SPECIAL REPORT: Can Online Ads Save Us?
NEW YORK Staff cuts, shrinking newsholes, angry investors, plummeting
circulation, pessimistic analysts, stagnant print advertising revenue
-- the business model that has sustained the newspaper industry for
more than a century is now in flux. To prosper, or at the very least
survive, newspaper owners and publishers are increasingly banking on
the rapid advertising growth of their Web sites.
You can hear it on the quarterly conference calls and investor
presentations. Just three years ago, online strategies were still
somewhat muffled in the conversation. Not anymore, as the December
presentations with analysts and investors in New York City again made
clear. The Internet has become the lede.
The Newspaper Association of America's quarterly tallies of
circulation and advertising revenue now emphasize surging online
readership and double-digit advertising gains. Ugly FAS-FAX circ
numbers and print ad-revenue declines often are buried in the
announcements.
The investments made by newspaper companies are telling, too. When
rumors surfaced that Gannett was making a play for the troubled
Tribune Co., it allegedly wasn't for the newspaper or broadcast
properties. Gannett reportedly expressed interest in Tribune for its
stake in the online recruitment powerhouse CareerBuilder, also owned
by McClatchy and Gannett.
The chatter really picked up in late November when seven newspaper
companies announced they were forming an alliance with Internet
behemoth Yahoo. The deal means newspapers will have access to
technology, traffic, and national advertising while Yahoo will lean on
newspapers for local content and local ad dollars.
Merrill Lynch analyst Lauren Rich Fine wrote in a note about the Yahoo
partnership: "We are somewhat mixed about the implications for the
newspaper industry, but ultimately believe this is a worthwhile
experiment."
Since the announcement, the group has mushroomed and now includes more
than 200 newspapers from Belo, Cox, Hearst, Journal Register, Lee,
MediaNews, Scripps, and Media General. The papers involved in the deal
exclusively use Yahoo's online recruitment arm and one-time newspaper
competitor, HotJobs. But that's just the first step: The partnership
will extend into other areas of online advertising, including paid
search.
Although the growth of online advertising is taking off, it started
from a very modest point. While growing at double-digit clips, it
still represents only a fraction (roughly 5%) of total revenue. The
NAA forecasts that online ad revenue at newspaper Web sites is
expected to advance 22% in 2007 over the prior year. Yet even after
all that, it will still be dwarfed by print ad revenue. Just look at
the Q3 industry results: Online advertising rose to $638 million, NAA
reported. Print revenue, despite showing declines of 2.6%, still stood
at $11.1 billion.
The print slide, along with a stream of new online partnerships --
Google is another foe-turned-friend-with-benefits -- produces heavy
pressure, and perhaps even a sense of foreboding. Newspaper executives
are under the gun to scramble and grab as much online revenue as they
can in order to cover the shortfalls of print circulation and ad
revenue. Outsell Research estimates the rapid decline of the
traditional moneymaking model over the next five years will set the
industry back $20 billion. The Web has already proven it can make up
at least some of that gap. The question is: How long will it take for
newspaper Web sites to grow enough muscle to really bolster, or even
carry, the business?
Closing the gap
Peter Aman, a media practice partner at consulting firm Bain & Co. in
Atlanta, observes, "It's not really about ad sales. The issue is about
the business model." Newspapers, he explains, "put up content and try
and monetize it. Content businesses have some of the worst economics
in terms of absolute dollars."
Each unique newspaper online user, he notes, might bring in somewhere
between $5 to $10 dollars in ad revenue. Compare that to one print
reader (or one unit of circulation) at a regional newspaper, who he
says brings $1,000 in revenue.
Closing that gap becomes ever more difficult. Citigroup research
analyst William Bird and his team wrote in a report that newspaper
fundamentals -- print circulation and ad revenue -- have not hit
bottom. "We expect the U.S. newspaper industry to exhibit five years
of declining operating income," the report stated, but added,
hopefully: "After year five, continued growth in newspapers' online
revenues should offset the secular pressures in the print business."
Those strains are by now painfully familiar: "the democratization of
information, higher Internet adoption rates, and the migration of more
advertising to the Internet, particularly classified."
Just as alarming is the impact the Web has on print circulation. The
report points to a prediction that could be scribbled on a doomsday
sign: By 2010, 35% of all broadband households will have likely
terminated their newspaper subscriptions.
Jason Klein, president and CEO of the Newspaper National Network,
thinks that could bring benefits, however: "I suspect most papers will
go to a hybrid model, like The Wall Street Journal, in order to get
complete access to the Web. For one price you get a print edition and
a very robust Web edition. ... I would imagine in five years, no one
will be selling just a print newspaper."
While Citigroup is forecasting a five-year transition, Merrill Lynch
estimates are much more dire. Fine wrote in a report that she and her
team do not see online representing more than 50% of total newspaper
ad revenue for at least another 30 years. That assumes double-digit
growth for online ad revenues through 2012 and then 5% thereafter, and
print revenue declines of 1.5% annually. "Moving from a near monopoly
to a competitive model is having the impact of restraining blended ad
rates and absolute dollar profits," Fine wrote.
Under pressure
Boston.com, the online arm of The Boston Globe, is just one of many
newspaper Web sites feeling the heat. The newspaper has been sacked
with declining circulation and advertising revenue, which means
Richard Gair, the site's vice president and general manager, is
expected to pick up the slack. He says, "There's a lot of pressure to
grow [online revenue] in excess of the industry average."
If the stress to perform seems daunting, giants like Google, Yahoo,
and Microsoft's MSN (and don't rule out TV Web sites that are ramping
up online) are looking for new grazing ground. "It's been my belief
the big guys like AOL, Yahoo, and MSN have their backs up against the
wall with advertising," says Gordon Borrell, CEO of online research
and consulting firm Borrell Associates in Portsmouth, Va.
"They are not going to be able to satisfy this incredible hunger for
growth without getting into the local market," he continues. "They
can't do that. Monster has tried that, and can't do it. Even the
Yellow Pages guys need to buy billboards in town and send in a SWAT
team for three months. They have to have people in the [local
market]. Yahoo can't invest in people in every single market."
He adds: "So what are they doing? Forming relationships with newspaper
groups."
Conversely, in order for newspapers to increase online revenue, they
need to quickly expand not only in the local market but at the
national level as well. In turn, newspapers have to increase traffic
to woo national advertisers. Says Ken Doctor, an affiliate analyst
with Outsell Research, "The Yahoo deal is a really good example of the
industry saying, one of the biggest problems we have is attracting ad
revenue because we simply don't have enough traffic. We need to
greatly multiply the number of people who see the stuff we produce so
we can take in more ad revenue."
The Yahoo alliance signals that newspapers are willing to try to
capitalize on their grip on the local market while realizing it might
have to give up some control to build out the network. "There's an
acknowledgement there that newspapers are not going to be their own
channel of distribution in the future," Doctor adds. "They are making
a nebulous pact with the future. They are giving up a sense of
control. They are giving up a percentage of revenue going forward --
probably forever."
Several industry observers think newspapers should band together to
form strong networks. Whether Yahoo (or Google or MSN) is the best way
to go about it remains to be seen.
"While we appreciate the participating newspapers' attempt to tap into
local online advertising by partnering with Yahoo, the partnership
also seems an admission that papers have to give up some economics
online in order to broaden their distribution," wrote Merrill Lynch's
Fine in a November note. "Giving up some economics versus potentially
missing out completely might prove to be a good decision, not to
mention that papers will gain access to technology."
The alliance so far has clearly articulated its recruitment strategy:
Newspapers in the network can upsell advertisers to the HotJobs
platform. Neither the newspapers nor Yahoo will disclose the revenue
share, and Doctor writes on his blog that each company signed a
separate deal with Yahoo. Robert Jiranek, vice president of sales and
strategic planning at Scripps-owned The Commercial Appeal in Memphis,
Tenn., told Business Week that his newspaper will receive 80% of the
revenue for the HotJobs portion of the deal.
For sure, recruitment advertising is only one aspect of the pact.
Lincoln Millstein, senior vice president/director of digital media at
Hearst Newspapers and an active participant in forming the
partnership, says that while conversations about the alliance grew out
of HotJobs, newspapers wanted more than help-wanted help. When
Millstein bumped into his counterpart at MediaNews Group, Eric Grilly,
he pressed him for more details about the Denver-based company's
relationship with Yahoo's recruitment site. In August 2005 Millstein
and Grilly arranged a dinner to discuss other possibilities that could
extend beyond online help-wanted advertising.
"We felt that Yahoo had a lot more to offer than just one vertical,"
says Millstein. "I think if we were to just pick one vertical" like
CareerBuilder, he adds, "we would not have done this deal."
Millstein, who joined Hearst in the newly created position after
working for The New York Times Co., says that the pressure was always
there to increase online ad revenue — and that this deal made the
most sense to ramp up. "[There's] a realization that we need to be
much more expansive in digital strategies and look for partnerships to
achieve scale," he says. "The Internet is really about networks, not
branded destinations."
From Yahoo's perspective, teaming up with newspapers was a
no-brainer. "It's part and parcel of Yahoo's strategy to seek high
quality distribution partners," says Hilary Schneider, senior vice
president of Yahoo Marketplaces and a former senior vice president of
Knight Ridder and CEO of Knight Ridder Digital. "Newspapers really
represent that in a lot of ways. They are an ideal partner because of
their high quality brands and their content is inherently local."
HotJobs competitor Monster, meanwhile, wasn't going to get caught
staring into space and decided it too needed newspapers to grow its
online revenue. Monster started talks with papers in 2005 when
whispering of a Yahoo/newspaper partnership began, explains Peter
Newton, Monster's general manager of small and mid-size businesses. The
job site discovered that in order to gobble up more recruitment share,
it needed to team up with newspapers.
So far, 43 newspapers are aligned with Monster, including The
Philadelphia Inquirer and The Orange County (Calif.) Register. "It's a
very important strategy for us to penetrate local markets," says
Newton, who used to work for Boston Works, the Globe's recruitment
arm. "We believe we can do that much more quickly and successfully by
partnering in a long-term relationship with local audience
leaders. Newspapers are a logical first choice."
The Yahoo/newspaper pact also could be viewed as a thumb in the eye for
CareerBuilder. During Media Week in December in New York,
CareerBuilder's CEO Matt Ferguson put on a brave face. He told analysts
and investors at the Credit Suisse presentation that the Yahoo deal is
"something to be watched."
Christian Hendricks, vice president of interactive media at McClatchy,
suspects that the deal will affect CareerBuilder in the markets where
HotJobs or CareerBuilder do not have a presence. On the Yahoo deal he
observes, "I think it's a pretty positive thing and holds a lot of
promise."
McClatchy's Hendricks will not rule out future partnerships with
Yahoo, MSN, Google, and AOL -- even though McClatchy owns a stake in
CareerBuilder. He says it's up to Yahoo if it opts to bring more
papers into the fold. On McClatchy's test run with Google's print-ad
placement program, Hendricks says he is "stunned" -- in a good way --
by the results they have seen so far. Of the seven McClatchy papers
participating, 90% of the ads placed through Google are from new
advertisers.
Deal with the devil?
Yahoo, for its part, has fallen behind Google in search and is
undergoing its own internal transition towards content aggregation.
Yahoo CFO Susan Decker, who orchestrated the newspaper deal, was
recently elevated to head the advertiser and publisher group. (She is
seen by observers as the company's heir apparent to Chairman/CEO Terry
Semel.) In preparation for this shift, Yahoo launched a major project
dubbed "Panama" to upgrade the search function for serving contextual
ads.
The newspaper group is negotiating with Yahoo to use the portal's
souped-up search function on their sites, Millstein says, where Yahoo
would be serving sponsored links.
It would work like this: Sfgate.com uses Yahoo's technology to serve
sponsored links that are pertinent to the article. Another piece of
the deal would allow newspapers to use Yahoo as the primary search
bar. Newspapers can also lean on Yahoo's ad serving platform to serve
banner ads tapping into Yahoo's technology for its national reach and
the ability to better target local ads on the newspaper's Web site.
"They have a tremendous network and sophisticated ad serving," says
Millstein about Yahoo. "It's a big win for us. We could rely on their
infrastructure and garner some revenue." He argues the newspaper group
would never negotiate a deal that would damage the print medium, but
that could happen subtly, regardless. There's been some concern that
by joining the Yahoo network -- or Google, or any other large online
property with superior technology -- that cash cow newspapers are
going to give away too much milk.
Classified Intelligence's John Zappe wrote in a December report on the
Yahoo deal: "It's a roll of the dice and a hard-way bet. Losing means
becoming a Yahoo vassal, selling its products and producing content to
feed its portals. Winning isn't clearly defined."
Boston.com's Gair concedes that while they partner with Google on a
cost-per-click basis, and that relationship has been "good," he
realizes the big players are licking their chops over the potential of
local advertising. "As they get more local, we need to make a stand
and not necessarily partner with them," he says. Boston.com launched a
local search product in December.
Like Boston, San Diego is moving into the same headwind. Both cities
have high broadband penetration and savvy Internet audiences, and the
challenge for both Web sites is to increase traffic. But Chris
Jennewein, Internet operations director for The San Diego
Union-Tribune's SignOnSanDiego.com, is still weighing his options.
The Web site agreed to partner with Yahoo's HotJobs for recruitment, but
then stopped short. "We are actively considering the alliance,"
Jennewein says. "We had been in discussions as early as September." But
since then, the Union-Tribune's owner, Copley Press, has gone through
some changes, announcing the sale of several newspapers in Ohio,
California, and Illinois. That was one reason the U-T didn't jump on
board immediately.
It also bought more time: "Any national advertising arrangement needs
to fairly benefit both sides as well," Jennewein adds. "There are
challenges in creating an equitable distribution of traffic under a
wider partnership. I think this is something that all parties want to
achieve."
Betting on the wrong horses
Beneath the online growth results for newspaper Web sites lurks some
disturbing news. While Merrill Lynch forecasts online revenue to grow
23.3% in 2007, that's down from the 2006 estimate's growth of 34%. The
gains get smaller as the years go by: In 2010, Merrill Lynch predicts
online ad revenue will advance 8.1%.
Newspapers are also losing share. Borrell Associates estimates that
newspapers will garner about 36% of the $5.8 billion that advertisers
spent on the Internet in 2006. The problem, Borrell notes, is that
just two years ago, newspapers' share was 44%.
Two factors account for this: Newspapers often hitch online
advertising to their print advertising, essentially upselling online
ads. As print revenue declines, online revenue tied to the print
edition naturally falls. Secondly, newspapers, says Borrell, are
concentrating on the slowest growing portion of online advertising:
banners and listings. (For more forecast data, see p. 52.)
Borrell projects that in 2007, local online advertising will grow
roughly 30%. Of that, local paid search is estimated to grow 86.1%,
local e-mail is expected to grow 54.3%, and local banners and listings
are forecast to grow 18.5%. "This is why [newspapers] are losing
share," Borrell tells E&P. "Local banners and listings are the lowest
growth. They are missing out on the highest growth categories."
Also, newspapers need to look to national accounts. Jennewein notes
that national advertising is one of the industry's "greatest areas of
opportunity" and that it involves being part of many networks.
But newspaper Web sites will have to overcome the stigmas attached to
print newspaper advertising -- especially for national and regional
advertisers looking to buy across several publications.
The same headache-inducing problems for advertisers looking to make
buys across several print newspapers still exist at the Web
properties. Specs, technology platforms, rate cards, and availability
of space all vary online.
Shawn Riegsecker, president of the Chicago-based Centro, acts as a
middleman between advertising agencies and their clients who want to
place online ads. He estimates that some 30% to 40% of display ads are
from national and regional accounts, but that newspapers are well
positioned to capture more online ad dollars.
"Clients are moving away from [the portals] as fast as they can,"
Riegsecker observes. "Why would they do this? Because the portals have
been top-of-mind and established value propositions and they are
simple to buy across the country, so they received the majority of ad
dollars. What advertisers are finally beginning to see is that the
portals own and produce very little content. Most brand advertisers
want their brands associated with great editorial. Newspapers own more
content than any industry in the world."
But to capitalize on that, newspapers need to move away from a set
rate-card mentality and start pricing online inventory according to
supply and demand. It's a concept understood well by TV and radio;
those advertisers know that during sweeps, ads will cost more due to
tight availability.
Liz Phillips, group media director at New York agency MEC Interaction,
sought out newspaper Web sites for one of her clients,
Gallo. Internally they dubbed the campaign "start spreading the news,"
since it involved new positioning for the Gallo family vineyards.
Gallo wanted a grassroots feel to the blitz, so it turned to newspaper
Web sites as opposed to the homepages of portals. They advertised in
15 markets through Centro -- and Phillips didn't have any problems
placing the display ads. "We had a great experience," she says, adding
that the campaign lifted awareness and purchase consideration.
Bank of America also looked to newspaper Web sites when it wanted to
tout a philanthropic campaign enticing customers to visit
participating museums for free. They really didn't consider
advertising on, say, a portal's financial page. "At the bottom of the
purchase funnel, when someone is looking for local financial
information, they will go to their local newspaper's [Web site],
versus the stock quotes on national sites," says Roni Jenkins, east
coast director at media agency Prometheus. "You can't get that kind of
local detail on a national site."
Boston.com's Gair sees a lot of opportunity for user-generated content
that features video. The site, for example, just started a program
where users can upload videos of high school sports. On the
advertising side, since many of Boston.com's users access the Internet
through broadband, he says the site can run "more
aggressive-creative."
Additionally, Boston.com can target a users' behaviors thanks to the
required- registration data it began collecting in 2005. So if an
advertiser is looking to reach a business-minded user and the business
section is sold out of inventory, that user might also read the
general news section.
So what's the next step?
Newspapers are indeed showing a willingness to move a little faster
than in the past. Borrell notices that executives understand the need
to change, and they are doing more than just navel-gazing. He says
he's working with one newspaper company, with which he spent the day
strategizing about what they are going to do to improve local search.
More important, Borrell adds, they wanted to know how they were going
to implement those ideas.
When asked if other papers currently involved in deals with Monster
and CareerBuilder could one day join the Yahoo alliance while
maintaining their ties to other recruitment platforms, Millstein says
the group wouldn't rule that out: "We are taking a much different
approach to this consortium and the industrywide efforts that have
been made in the past."
Those past deals, like the failed News Century Network, were massively
complicated, with too many personalities involved. "Obviously, the
landscape has changed," Millstein adds. "I think we have a cast of
people and CEOs who are much more willing to take risks."
Jennifer Saba (jsaba@editorandpublisher.com) is associate editor of E&P.
Read more at http://EditorandPublisher.com
Copyright 2007 Editor and Publisher.
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