By: Jennifer Saba
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.
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.”