Online Ad Revenue Keeps Rising, but Will it Fly in 2008?

By: Jennifer Saba It wasn't too long ago when the online division of newspapers was considered an afterthought, the red-headed stepchild of the business. While publishers struggled to figure out how to adapt content to the Web, online ad inventory was practically given away for free ? a bone thrown to advertisers spending money in print.

The Web is now maturing into favored status, with online revenue just about the one good thing going for newspapers these days. The Interactive Advertising Bureau (IAB), in conjunction with PricewaterhouseCoopers, reported record-breaking highs for Internet advertising revenue in Q3, up 25.3% to $1.1 billion, compared to Q3 '06.

Borrell Associates, meanwhile, expects a 48% increase in 2008 to $12.6 billion for local online ad spending.

The Newspaper Association of America reported that in Q3, online ad revenue for the industry grew 21.1%. For the same quarter in 2006, online ad revenue increased 23%; for Q3 2005, it advanced 26.7%. So the growth is slowing but industry observers suggest once the Yahoo partnership kicks in fully, newspaper online revenue should soar.

With this in mind, there is a sense out there that newspapers are still leaving money on the table. To hear Greg Harmon, director/Interactive at Belden Associates, tell it, it's more than chump change. "Local newspaper Web sites are profoundly underpricing," he says. "Their concept of price elasticity and variability focus around the orbit of print. ... They are very reluctant to get aggressive with online pricing."

He divides online advertising into two chunks, local and national. Both are very different. The national online advertisers, he contends, are hard drivers looking for low CPMs (cost per thousand) for aggregate buys.

On the local level, "it's a completely different universe," Harmon adds. He believes online newspapers can start talking about $20 and $30 CPM as only a starting point. When he makes that suggestion to newspapers, "typically, they faint," he says. "And then we take out the smelling salts. They still price 25% below our recommendation rate because they don't believe it works."

A study from Borrell Associates pins the problem on the structure of the ad sales department. The research firm found that while local online is poised to surge, newspapers are losing share to pure-play Internet companies.

Why? Media properties (i.e. newspaper Web sites) that rely on a sales force to hawk print and online inventory suffer, Borrell contends. "Nearly all of the local media companies that focused on convergent sales strategies have begun experiencing slower growth," analysts wrote. "They may be reaching a saturation point at which their traditional reps have sold all the online advertising they can to their existing customer base."

To wit, Borrell holds Gannett ? netting $400 million in local online revenue for the first nine months of 2007 ? as Exhibit A. For that period at Gannett, online revenue growth slowed to 7.5% while the local online market grew more than five times that rate. "Hiring online-only salespeople should be well worth the investment," Borrell analysts reported.

And why not, since online newspapers have several things going for them, including a sought-after audience and environment? "Newspapers have those in spades," says Ben Crain, vice president of marketing and alliances with Rapt, a San Francisco-based software company that helps with pricing and inventory. "Marketers will place a premium on getting in the right environment and in front of the right users."

Selling that inventory requires a new mindset. Explains Lorraine Ross, VP of advertising sales at USAtoday.com: "Everything has gone from mass to niche, and newspapers are still very broad by nature." It's in the industry's nature to appeal to the most people. But as far as online advertising is concerned, "news-papers shouldn't be pushing their mass mandate," she adds.

At the same time, Ross says she has noticed a rise over the last 18 months in what she calls the "indirect market," or middleman ad exchanges that sell online space instead of a client buying it directly from a newspaper.

The indirect market is a double-edged sword. It allows for more money to flow to the Internet, but it also commoditizes the impressions (as the ads are usually bought in bulk), thus lowering rates. "There is competition within the [selling] channels," Ross adds.

What it really comes down to is this: newspapers do a lousy job convincing everyone ? readers, advertisers, investors, the FCC, and even themselves ? of their worth. Harmon says it best, "We are unconvinced of our own value." Get some confidence and start spreading it. "For local businesses you can make the value case and win," he says.