Study Offers Surprising Numbers on Newspaper/Yahoo Deal

By: Jennifer Saba

Ever since seven newspaper companies announced with much fanfare an alliance with Internet giant Yahoo in November 2006, scant detail has emerged concerning the revenue upside newspapers expected to reap. More outfits have joined the deal — as of now 17 companies and roughly 400 newspapers — and there is still questions about when the partnership will find its legs.

But now Deutsche Bank analysts have put a pencil to paper, shedding some light on just how much newspapers could stand to gain by joining forces with Yahoo.

Deutsche Bank analyst Paul Ginocchio and his team, David T. Clark and Matt Chesler, estimate the Yahoo consortium could push newspapers into positive revenue territory a year earlier than originally forecasted.

“We believe the benefits from the Yahoo deal could move the revenue and EBITDA inflection points forward, positively surprising the market,” wrote analysts.

The upswing could come as early as 2009, according to the research report.

Even more amazing, the newspapers involved in the deal could see a lift in year-over-year online revenue growth by 20 points by the second half of 2008, from 20% to 40%.

Deutsche Bank believes the greatest advantages of the partnership will come from increased online inventory and traffic, better CPMs due to Yahoo’s behavioral targeting capabilities, and the HotJobs affiliation.

For example, the team points to Lee Enterprises to illustrate the potential with HotJobs. Since Lee fully launched its co-branded HotJobs recruitment sites in February 2007, online revenue soared 62% on average through July compared with an average of 49% from June 2006 through February 2007.

Couple the benefits of HotJobs with display advertising, an area that is growing “gang-busters” — up at least 50% in 2006 — and some consortium members will see online revenue growth rates of 40% for at least two years, starting in 2008.

Deutsche Bank concedes there are several risks that could throw water on the forecast including stalled job growth and a possible recession. And they nod to the alarming drop in print advertising – a fall-off that has occurred during a non-recessionary period. The research firm is forecasting a 7% decline in print ad revenue in 2007, a 6% decline for 2008, and a 5% decline in 2009. Circulation revenue is anticipated to fall 3%.

But this is where the newspapers involved in the Yahoo alliance – especially those that are taking advantage of all aspects – stand to benefit, posits Deutsche Bank.

The team maps out three different scenarios, using 2006 as the base year.

In the first estimate, it’s assumed that online revenue will continue to increase at a strong clip about 25% because either the Yahoo deal doesn’t significantly “move the needle” or helps but not enough to stanch print losses. Total newspaper revenue and EBITDA won’t turn positive until 2012.

In the second scenario, online revenue advances about 40% starting in the second half of 2008 before settling back down to a growth rate of 25% in 2012. The surge is anticipated as newspapers add more Yahoo features, like the capability to sell remnant inventory for much greater CPMs. Total newspaper revenue and EBITDA will rise starting in 2010.

In the third scenario, online revenue growth is much more robust, increasing 40% in 2008, 50% in 2009, and 50% in 2010 before falling back down to a growth rate of 25% by 2011. Total revenue and EBITA growth will hit positive territory by 2009.

Deutsche Bank analysts believe that in the most likely outcome, total revenue will start increasing by 2010. “This is about a year to year and a half earlier than we previously expected,” analysts wrote. “However if we are underestimating the traffic boost the newspapers will get from Yahoo” — now projected at a 10% increase — “this inflection point could be even closer than we think.”

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