second, if profit-seeking is the point, why stop with shorting overpriced shares? You might just as well invest in competitors that would benefit from the market’s revenge, as Hunterbrook did by buying shares in a United Wholesale Mortgage rival. And why not skip the negative news altogether, and go the traditional direction of the lap-dog press by fawning over companies you invested in so their share price will rise?

While we’re at it, why limit yourself to financial assets? The local paper that blows the whistle on a toxic landfill — why wouldn’t its publishers put their chips behind the companies most likely to profit from the cleanup? Or if good reporting turns up pending zoning changes, why shouldn’t they grab tracts that will be upzoned before other would-be investors?

Third, and above all, is the matter of trust. At its most basic, trust in a media organization rests on confidence that its motives are sound, and that it has no ulterior goals that might keep it from acting in the interest of the public it purports to serve. To its credit, Hunterbrook pledges that it won’t allow its investment plays to color its reporting. But its editorial vision — its basic judgments about what matters — still rests on a revenue model built on the anticipation of financial gain for privileged insiders.

Hunterbrook has promise as a source of energetic reporting to help keep businesses accountable. But using that editorial strength to steer private side-bets on the impact of its coverage is a corruption of the public service motive that drives its reporting, and inspires not hope for the future of journalism but a deepened despair.

Edward Wasserman is a media ethicist and professor at UC Berkeley’s Graduate School of Journalism, where he is a former dean.