The online slowdown lowdown

While newspaper publishers boast about how rapidly their online sales are growing, the fact is that new media revenues in the first half of 2007 grew at only two-thirds the pace achieved in each of the prior three years.

To be perfectly clear: Online sales climbed at the robust clip of 20.8% in the first six months of this year to an all-time high of slightly more than $1.5 billion. Sales in the same period a year ago were a bit less than $1.3 billion.

Although it sounds nutty to worry about growth like this, you have be concerned when you put those numbers in the context of the industry’s performance in prior years.

In fact, online sales in the first half of each of the years 2004, 2005 and 2006 averaged 32.8%, according statistics provided by the Newspaper Association of America. So, a growth of “only” 20.8% this year is two-thirds of the historical run rate.

While 20.8% growth is way healthy, another cause for concern is the speed at which growth has declerated since the end of last year. As you can see from the graph below, online sales growth dropped from 35% in the fourth quarter of 2006 to 22% in the first quarter of this year to 19% in the second quarter of this year.

This could be a more extreme example of the zigzag pattern of sales growth demonstrated in the earlier years. If so, no worries.

If not, then the abrupt sales decline in the first half of this year could be the precursor of an alarming new trend for an industry that counts on new media as the single ray of hope in an otherwise dismal outlook. As reported here and here, print sales for newspapers (which represent 97% of industry revenues) appear to be headed this year to a 10-year low of $43 billion.

A deep and sustained drop in online sales would blow a hole in the economic assumptions upon which most publishers run their businesses. And it would blow a major hole in the upbeat story publishers have been trying to sell the Wall Street skeptics who have been battering their shares.

What’s behind the deceleration in online sales?

One simple (and comforting) answer is that it is easier to achieve large sales gains off a small base than a large one. If I sold $100 worth of ads last year and sold $133 of ads this year, the sales gain would be 33%. If I sold $1,000 of ads last year and tripled ad sales this year to $100, the gain would be only 10%.

A less-benign cause, however, could be the slowdown in online traffic at most newspaper web sites that was reported recently by the Shorenstein Center at Harvard University. As discussed here, traffic has been flat for a year at most newspaper web sites, save for 10% gains at each of the sites operated by the New York Times, Washington Post and USA Today.

Other potential factors: Ever-greater competition from online venues ranging from Google to Facebook and/or an over-all decline in ad spending related to the housing slowdown, accompanying credit crunch and fears among marketers that consumers won’t be buying as many iPhones, cars or refrigerators as they might have a year ago.

If online traffic and sales indeed are declining at an acclerating pace, then the pressure will be greater than ever on the industry to find compelling new digital products to replace the prevailing practice of shoveling yesterday’s news onto tomorrow’s web site.

In the event online sales do bounce back to quarterly advances of 35% or more, publishers still would be well advised to spend some extra cash on developing a few fresh ideas.