Print drives online ad sales at newspapers

Second in a series. Part one is here.

The misguided assumption among those advocating paperless newspapers is that the revenues of the digital-only entities succeeding them will be at least as robust in the future as they are today.

This is dangerously false, because it overlooks the reality that the vast majority of online revenues at most newspaper companies come from print advertisers who are “upsold” to the web when purchasing a print schedule.

It requires a tremendous leap of faith to believe that the marketers who buy print advertising would continue to spend equal or greater sums on web advertising if the publisher eliminated the medium that attracted them in the first place.

Before anyone stops the presses in perpetuity, let’s get a grip on the facts.

As discussed in the first installment of this series, interactive advertising produces only a slender fraction of the total sales at the average newspaper company.

The $3.1 billion of interactive revenues booked by the newspaper industry in 2007 represented barely 7% of over-all advertising sales. While it is possible the industry may have generated up to 10% of its sales on the web in 2008, this is because print has been shrinking so rapidly that the online component has become proportionately larger.

Online revenues are declining, too, though not as fast as print sales. While online sales at newspapers advanced by 31% as recently as 2006, the rate of growth dropped to 18.8% in 2007 and almost certainly will be down by 2% to 5% when the final numbers are calculated for 2008. Few forecasters anticipate positive growth this year, especially since online ad rates on average are approximately half of what they were in 2007.

The worst part of the online sales story at newspapers is that fully two-thirds of revenues at most properties come from the three principal classified categories, employment, automotive and real estate. The verticals have been shrinking sharply for years because each is in state of profound secular decline.

The significance of the industry’s dependence on classified advertising is so great that it’s worth taking a deeper dive.

Classified advertising, which produced 40% of the industry’s revenues and more than 40% of its profits in 2000, generated only 23% of newspaper revenues in the first nine months of 2008, according to the Newspaper Association of America. Between 2000 and 2007:

:: Recruitment revenues fell $4.9 billion, or 56.3%, to the lowest level in 13 years.

:: Automotive sales slid $1.8 billion, or 35%, to the lowest level in 22 years.

:: Real estate sales, which had been the only category showing consistent gains after 2000, plunged sharply in 2007, dropping $1.2 billion, or 22.6%, in a single year.

When the final numbers for 2008 are reported, classified revenues will be down by somewhere between 25% and 30%, based on their trajectory in the first nine months of the year – a trend aggravated by the economic meltdown in final quarter of the year. In but one data point, the Conference Board reports that the number of online job listings dropped by nearly 645,000 listings, or 23%, between December, 2007 and December, 2008.

Though the rate of decay in the classified categories may moderate this year, the dismal state of the economy gives no reason to believe any of the categories will show positive grow in 2009. The crystal ball is too murky to guess what might happen in 2010 and beyond.

The long-running decline in classified advertising is not the product of a weak economy, although it certainly is exacerbated by it. And don’t blame the collapse of classified advertising on simply the bargain rates at Craig’s List, either.

Rather, the decline in classified advertising reflects the new ways employers are hiring workers; a shrinking number of auto dealers and the eight hours that consumers shop for cars online, and the way people will start buying and selling homes among themselves now that real estate agents have lost their multiple-listing monopoly.

In other words, there is absolutely no reason to believe the market for classified advertising will regain its strength whenever the economy recovers.

Even though the changes in consumer and advertiser preferences have been manifestly evident for eight years in the employment vertical, abundantly clear for five years in the auto sector and vehemently obvious in the last two years in real estate, newspaper publishers to date continue to rely to a dangerous degree on the rapidly decaying classified advertising business to generate the preponderance of their online sales.

They do this by encouraging – or, in some cases, forcing – print classified advertisers to buy online ads when they book a print schedule. This is called an “upsell” and, as noted above, it historically has produced roughly two-thirds of the ad dollars at most newspaper websites.

So, what would happen if newspapers stopped the presses and no longer had print ads to upsell from? Several things. All at once. And all ugly:

:: A certain number of advertisers would stop doing business with the publisher because they don’t like, don’t understand or don’t value the web.

:: Web-savvy advertisers doing a bit of comparison shopping would find that the rates for ads at the newspaper website are a whole lot higher than the free listings they can get at Craig’s List, Wal-Mart (via Oodle), Ebay’s Kijiji and many other sites, great and small. Newspapers would be forced to either sharply dial down their ad rates or risk losing a significant volume of business. Either way, revenues would shrink.

:: With their ad revenues constricted, newspapers would discover they no longer could afford the large and well compensated advertising staffs that historically enabled publishers to extract the largest share of advertising dollars in almost every community in the land. An ad rep who previously booked $9,000 in print revenues and $1,000 in online sales now might generate an order for only $1,000 in online advertising – or perhaps less, if the paper were forced to drop its online ad rates to remain competitive in the marketplace.

No matter how aggressively a publisher cut sales expenses to offset the sharp drop in revenues, she never could get them as low as Google or any of the thousands of other do-it-yourself online advertising media that employ no sales staff and, instead, rely on customers to create, schedule and pay for their ads by themselves.

Further, a substantial cut in the sales staff to trim overhead at a publishing company almost certainly would lead to a drop in volume, because fewer people would be calling on fewer prospects.

Newspaper publishers could join Google and move to do-it-yourself advertising, too. But they would have to make substantial investments in promotion and training to successfully migrate merchants in their communities to this new way of doing business. As demonstrated by Google’s recent decision to shut down the do-it-yourself print advertising system it had been offering to newspapers, the adoption of such a radical change is neither smooth nor rapid.

With likely declines in both ad rates and volume after the discontinuation of the print product, the typical digital-only newspaper company would be left with a notably smaller advertising base than it has today.

This necessarily would force economies throughout the organization. And the department that could be cut the most easily would be, as always, the newsroom.

Next: Newspaper web traffic depends on print, too

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