Online Business Model Progress Report

By: Steve Outing

Nearly a decade into the online-news boom, media companies can be proud of their growth and reaching a certain level of maturity. For those news organizations that take the Internet seriously (and that’s definitely not everyone, yet), news sites are a real business, bringing in substantial revenues.

A report released just last week by Borrell Associates Inc. of Hampton Roads, Va., found that daily U.S. newspaper Web sites generated $655 million in revenues in 2002 — or 40% of the $1.65 billion spent on local Internet advertising. (The figure was extrapolated from a survey of 246 papers.) While clearly not every online news operation is yet reporting a profit, those revenues are worth heralding.

Still, business models remain in flux. Debate rages about whether online advertising will grow enough to create real, long-term success stories; whether or not it makes sense to charge for content; whether there are other revenue streams out there, still untapped, that will take the pressure off the advertising model.

To get a handle on the current business models for online news shops, I’ve consulted a handful of experts to get their views — and interspersed them with my own.

You have to work at it



An interesting tidbit from the Borrell report: Web sites of public newspaper companies averaged $7.93 in annual revenue per unique visitor — compared to more than double that for pure-play online companies that operate competitive services, such as Monster.com, eBay, and AutoTrader.com. Within the newspaper group, per-visitor revenues varied widely — from close to zero all the way up to $44.

CEO Gordon Borrell says he saw some good news in those numbers and in the variation between news companies. His researchers found that the newspapers that were doing well were those that had gone beyond the ordinary and had added new revenue streams to the core, obvious ones — like classified-ad upsells and vertical classifieds services (auto, real estate, jobs). The sites that reported higher per-visitor revenues had invested in larger sales staff to push online; they had created services like virtual home-sale tours and aggressively sold them; they had created effective targeted advertising programs on the Web, and were heavily into targeted e-mail services.

In short, says Borrell, business models already exist for newspapers to make decent money online. It’s just that many publishers choose not to employ them.

He says that one of the papers surveyed as part of the “What Newspaper Web Sites Earn” project reported online revenues of “zero” — this from a newspaper with a print circulation of 75,000, whose publisher had chosen to have its Web site merely be an extension of the print product, with no sales staff to monetize the online investment. Borrell was able to find several other newspapers with similar print circulation that had Web sites pulling in between $350,000 and $400,000 in annual revenues. That zero-revenue paper, which already had a Web publishing system in place, had made a management decision not to bother earning money to pay for its online operation, let alone profit from it.

Borrell’s advice to online managers at organizations with similar stories: “Grab the publisher by the shoulders and say, ‘All you have to do is sell some advertising!'”

Can advertising ‘float all boats’?



In the last couple of years, online-news executives have debated whether the dominant model of Web publishing — give content away for free and support it primarily with advertising — is a mistake or the right path long term. While free content is still the norm in the news industry, a significant number of sites have either put up subscription toll gates to their content (and among newspapers, it’s not uncommon for a site to be free to print subscribers but charge all others), or created “premium-content” areas that require an entrance fee while leaving other content free.

But news executives who think that free-content/paid-advertising will not be the primary model long term are misguided, says Peter Zollman, principal of the Advanced Interactive Media (AIM) Group, which specializes in new-media advice to news companies.

Zollman is no fan of counting on paid-content schemes to support news sites — except those sites that serve a defined, targeted niche. His recommendation: Develop effective niche content and find appropriate sponsors for it; package and bundle online content and services with traditional print (or broadcast) efforts; and work hard to sell it to advertisers (which could mean beefing up the sales force). “Lo and behold, then you’ve got a real business — if you work hard and work smart,” he says.

To Zollman, the idea of putting content behind a paid wall — especially when done by a general-interest news organization — is giving away big potential as the online advertising market continues to grow. The payoff from paid content cannot be anywhere near what advertising eventually could bring to the same content, he believes. He cites Belo as one company that aggressively experimented with paid content services but backed off when its executives realized that they were losing more revenue potential by restricting access to some content than they were gaining by charging for it.

“I’ve yet to see a general-interest newspaper make charge-for-content business work,” Zollman says, “even minimally. It appears to have been a gross failure wherever it’s been tried.” That, of course, does not apply to vertical-news sites — like ConsumerReports.org, WSJ.com, and FT.com — which have prospered by charging for Web subscriptions.

Will online advertising really grow to the point that news publishers can cease getting distracted by “trend of the month” debates like paid content? I’ll point to the recent pronouncements by fast-good giant McDonald’s that it will move significant amounts of its ad spending from television to the Internet. Where McDonald’s goes, other advertisers are sure to follow.

Experiment with advertising



Perhaps the recent resurgence in online advertising is the reason behind some innovation at news sites. Most notable are the new “half-page” large-format ads being offered on NYTimes.com, Boston.com, and Forbes.com. The 336 x 800 pixel format offers advertisers an exclusive on inside-article pages, and more room to create compelling, rich-media messages. It’s a format designed with increased online ad spending in mind.

But the online-news industry still seems stuck on old thinking about ads. Annoying pop-ups and pop-unders cling to life. (Visit LATimes.com and you’ll get two pop-unders.) The industry could stand some additional innovation.

One approach worth mimmicking is that of WeatherBug. The online weather service asks users of its proprietary Web application to “select a sponsor” from a list — and that advertisement is wrapped around the service’s content, individualized for the user. Sponsors can be changed by the user, or the user is prompted periodically to select a new sponsor. (Alternatively, WeatherBug offers a paid, ad-free service.)

That’s a great strategy that could certainly be applied by news sites. (Imagine a newspaper site’s weather page, with the visitor given an option of selecting the advertiser to be seen from among, say, an allergy medicine, a sporting good retailer, an airline, etc.) I wonder why it’s not more commonly used.

Likewise, interstitials remain rare — except for the occasional appearance I spot on CBS MarketWatch. A targeted commercial interruption on the way to a particularly excellent piece of content makes sense.

And few have taken up Salon‘s tactic of offering access to premium content by either paying with cash OR watching a 15-second Web commercial. Perhaps as online advertising heats up more this year, we’ll start to see news sites experiment a bit more and offer advertisers such opportunities. (I hope so.)

‘Temporary’ business models



One area that seems to be doing well financially is the digital-replica edition. Using services like NewsStand and Olive Software, newspapers offer digital editions of the paper that are identical in look to the print edition — for a subscription and/or per-issue fee. Zollman, who consults to news companies on this topic and has worked with Olive in the past, says this line of business is demonstrating moderate success — probably because a segment of the Internet-using population is “very comfortable” with the print-newspaper metaphor applied to the online experience.

“I think many people are still comfortable with ‘the newspaper,'” he says. “If they can get the newspaper online, then they like it” — and are willing to pay for it.

But the notion of digital-replica editions succeeding seems counter-intuitive. The newspaper format viewed on a small computer screen isn’t the optimal reading experience. Ergo, the digital-replica model as we know it now may not last as a long-term, successful revenue stream. Zollman says that while he wouldn’t recommend that his clients build a business model around digital replicas, it may make sense to take advantage of the public’s acceptance of the format and willingness to pay for it in the short term. “Advertisers like it. Sales reps understand it. Readers use it,” he says.

Another revenue area that I would categorize as “temporary” is online classified-ad upsells — where sales reps selling classifieds sell online placement on top of print. As Borrell’s project reports, 73% of the typical U.S. newspaper’s online revenues come from classifieds, and half of that is from the oh-so-basic online upsell — what Borrell terms “low-hanging fruit.” He expects as much as half of all newspaper online revenues in 2003 to come from upsold liner ads.

While this is a fine business for online newspapers these days, it won’t last forever. Borrell predicts that classifieds’ share of online newspaper revenues will decline as companies become more adept at exploiting the audiences that their sites attract. “In fact,” the report states, “the revenue growth from non-classified applications, particularly e-mail and other forms of targeted advertising, show far greater potential for growth.”

Yeah, e-mail — that’s good



Anne Holland, a marketing and e-publications expert who edits and publishes ContentBiz.com, says most newspapers don’t seem to grasp the full potential of targeted e-mail newsletters. Especially in trade news publishing, she says, “that’s where the [online] money is” — in paid specialty-content newsletters bringing in subscription revenue and sponsorship money, and in sponsored free vertical e-newsletters. B2B publishers needn’t have all the fun, she says — the same principles should apply to B2C media like newspapers.

Holland says that less money is being made these days from newsletter publishers renting their lists to direct marketers, and she thinks that paid, sponsored e-mail newsletters represent a much larger opportunity.

E-mail is getting to be a more difficult business due to the proliferation of spam (junk e-mail), of course. Spam filters continue to catch opt-in e-mail publications, which calls for a more professional approach to serving an opt-in e-mail audience. But despite all the spam that lands in the typical Internet user’s in-box, Holland points to research showing that people are still opening the e-mail that they request; opened-mail percentages are not going down.

E-docs, search opportunities



Holland also is bullish on e-documents — selling content shorter than a book, but longer than a newspaper or magazine article, in PDF form. By this, she means going beyond the typical dollar-or-two archived article sale and instead creating beefed-up documents worth paying for. A good example of this approach is Tim Carter, a nationally syndicated newspaper columnist who writes Ask the Builder. Carter has built a lucrative small business selling how-to e-booklets on various home-improvement topics — to the tune of some $1 million a year in revenue. (Holland recently profiled Carter for ContentBiz.com.)

“Why aren’t newspapers doing this?” she asks. She recommends not only selling similar e-document content, but also selling sponsorships and delivering a highly targeted audience to interested advertisers.

Holland also recommends selling ads against news-site search queries — not a new concept, but something that’s not being done nearly enough in the newspaper world. Take some time to look at the most common search queries on your site, then start selling those top keywords to advertisers. (Just make sure you clearly label the sponsored links as “advertising.”)

Multiple revenues streams — still



One theme that showed up in all my interviews of online-news experts this week was “multiple revenue streams.” I recommended that as de rigueur in online news publishing way back in 1995, when I wrote a research report for Jupiter Communications on early online newspapers — and it’s still a critical part of the standard online-news business model today.

Michael Zimbalist, executive director of the Online Publishers Association in New York, thinks in terms of legs holding up a stool — where advertising, paid-content services and other revenue streams make up the support structure.

What’s different today than back in the 1990s, he says, is that the online-news business has matured significantly. “We’re adding services based on sound business judgment — it’s no longer a land grab or blind investment.”

While the industry may not yet have reached business-model nirvana, it’s come a long way. Online news is now serious business.

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