Yahoo! for Yahoo?

Newspaper publishers who partnered with Yahoo are seeing such significant online sales increases that they could start producing positive over-all revenue gains as early as 2009, says one Wall Street analyst.

That would be a welcome change for an industry that has endured six straight quarters of accelerating revenue erosion and appears to be headed to its worst annual print sales in a decade.

“In our top-down industry model, we've been expecting industry revenue growth to turn positive around 2010-2011, with EBITDA growth turning positive a year later,” says Paul Ginocchio, the Deutsche Bank securities analyst who thinks the Yahoo partnership could rally the gloomy industry. (EBITDA, which stands for earnings before interest, taxes, depreciation and amortization, is the way newspapers commonly gauge their operating profitability.)

Given the early positive online sales performance of the newspapers collaborating with Yahoo, “we believe this deal could move ahead by a year or more the inflection point where online revenue gains offset print declines,” says Paul.

He is so enthused by what he sees that he is urging clients to buy shares of Lee, the only newspaper publisher to date that has embraced the full range of Yahoo partnership possibilities. Lee's reward has been a 56.2% leap through August in year-over-year interactive sales. Sorry, folks, Lee is the only “buy” on Paul's list.

Yahoo struck a deal earlier this year to sell online advertising in partnership with such publishers as Belo, Hearst, Media General and Media News. Biggies like Dow Jones, Gannett, the New York Times Co. and Tribune, who have separate online initiatives of their own, did not join the consortium. And McClatchy, whose online sales have fizzled this year, elected to participate in some parts of the joint venture but not others.

The first and most prominent manifestation of the Yahoo-newspaper venture was an agreement to have newspapers promote and sell advertising for HotJobs, the Yahoo online recruitment site. The ambitious deal also extends to cross-selling local ads, national banners and keywords in search results.

Thus, as I wrote earlier, Yahoo locked up “the largest, most experienced and best-connected local sales force in every market participating in the program.” As the busiest web site on the planet, Yahoo contributes a high profile, billions of page views and a technological astuteness that has eluded most newspapers.

Pointing to the early success achieved by Lee and other Yahoo affiliates, Paul sees four benefits to newspapers from the Yahoo partnership: more online ad inventory, more website traffic, higher ad rates and a welcome share of the revenues Yahoo generates by selling national ads to run on local newspaper sites.

With Yahoo's help, says Paul, banner-ad revenue, which he calls the long-time “poor step-sister” of classified advertising, could grow by as much as 50% this year at participating papers – and soar at still higher percentages in 2008 and 2009. He believes sales from HotJobs and other Yahoo classified products could more than double to 11.6% in 2008 from 5.1% in 2007.

Throw in a bit of new search revenue, and the consolidated online sales at Paul's prototypical newspaper could leap 40% annually (or better) between 2008 and 2010, he says. That would surpass the industry's average online sales growth of 20.8% in the first six months of 2007, which happens to be two-thirds the rate sales grew in the first half of each of the prior three years.

After two or three years of 40+% online sales growth, says Paul, interactive revenues would become sufficiently large at newspapers to offset the anticipated continuing decline in print ad sales. If it all comes together as Paul predicts, at least some publishers could be posting positive over-all sales gains as soon as 2009.

Paul’s encouraging hypothesis implicitly assumes there will be no major shocks to the economy and that no new disruptive forces will emerge to vector advertising dollars away from the print and online media traditionally sold by the newspapers and Yahoo. Given a two-year weakness in auto advertising, the deteriorating real estate market and the questionable future strength of help-wanted advertising, you can see how things might not materialize as smoothly as Paul would have it.

In the meantime, however, the 56% lift in online sales at Lee certainly has one publisher hollering, “Yahoo!”

Yahoo! for Yahoo? Maybe not.

The jumbo online revenue gains at Yahoo’s newspaper partners may be transitory and short-lived, say publishers struggling to sustain initial lifts they fear they can’t replicate in the second year of the agreement.

While online sales increased in the neighborhood of 50% for some publishers who began cross-selling Yahoo’s HotJobs along with their traditional recruitment products, executives on the eve of the one-year anniversary of the partnership say it will be difficult in the second 12 months to equal its first-year success.

The Yahoo newspaper consortium, which launched in November, 2006, was forged by Belo, Cox, Scripps, Hearst, Journal Register, Lee Enterprises and MediaNews Group. Although publishers hailed the deal at the time as “transformational,” executives now are worried about maintaining the encouraging early momentum.

“We aren’t anywhere near matching the initial gains,” says an online executive at one of the earliest publishers to partner with HotJobs. “We are struggling and I don’t see how we are going to make it.”

If this experience proves to be commonplace, it would throw cold water on the idea that hefty, double-digit advances in online sales in the next few years could help Yahoo’s newspaper partners offset an appreciable portion of their declining print revenues.

As previously reported here, one Wall Street analyst hypothesized that the newspapers teaming with Yahoo could boost their online sales by a large enough amount to achieve positive over-all sales gains as soon as 2009. Paul Ginocchio, the Deutsche Bank analyst, premised his forecast on newspapers being able grow online sales by no less than 40% annually for a period of three straight years.

While year-to-date online ad sales at a publisher like Lee Enterprises are 56% stronger in 2007 than they were prior to the HotJobs deal, some executives are worried that the year-to-year numbers after the first anniversary won’t grow at anything close to the original pace.

Industry-wide, print newspaper classified revenue fell nearly 16.5% in the half of this year to $1.97 billion, according to the Newspaper Association of America. Although the NAA does not report online revenues by category, total newspaper online revenues gained 20.3% in the first six months. In the same period, Monster.Com, the leading independent online job site, reported a 22% gain in sales.

Even though Monster seems to be growing at a respectable clip, online newspaper sales can’t help but be dragged down by the eroding print side of the business, which historically was the reason help-wanted advertisers came to the newspaper in the first place. If advertisers are migrating to online vs. print recruitment, it doesn’t necessarily follow that they will stick with newspapers, especially since Monster often is cheaper than newspapers and Craig’s List is free in all but a handful of major markets where its top price for a help-wanted ad is $75.

In addition to the above challenges, newspapers face two additional hurdles in their pursuit of back-to-back years of 40% or 50% gains in their online-recruitment sales.

First, newspapers entering the second year of the Yahoo partnership won’t have the one-time infusion of new revenues they got when they initially added HotJobs to their existing recruitment efforts. A restaurant serving only lunch and dinner can boost its sales quite a bit by opening for breakfast. But it can’t add other meals in the second, third and fourth years to match the first-year bonanza.

Second, help-wanted advertising seems to be declining in concert with a real, or perceived, slowdown in the economy. Employers are thinning their payrolls in response to tighter credit, the housing slump and a feared pullback in consumer spending.

In fairness, there’s more to the Yahoo partnership than HotJobs. The venture also includes mutual cooperation in the sale of national, local and search advertising. While some of those products already are reflected in the improved online numbers for newspapers, it is likely they can be developed further.

At the moment, however, HotJobs is the major factor driving the Yahoo revenue surge. And the outlook for that vertical isn’t auspicious.

“We think recruitment advertising will slow further, even if the economy avoids a recession in 2008,” says John Janedis of Wachovia Bank.

So, publishers counting on Yahoo to rescue them may want to consider some alternative juju, too.

Newspaper web sales lag by every measure

By every measure, online advertising sales at newspapers seriously trail the growth of the rest of the interactive market in the United States. And the industry is falling farther and farther behind.

The inability of newspapers to capture and retain their fair share of digital advertising likely is one of the reasons that a growing number of publishers are thinking about charging for access to their websites.

Frustration over fast-shrinking online market share also may be why some publishers were so outspoken at their annual convention last week about the revenues they believe they are losing to online aggregators and to web publishers who violate newspaper copyrights by running unauthorized stories on their sites.

Several indicators illustrate the failure of the newspaper industry to thrive online. The following facts emerge from an analysis of sales data reported by two trade groups, the Newspaper Association of America and the Interactive Advertising Bureau:

:: Interactive revenues for newspapers dropped by 1.8% in 2008 to $3.1 billion at the same time over-all online ad sales in the United States surged 10.4% to a record $23.4 billion. See Sales Growth graph below.

:: Where there was only a $6.1 billion spread between annual newspaper sales and total online revenues in the United States in 2003, the gap widened to $20.3 billion in 2008. See Annual Revenue graph below.

:: The newspaper share of online revenues, which peaked at 16.2% in 2005, has declined annually ever since, dropping to an all-time low of 13.3% in 2008. See Market Share graph below.

Although it is reasonable to expect that newspaper market share would shrink in light of the explosive rise of online competitors ranging from YouTube to teeny blogs earning a few bucks a month from a handful of keyword-ad clicks, this argument seems insufficient to explain why online newspaper advertising declined last year when the sales of the over-all industry rose by more than 10%.

One of the reason newspapers trail the over-all online industry is that they offer no search advertising, the largest and fastest-growing category of online advertising. Those are the keyword-driven ads that appear next to searches at Google, Yahoo and Microsoft and other search sites.

Another reason for the under-performance of the industry is that newspapers are inordinately dependent (discussed previously here) on generating online sales from their traditional print advertisers, a business that is in both secular and cyclical decline.

As of the end of 2008, print advertising sales had dropped 23% from a record high of $49.4 billion as recently as 2005. Deep print sales declines likely occurred in the first quarter of this year, too.

The worst part about the print-to-web “upsell” strategy is that a substantial portion of online newspaper revenues historically came from classified ads sold to three verticals suffering mightily in the economic downturn: recruitment, automotive and real estate.

Even before the collapse of the economy battered each of these categories, advertisers increasingly had been shunning high-priced newspaper advertising in favor of sites like Craig’s List, sites targeted to job seekers in particular professions and sites optimized for selling houses or cars.

The only way newspapers can turn around their lagging digital sales performance – assuming it can be turned around – is for them to develop web and mobile venues that are less like newspapers and more like the interactive, viral and fun environments operated by their competitors. (More tips here.)

Newspapers also will need to develop more sophisticated online revenue solutions than selling the dollar-a-holler, backfill ads they use to fill the substantial banner inventory that many of them seem unable to sell on their own.

What would Google do about newspapers?

This guest commentary comes from Bill Grueskin, the academic dean of the School of Journalism at Columbia University and former managing editor of WSJ.Com. For an alternative look at Google’s role in the emerging news ecosystem, see this prior post, Don’t Blame Google for Newspaper Woes.

By Bill Grueskin

Marissa Mayer is the Google executive whose rigid adherence to improving the user experience helped vault the company to pre-eminence. But her elliptical comments at a congressional hearing on the sorry state of the newspaper industry revolved around a message that seemed to add up to: “Lotsa luck, fellas.”

Mayer, who is Google’s vice president of search products and user experience, appeared Wednesday at the Senate commerce subcommittee hearing called by Sen John Kerry (D-MA) to consider ways the government might aid ailing publishers.

Mayer’s prepared remarks weren't easy to decipher – perhaps because Google itself is under such scrutiny these days, including from federal regulators. So, here are some excerpts from her testimony (in bold), along with suggested translations:

"Every day, millions of people search the Web for relevant answers to their questions. In response, search engines strive to connect each user with the right results…. Google is one such search engine that people use to find answers online."

Google is indeed one such search engine. It appears there are others, but it’s been a long time since anyone has said, “I’m going to AltaVista that guy before I go out on a blind date with him.”

"Another service we offer is Google News…. We show people just enough information to invite them to read more -- the headline, a line or two of text, and a link to the news publisher's website."

That’s true, but many Web readers are entirely satisfied with just a headline and summary. They won’t tolerate the painful load time of news sites, and dislike seeing a single story broken into four or five sections just to drive more page views.

"Together, Google News and Google search provide a valuable free service to online newspapers specifically by sending interested readers to their sites at a rate of more than 1 billion clicks per month. Newspapers use that Web traffic to increase their readership and generate additional revenue."

A billion clicks sounds like a lot, until you divide it among thousands of news sources and then figure most of those page views generate a penny each, at best, for the underlying sites.

"We allow site owners to choose whether or not Google can index their sites. … So, while we think inclusion in a search engine can drive a lot of beneficial traffic, our policy first and foremost is to respect the wishes of content owners."

You want someone else to get the traffic? Be my guest.

"By providing relevant ads and improving the connection between ad"vertisers and our users, Google AdSense creates billions of dollars in annual revenue for publishers. In fact, in 2008, that figure exceeded $5 billion in revenue for AdSense publishers. "

“Publishers” is a very broad term here. It includes every blog, site and news organization that uses AdSense.

"The atomic unit of consumption for existing media is almost always disrupted by emerging media. … The structure of the Web has caused the atomic unit of consumption for news to migrate from the full newspaper to the individual article. As with music and video, many people still consume physical newspapers in their original full-length format. But with online news, a reader is much more likely to arrive at a single article."

Now we’re getting to the core issue. In other words, people used to buy newspapers to get disparate chunks of information (sports scores, movie times, local-government coverage, weather forecasts) that papers provided, yet those readers were effectively subsidizing the entire newsroom. By atomizing content, the Web makes each story instantaneously and ubiquitously accessible, meaning newspapers have gone from the profitable front end of the distribution chain to the unprofitable back end.

"Treating the article as the atomic unit of consumption online has several powerful consequences. When producing an article for online news, the publisher must assume that a reader may be viewing this article on its own, independent of the rest of the publication. To make an article effective in a standalone setting requires providing sufficient context for first-time readers…"

So, news sites spend a lot of time coming up with links from current stories to past stories, blog posts, data from other sources, etc. That works great in a search context, where people are often looking to dive deeply into specific topics, but far less well in a news context, where time is as important, or more important, than depth.

"…while clearly calling out the latest information for those following a story over time…."

So good news sites now update top stories constantly, which is incredibly important online, and is also incredibly expensive and time-consuming, with opportunity costs of its own.

"It also requires a different approach to monetization: each individual article should be self-sustaining."

Yes, it should be, but it isn’t. Most mid-tier news sites’ stories get under 5,000 page views. It’s hard to justify a reporter spending even a half a day on that story if it’s going to generate $50 in revenue (assuming a most generous $10 CPM).

"These types of changes will require innovation and experimentation in how news is delivered online, and how advertising can support it."

Lotsa luck, fellas. Even the brilliant minds at Google haven’t figured this one out.

"A much smaller but important factor for online newspapers to consider in today's digital age is the fundamental design and presentation of their content."

Too many news sites are clunky, slow, and packed with links no one clicks on. Why can’t you design a home page with this kind of elegant simplicity?

"When a reader finishes an article online, it is the publication's responsibility to answer the reader who asks, “What should I do next?” Click on a related article or advertisement? Post a comment? Read earlier stories on the topic?"

A few years ago, the mantra was, every article page is a home page. So editors bulked up article pages with related links, interactive doodads, and so on. And in the end, they found out that it’s the referrer, not the referree, that still winds up with the bulk of the traffic.

"Preserving robust and independent journalism at the national and local levels is an important goal for the United States. Google is doing its part by driving significant traffic to online news publishers, by helping them generate revenue through advertising, and by providing tools and platforms enabling them to reach millions of people."

Google isn’t to blame for news publishers’ problems, which began long before the company was founded. So, lay off.

Inflated traffic stats cloud pay-wall plans

Newspapers trying to assess the financial impact of potential paid-content schemes are starting with a wildly inflated sense of the size of their online audience that could come back to bite them in a big way.

In “nearly every market” included in a study of 118 newspapers of every size in every part of the country, Greg Harmon of Belden Interactive found that publishers on average report the number of unique visitors to their websites is 1.3 times larger than the population of their respective communities – and fully 10 times greater than their print circulation.

Those numbers are not just moderately overstated. “They are magnificently incorrect,” said Harmon, who presented his findings to an industry conference earlier this week sponsored by the American Press Institute.

Worse, no one knows what the true numbers are. And that’s a major problem, because:

Understanding the true size of news-site traffic is crucial to developing a model that will accurately predict the revenues – and the inevitable audience loss – that would result from any paper’s decision to charge for the content it now provides for free.

To illustrate the enormity of the miscalculation that could be produced by basing a paid-content model on the wrong audiene number, let’s consider the case of Newspaper X. The hypothetical paper serves a community of 1 million residents, has a circulation of 100,000 copies and claims 1.3 million unique monthly visitors at its website.

If the publisher of Newspaper X starts out with the belief that she has 1.3 million unique visitors to her site and generously assumes that 15% of them will pay $4.50 per month to read the news, then she will project that charging for content will produce $10.5 million in annual subscription revenue.

But what is the likelihood that NewspaperX.Com really has 1.3 times more readers than the number of people who live in its city? Common sense, as well as Greg Harmon, will tell you the chance is implausibly slim.

To develop a more conservative projection, the publisher of Newspaper X could trim the number of unique visitors to equal the 1 million people who live in the market. Based on the assumptions described for the first case, the paper’s annual online subscription revenue would fall to $8.1 million, or 23% less than would be produced by starting with 1.3 million unique visitors.

But let’s get serious. Could every man, woman and child in town really be logging on to the newspaper’s site at least once a month? Not likely.

What if the actual number of unique visitors to the newspaper site happened to equal the number of its print subscribers? If the true traffic to the site were only 100,000 unique visitors per month, then online subscription revenue would be just $810,000 per year, or 76% of the sum that would be produced by 1.3 million visitors.

Don’t like those outcomes? Pick any unique-visitor number you want. No one can argue with you, because publishers haven’t the slightest idea of what the right number might be.

The online traffic numbers cited by most newspapers today are generated by server -logging systems that are almost universally acknowledged to overstate the number of individual visitors.

But publishers to date haven’t worried about cleaning up their data, because the unrealistically high figures generated by their systems support the story they like to tell about the broad reach delivered by their combined print and online products.

Advertisers typically haven’t been fussed by the inaccuracy, because they buy print ads by the inches and online ads, for the most part, according to a certain number of page views. As long as the publisher states she delivered the promised number of inches and page views, the advertiser is happy.

Now that publishers are trying to decide whether and how to charge for access to their websites, however, it is absolutely essential for them to know true size of their audience.

This information matters not only for the purposes of projecting potential revenue but also – and perhaps more importantly – in guessing how many visitors would stick around if they suddenly were required to pay for the content they are accustomed to getting for free.

As Harmon has discovered in studying the website traffic at dozens of newspapers for several years, online news consumers are not created equal. The audience, he says, falls into three distinctly different categories:

:: 25% of the unique visitors consist of loyal readers who visit a newspaper site an average of 20 times per month and sometimes multiple times a day.

:: 21% of the audience comprises incidental readers who visit between one and three times a month.

:: 54% of the visitors are what Harmon calls “fly-bys” – people who may come once a month in response to a link on another website that steers them to the newspaper.

Given their low engagement with news sites, incidental and fly-by readers don’t appear to be prime candidates for paying for content. Further, it seems reasonable to surmise that most would spurn a site demanding payment, possibly never to return.

If you are a publisher trying to intelligently evaluate the business potential of charging for online content, you are left with a spreadsheet full of holes:

:: You don’t really know how many unique visitors you have.

:: You have to guess at the percentage of loyal visitors who will be amenable to paying for content.

:: You have to guess the price loyal visitors might pay.

:: You have to estimate not only how much web traffic you will lose but also how far your ad revenues will tumble in response to the almost certain decline in page views.

Put it all together and you can see why half of the publishers in the United States can’t decide what to do about paid content. Given the frightening uncertainty they face, it’s a wonder more of them aren’t straddling the fence.

The case for charging to read WSJ.Com

First of two parts

Proponents and opponents of paid content often invoke the subscription model at the Wall Street Journal Online as the reason for why their point of view is right.

In the following guest commentary, Bill Grueskin, former managing editor of WSJ.Com, sorts through what he calls “a few common myths” to provide insights into why and how the Journal came to be the most prominent pay site on the web. He left the Journal last summer to become the dean of academic affairs at Columbia University’s Graduate School of Journalism.

By Bill Grueskin

February 2005 was a tough month for those of us who worked at the Wall Street Journal Online, where I was in my fourth year as managing editor. A slew of media experts were telling the world that we were making a mistake of historic proportions by keeping WSJ.Com a paid site.

The criticism usually followed the same route. First, the author would invoke the obligatory paean to the Journal’s historic greatness. That would be followed by a tsk-tsking that the Journal had walled itself off from the “conversation” and thus was en route to irrelevance, followed by obsolescence.

Then, the elixir: Take down the subscription wall, make the site entirely free, and rake in those huge mounds of advertising revenue (time frame for that TBD, but trust us, it’ll come) that will more than compensate for the sudden absence of circulation revenue.

So, author Michael Wolff told a software trade group that February that the Journal was once “one of the truly astounding information franchises.” But then, he invoked ominously, “something happened” in the mid-1990s. “The Journal kind of disappeared. The Journal went out of the conversation as a point of influence…. It seemed to, if not stop existing, at least stop mattering.”

Wolff didn’t drop his argument there. He says he had “spent a lot of time thinking what happened because … it feels something of a puzzle and a little bit of a tragedy.” Applying the same rigorous research to his remedy as to his hypothesis, he determined thus: “The answer is the online thing. I think the fact that the Journal felt that it was powerful enough to charge, and for a long time everyone regarded the Journal's activities online as the ultimate. They had unlocked the puzzle. In fact, I don't think they did. I think they locked themselves into a puzzle.”

Shortly thereafter, Wired columnist Adam Penenberg warned, more in sorrow than in anger, that the Journal “is in danger of becoming irrelevant.” Penenberg applied more stringent standards to reach his conclusion than Wolff, not by quoting anyone from WSJ.Com or citing usage data, but by typing “Enron” and “Wall Street Journal” into Google search and finding only a few results. And so, Penenberg concluded, anyone doing research online (“and there are a lot of us”) were stymied from seeing Journal stories, and the Journal would become an unknown entity to a new generation of web users.

Penenberg made no mention of the fact that WSJ.Com’s subscriber base was growing more than 10% a year, or that overall Web traffic was growing faster, or that WSJ.Com had by then embarked on an aggressive effort to make individual stories freely available to bloggers and other third-party sites.

There was no need to, because he was able to quote blogger J.D. Lasica who was also thinking he might just (but hadn’t yet decided to) drop his WSJ.Com subscription because he was finding it so hard to link to Journal stories.

Four years later, the world is a different place. Major metro papers are closing or whittling back publication of their print editions. Most of their online sites are generating 10% or less of the advertising revenue that the print versions did. And suddenly, the Online Journal is being cited for its prescience and examined for whether it could be a model for struggling news organizations.

Amid all of that, I see a lot of theorizing about why the Journal now attracts nearly 1.1 million subscribers. Some of it came from a discussion last week hosted by the Los Angeles Times which involved two friends of mine, Jeff Jarvis (author and journalism professor) and Alan Mutter, who writes this blog. I asked Alan if I could use his excellent blog to offer another perspective.

There are a few common myths about how the Journal got to where it is.

The most common is that, as Jeff says flatly in the L.A. Times debate, “Its subscription fees are paid on expense accounts.” There. He just states it as if it is, channeling Jane Austen, a truth universally acknowledged. In fact, I recall several years ago that a Dow Jones executive said publicly that a survey of WSJ.Com readers showed less than a third of subscriptions were expensed. Of course, no one knows for sure, because subscribers aren’t required to disclose this to anyone other than the IRS. But the idea that the model is not replicable because of tax laws is unsupported.

Second, Jeff questions, as have others, how much the costs of acquisition, retention and commerce management weigh against online subscription revenues. In fact, churn was never very high at the Online Journal – far less than at most newspapers or magazines – and the marginal costs of new online subscribers were pretty close to zero. Most of the acquisition cost amounted to some cheap advertising and a couple of percentage points to the credit-card company. Otherwise, unlike in the print world, there’s no additional cost in delivery, paper, ink or such.

Third, many people dispute the idea of WSJ as a model because the site provides business information. There is both myth and truth to this. The truth is that, both emotionally and intellectually, readers can more easily find financial value (and justify paying a subscription) for a Heard on the Street stock analysis than a dispatch from the Baghdad bureau. Same goes for paying for someone plunking down $800 for a new refrigerator and deciding to subscribe to Consumer Reports. But if financial sites are such easy marks for subscribers, why are Fortune, BusinessWeek, Forbes, CNNMoney and even Bloomberg all free online?

One day last month, a Columbia Journalism student asked me in class why WSJ.Com had started as a paid site. This moment reminded me of the scene in Annie Hall (about two minutes into this), where Woody Allen produces Marshall McLuhan to refute (OK, I get the irony) a pompous Columbia instructor pontificating about the media.

At the class, I turned to my co-instructor, Peter Kann, former CEO of Dow Jones and the person ultimately responsible for the paid strategy.

“I made the site paid because I was ignorant, “ Kann told the class. “I didn’t know any better. I just thought people should pay for content.”

Next: Can the WSJ model work elsewhere?

So you won’t miss the next installment, sign up for the email alert or RSS feed in the right rail. Your privacy will be protected and the email address will not be used for any other purpose.

Online ad share slips at papers

Internet advertising sales at newspapers this year have grown at slower rates than those of competing media, shrinking the industry’s share of online revenues in the third quarter to the second-lowest level since 2004.

Notwithstanding sunny press releases from the Newspaper Association of America, the evidence is growing that the industry – which prominently and properly has targeted digital sales as a top strategic priority – is simply not keeping up with the universe of companies that sell online advertising.

Online ad sales in all media surged 26% to a record $15.2 billion in the first nine months of the year, according to PriceWaterhouse-Coopers, which conducts a quarterly survey for the Internet Advertising Bureau, a trade organization. By contrast, newspaper sales grew 20.9% in the same period to $2.3 billion.

While a sales gain of nearly 21% ain’t chopped liver, the comparatively weak momentum achieved by newspapers means that the industry’s share of the online revenue pie is shrinking at a time when publishers can least afford for that to happen.

Because online newspaper sales are growing more slowly than those of their competitors, publishers in the third quarter corraled only 14.7% of the total available revenues. Between April, 2004, and June, 2007, however, the newspaper industry never controlled less than 15% of industry revenues and, in fact, averaged quarterly sales growth of 15.9% throughout the period.

Although newspapers were slow to wake up to the threat of the Internet – and even slower to grasp its myriad bountiful opportunities – they actually surpassed the online Internet competition in quarterly sales growth from the middle of 2004 to the middle of 2005. As you can see from the graph below, however, they have been trailing the over-all industry’s growth pace since then (with the exception of the fourth quarter of 2006).

One reason newspapers may be lagging is that they have tried to bundle print and online sales into combo packages sold by all-purpose sales reps, who, depending on their pedigrees, either don't get new media, don't get print, or, in a few depressing cases, don't get either. The somewhat counter-intuitive argument that convergence selling is a failure is discussed here at PaidContent.Org and well worth a read.

While it would be wrong to make too much of a single quarter's sales slip, it is troubling to note that publishers collectively have under-performed their online peers for three quarters in a row in spite of an intense, high-profile effort to pump up their digital businesses. If the industry is going backwards while trying as hard as it can to move forward, it either isn't trying hard enough or isn't trying the right things.

Whatever challenges publishers have faced to date, the situation could get worse, given the slowdown in real estate, the softness in auto sales and a potential reduction in help-wanted advertising caused by the economic "headwinds" predicted for the new year by Ben Bernanke and others. These three advertising categories are the primary drivers of the classified business that represents the largest portion of online sales for newspapers.

If online classifieds deteriorate and significant new products aren't mustered rapidly and effectively to replace them, the industry's online growth gap could start turning into a sinkhole.

Web ad sales slump at newspapers

As if plunging print advertising sales weren’t bad enough, newspapers also suffered a significant slowdown in new media revenues in the first three months of this year.

Nearly overshadowed by the double-digit print declines reported widely throughout the industry, the interactive slowdown results from the stubborn determination of most publishers to try to sell online advertising to the very same people who are forsaking print advertising.

But the plan isn’t working.

In the same three months that sales leaped 41.5% at Google, online revenue at newspapers in the first quarter of this year ranged from a gain of 10% at McClatchy to an increase of 7.5% at Lee Enterprises to a decline of 3.3% at Media General. This compares with the online gains of 17%, 54% and 66% that McClatchy, Lee and MEG respectively reported in the same period a year ago.

How could Google be doing so much better than newspapers? And why are interactive sales decelerating at newspapers when they are booming at Google? The answer to both questions lies in the difference between the types of the ads sold by Google and by newspapers.

Nearly all of Google’s sales come from the keyword ads that run on the right-hand side of search results, as well as the millions of other websites that carry Google ads in exchange for a split of the revenue generated when someone clicks on an ad. This business is growing explosively because advertisers love the idea of paying for an ad only when someone cares enough to click on it – and because marketers prize the precise (and free) metrics that Google provides to monitor their campaigns.

By contrast, most newspapers generate something north of two-thirds of their online advertising revenues by selling listings in the three major classified categories: auto, employment and real estate. These would be the same ad verticals where print sales, respectively, have fallen 14%, 28.8% and 25.8% since 2005, according to the annual industry statistics compiled by the Newspaper Association of America. (For an in-depth look at the collapse of the recruitment market since 2000, see this post.)

While Google is minting money by selling truly interactive advertising, newspapers for the most part continue to base their online businesses on the idea of “upselling” web versions of classified ads to marketers who are rejecting the one-to-many print model at an ever-faster rate.

Companies like Lee and Media General may have thought they were on to something a couple of years ago when they affiliated with Yahoo’s HotJobs to gain a host of new online recruitment offerings. Though the expanded product line indeed enabled the publishers to produce enviable sales gains in 2007, the publishers have no comparable new products this year to replicate last year's one-time feat.

Worse, you can pretty much count on each of the major classified categories to continue eroding as long as the economy remains in a recession. The big question, of course, is how much business will return when the economy revives.

In the same years Google ventured deeper into banner, video and other popular new forms of interactive advertising (including mobile), newspapers inexplicably continued to put their faith and energy into trying to shore up the classified-advertising business despite its obvious and seemingly irreversible secular decline. (One way newspapers could get beyond their heavy reliance on classified advertising is discussed here.)

Now that online growth is shrinking at the same time print revenues are shriveling, publishers will be harder-pressed than ever to muster the economic resources necessary to assure the economic vigor of their enterprises.

If the new media are supposed to be saving the newspaper business, then newspapers had better act quickly to start saving their new media franchises.

Online rescues top line for newspapers

Newspaper companies mainlined online revenues to add more than a full percentage point worth of growth to their sales in 2004, according to newly released research from Banc of America Securities.

Thanks to an average increase of 36.7% in sales from online operations, the publicly held newspaper corporations achieved an average 5.9% revenue growth last year. Absent the online contribution, revenues grew an average of 4.8%, according to an analysis of annual reports by John Janedis at Banc of America.

"We think online could be the long-term wildcard to meaningful profit growth in the years ahead," says John. "While newspaper ad growth in 2004 was generally below expectations, the online component for the group has been driving total ad growth."

As illustrated in the graph below, online revenues contributed to 47% of the increase in ad sales last year for both the New York Times and Knight Ridder. Online contributed more than 20% of sales gains for both Tribune and McClatchy.

The table below compares the velocity of growth in online vs print advertising, where online sales increased by an average of 36.% and print sales grew by 4.6% (compared with an average 6.3% increase for all media). As discussed earlier in this space, newspapers last year, just like in other recent years, lagged substantially behind television and outdoor in ad sales growth, whose gains were double and triple those achieved by newspapers.

Notwithstanding the significance of online sales to the top line of newspapers, many publishers, as previously reported here, are cutting back on their investments in new media. To quote the Project for Excellence in Journalism:

Our data suggest that news organizations have imposed more cutbacks in their Internet operations than in their old media.... Where the investment has come, is in technology for processing information, not people to gather it.

What are publishers thinking?

Five fatal flaws in local Internet ad sales

Online sales require different skill sets than those that historically have been employed by traditional media companies.

Dave Chase, one of the founders of Microsoft’s Sidewalk.Com who has gone on to be an independent investor and sales consultant, tells what it takes to build a successful online sales organization. He eats his own cooking at what he says is his own profitable local website in Idaho, SunValleyOnline.

By Dave Chase

Too much time is being spent discussing ways to reduce production costs or find new ways to fund journalism. While that may help, I'm convinced the only path to long-term economic viability is to address directly the revenue problem.

The level of innovation happening on the production and funding side of the equation needs to be matched by innovation on the revenue side. Unfortunately, I have observed five fatal flaws in generating revenues that will lead local Internet plays to fail as many before them have. These are entirely avoidable but most are falling into these traps. Laid out below are the flaws and a high-level summary of how to avoid those fatal flaws.

1. Farming Hunters

I have blogged previously about Farming Hunters and Hunting Farmers, which is a common mistake present in sales organizations. That is, people who are skilled at managing an existing customer base (“farming”) is a far different talent than “hunters” who know how to find new business. We strongly believe in having clear role definitions throughout the sales process with accompanying job descriptions and compensation models. We define four main types of reps — Lead Qualification, Acquisition, Development and Retention. In our experience, many of the newspaper organizations we’ve worked with only have “farmers” that have managed a book of business for a long time. They not only are ignoring 80% to 90% of the advertising market that has been out of the reach of newspapers but they simply have a different skill set than those with capabilities to develop new business.

2. Expensive sales people and processes for low-dollar advertisers

It’s a mistake to think an advertiser still relatively new to online advertising will spend at the same level as an advertiser who has been in the newspaper for the last 20 years. The aforementioned 80% to 90% of the local advertising market that didn’t advertise regularly in the paper generally is going to spend less per year. Nonetheless, traditional and expensive shoe-leather sales models are the rule rather than the exception. In my consulting business, I have seen technology and media companies closing business into the low six figures via phone-based sales models. With the dramatically lower cost of sale of a telesales organization, one can service a segment of advertisers that previously was out of reach of most local media organizations. Unfortunately, most media organizations have little experience building and managing a telesales organization, which is fundamentally different than a field-based sales organization. I’m convinced that building or buying this competence is absolutely vital and should start tomorrow.

3. Inability to quantify the value of your audience and articulate a return-on-investment to a prospect

For most local advertisers who are relatively small businesses, Internet-based advertising still is quite new. They have a hard time understanding online advertising. Consequently, they don’t know what to make of the numbers thrown at them by a typical sales reps. (Some reps further confuse the issue by not knowing the difference between "hits" and "page views" or "unique visits" and "unique visitors". Potential advertisers might ask themselves “is a million page views good or bad?” or “if they have millions of page views, should I expect hundreds of thousands of visitors when I advertise?” A successful online seller needs to not only know the basics of his or her site (e.g., quantity of visitors, demographic summaries, etc.), but the rep also needs to have data specific to a typical advertiser’s business to calibrate expectations of what a marketer should expect in an online campaign (hint: it’s probably closer to dozens of customers vs. hundreds of new customers). It is vital to use this information to show the advertiser his likely return on investment.

4. Cluttered sites with postage stamp-sized ads

I’m not the first one to write about this but it is still the norm for most local media websites. They are extremely cluttered with tons of ads per page. One of experiences from my last role at Microsoft was being on the Executive Board of the Internet Advertising Bureau (an industry-funded trade organization) following the dotcom bust. I was integrally involved in forming the Universal Ad Package ad standard. In order to arrive at that standard, we did a boatload of effectiveness research about ad sizes, placement and quantity. The short version of the findings is that fewer, bigger ads not only perform better but also sell better.

5. Rate card as afterthought vs. a strategic selling tool

The typical way an online seller deals with a rate card is just lobbing the rate card across the transom without explanation. To make it a strategic selling tool, there are two elements that are critical. First, it is important to recognize that a drawback to online advertising is you can’t tell the advertiser to look at page A6 or watch the News between 5:30 and 6:00 p.m. Unless it’s a permanent sponsorship slot, it is likely that Murphy’s Law will rear its head and the advertiser never will see his ad when he goes to the site. One way to combat this is to sell your site at a more granular level than most sites. This increases the odds of the advertiser seeing her ad, as well as giving your site a range of ad prices depending on the advertiser’s appetite. Second, creating scarcity by only allowing a certain number of advertisers in a particular section creates a sense of urgency that is often absent in online advertising, where inventory seems to be limitless to an advertiser. The deadline of print creates urgency, whereas online is viewed as having no deadline. Done right, this can also set the stage for improved advertiser retention, as you should be able to over-deliver against the impression levels that originally caused the advertiser to invest in the campaign.

Online tops newspaper job-ad sales

Employers spent more money on Internet recruitment advertising than in newspapers in 2006, making this the first time any of the traditional newspaper categories has been surpassed by the digital media.

The aggregate $5.9 billion expected to be spent this year at Monster, Hot Jobs, Craig’s List and the other online job sites eclipsed the $5.4 billion forecast for newspapers, according to Borrell Associates, an independent market research firm.

If it’s any consolation to publishers smarting over the loss of their historic dominance in this highly profitable category, recruitment revenues this year appear to have gained nearly 6% from $5.1 billion in 2005.

Unfortunately, the brisk market for employment advertising wasn’t enough to overcome the steady inroads that online job sites have made over print in the last 12 years. Unless something changes, the outlook is for further deterioration of newspaper market share, say the analysts at Borrell.

“When the history of Internet advertising is written, recruitment sites will undoubtedly dominate the first chapter,” says Borrell. “In 12 years, these sites have grown from a few job boards to hundreds of niche competitors. Online recruitment now accounts for 25% of Internet advertising.”

The drop to second-place status in recruitment advertising is the first time that online advertising expenditures in any of the traditional newspaper categories – retail, national, recruitment, real estate and auto – have overtaken the amount spent on print.

Recruitment advertising was the largest of the three classified categories in 2005, accounting for 10.8% of the $47.4 billion in print newspaper revenues, according to the Newspaper Association of America, the industry’s trade group. The industry notched $2 bllion in online sales in 2005. The relative importance of the top newspaper print ad categories is illustrated in the chart below.

All the newspaper revenue sources are under increasing pressure. Retail and national advertising have been constricted, respectively, by such things as the combination of major cellular phone companies and the merger of the largest department store chains.

Automotive advertising, which is expected to hit a 10-year low, has been affected by both the financial distress of the three domestic car companies and competition from the online sites that enable consumers to conveniently shop for cars by model, features and price. Real estate advertising could suffer in a prolonged slowdown of the housing market.

Online job sites have been undercutting the historic dominance of newspapers in two ways.

First, they are beating them on price. A job listing on Craig’s List, the cheapest of them all, costs $75 in San Francisco, $25 in New York and is free in Chicago and most other markets. Newspapers accustomed to charging hundreds of dollars for listings can’t compete with those predatory economics.

Second, a growing number of highly targeted sites have outflanked newspapers by becoming the de facto marketplaces for nurses, chemical engineers and even journalists. With ads for everything from accountants to X-ray technicians, newspapers indeed have the broadest array of listings, but they cannot match the depth of offerings possible on sites dedicated to individual professions.

As much as the employment advertising business has changed in the last decade, it is likely to morph even further in the years ahead.

Borrell believes niche job sites will continue to proliferate, putting pressure on not just newspapers but also on the online mega-sites that have siphoned away so much of the market.

It’s also possible that the days of help-wanted advertisements may be numbered, regardless of whether they are rendered in print or pixel.

A growing number of online employment sites are encouraging visitors to add their resumes to databases that the sites rent to employers seeking to recruit individuals who are not actively searching for jobs.

To the degree employers embrace this approach, which would give them access to a far greater population of potential candidates than the typical want-ad can produce, they will divert their recruitment dollars away from ads and into database subscriptions. When job seekers recognize this is a better way to advance their careers, they will stop reading and responding to traditional help-wanted ads.

To compete with the growing trend, newspapers ought to be assembling deep and detailed resume databases as fast as they can. Instead, newspapers to date have attempted to compete with the potentially endangered online Monsters by emulating them.

Gannett, Tribune and Knight Ridder, to their credit, invested in Career Builder, and their efforts actually contributed to the online job-site revenues that overtook print. In an extremely tardy bid to catch up with the big boys, a group of smaller publishers just 30 days ago affiliated with Yahoo’s Hot Jobs.

These palliative efforts, while better than nothing, essentially enable newspapers to compete with the marketplace that evolved over the last dozen years. Optimizing these belated initiatives, unfortunately, will not necessarily equip publishers to compete effectively with the recruitment market of tomorrow.

If publishers want to remain major players in recruitment in the future – and they can’t afford not to be – then they need to get ahead of where they are today. If not, the growing number of resumes filling the Internet may include their own.

Only 2.4% subscribe at newspaper pay sites

A puny 2.4% of print subscribers is the average number of people paying for online content at the handful of daily newspapers that have been bold enough to erect pay walls, according to a new survey.

In the first comprehensive study of actual consumer willingness to pay for online news, ITZ/Belden Interactive delivered both good and bad tidings to publishers hoping to begin charging for their content.

The bad news, of course, is the limited number of online readers who were willing to pay for online access to the 26 U.S. dailies included in the survey.

The good news, as you can see in the table below (click to enlarge), is that the few consumers who are willing to pay for online content appear to be largely indifferent to how much it costs. (Clarification 1.12.2010: The survey lumps together all forms of paid digital offerings, including not just pay walls but also electroic editions of papers.)

The full survey is available here for $599.

The study found that only two papers – the Key West (FL) Citizen and the Bloomington (IN) Herald Times – were able to sell online access to a number of subscribers equal to 4% or more of their print circulation. If you factor out those two outlying publications, the average online penetration of the remaining 24 papers – which together have more than 1 million print subscribers – is an anemic 2.1%.

But wait, it gets worse. Because only about a third of American households subscribe to newspapers, the survey suggests that the actual average penetration of pay sites is at best 0.7% of total households.

As for the good news in the study, publishers will be cheered to know there is “little to no correlation between price and uptake,” said Greg Harmon, the lead researcher for the project conducted in conjunction with the American Press Institute.

Even though the Newport (RI) Daily News charges $420 annually for online access, its 1.7% penetration rate is identical to that of the Colorado Springs (CO) Gazette, which charges web subscribers only $1 a year.

This suggests that publishers who start charging for access to their websites can ask pretty much anything they want. They evidently won’t get a lot of takers but that may not matter to publishers of small and medium papers facing scant competition in isolated markets.

“It is typical that newspaper sites in small and mid-range markets sell less than half of the available banner inventory to local advertisers,” said Harmon. For publishers who sell a limited number of online subscriptions, he continued, “a decline in page views poses little or no risk to revenue.”

The story would be different, said Harmon, for metros and other papers that depend on lots of page views to generate online ad revenues.

Noting that there is no one-size-fits all solution to charging for content, Harmon said paid access is not going to be the “silver bullet to save the newspaper industry.”

To the degree its is successful at all, he continued, publishers have to approach charging for content “as a new business opportunity, not simply as a means of walling off content to defend print.”

Retailers are routing around the media

In a stunning reversal of fortune for newspapers, some of the biggest retailers in the nation have taken to selling advertising and featuring editorial content at their busy and heavily promoted online shopping sites.

By transforming themselves into publishers, the folks who formerly depended on newspapers to reach prospective customers are building direct, powerful and sustainable connections with consumers in a strategy that is bound to reduce demand for traditional advertising.

Unless newspapers angle their way back into the mix, it is hard to see how they can stop the slide in advertising that brought industry revenues to some $24 billion in 2011 from $49.4 billion in 2005. The total revenue production for newspapers last year, by the way, amounted to less than two-thirds of Google’s $37.9 billion in sales.

The revenue associated with selling advertising at commerce sites is a succulent attraction for a growing number of merchants, as demonstrated by Target.Com, one of the pioneers of the trend.

Whether you are shopping for watches, gardening shears or socks, you will see a slug of Google-provided ads on almost every interior page at Target.Com. The ads, amazingly, tout not only the wares of competing online merchants but also those of such bricks-and-mortar rivals as Pottery Barn and Sears. While most of the ads at the Target site are related to the merchandise on the page, the page views clearly are for sale to the highest bidder. Ads for tax-prep services, for example, were popping up all over the site as the April 15 deadline closed in.

Industry sources report that a site like Target.Com is capable of generating many tens of millions of dollars in ad revenue in a year. Eyeing this potential new revenue stream, competing online retailers are hiring ad experts to monetize the white space around the merchandise. Retail analysts say it is only a matter of time until this strategy is widespread, if not commonplace.

Sites like Walmart.Com and Safeway.Com not only are selling ads but also investing in editorial content to encourage shoppers to buy more stuff – and to motivate them to return.

Walmart helpfully provides advice for all the major life cycles: How to plan a Barbie-themed birthday party, how to get along with your college roommate and how nutritional supplements can ease the creak in aging knees. Walmart recently appointed the former head of CBS Interactive to helm its digital commerce operations, suggesting that an even greater emphasis on content may be right around the corner.

Safeway publishes an extensive collection of recipes that you can sort by the ethnicity of the cuisine, the time to cook it, the size of the group you want to serve and the difficulty of preparation. The site encourages users to review and comment on each recipe, the better to build community and repeat traffic. There’s not much advertising adjacent to the content – yet – but it's not hard to see how that could change.

Like lots of other merchants, Meijer.Com, a Midwest retail chain, posts all of its newspaper ad inserts on its website, comprehensively indexing items by brand and category. In addition to carrying the usual bargains and coupons, however, the vitamin insert published in December contained full-page articles on the health benefits of fish oil and the usefulness of melatonin as a sleep aid.

Venturing well beyond selling refrigerators and televisions, BestBuy.Com has created a members-only online mall it calls the Rewards Zone, which features products from more than 400 brands ranging from Saks Fifth Avenue to iTunes to Budget Rent a Car. Members receive frequent-buyer points for anything they buy at the portal, but the points can only be redeemed at – you guessed it – BestBuy.

The program has three major benefits for the retailer: First, it generates some extra cash through commissions paid by the affiliate merchants. Second, it builds customer loyalty for Best Buy. But the best part is that it will provide the company with comprehensive information about the buying habits of each and every registered user.

In other words, BestBuy is pursuing the Holy Grail of digital marketing: Detailed and actionable information about individuals, including who they are, where they are, what they have bought in the past and what they might buy next.

The chief way newspapers can remain relevant to marketers in the future is by developing the same kind of information for as many individuals as possible in the communities they serve. To do this successfully, this means tracking customers not only on newspaper-owned media but also across the widest possible number of digital venues in the market.

Publishers who invest in this strategy will have a path forward, as advertisers increasingly de-emphasize the classic print and broadcast media in favor of efficiently targeted digital marketing.

Advertisers clearly have begun moving on. Publishers need to catch up.

© 2012, Editor & Publisher

How to plug the $17B newspaper sales gap

This column originally was published in the March edition of Editor & Publisher Magazine and is being reprinted with permission. To subscribe to the magazine so you can see the full array of industry coverage when it first appears in print, click here.

There’s a succulent advertising stream that could replace a substantial portion of the $17 billion in sales the U.S. newspaper industry has shed since 2007. Anyone interested?

The opportunity is called Yellow Pages advertising and there are powerful reasons to believe that a growing proportion of the directory industry’s business will be up for grabs in the near future as consumers increasingly choose to let their fingers do the walking on the web.

Although newspaper publishers are in the best position to bag a substantial share of the $16.5 billion now spent annually on directory advertising, they will not be alone in the hunt. A little outfit called Google recently zeroed in on the business by starting to sell upgraded search listings to local merchants. Because newspapers have sales forces that Google can only envy, however, this opportunity is theirs to lose.

Some 85% of the Yellow Pages business, like the bulk of newspaper sales, is derived from print advertising. But there is growing evidence that the print YP business may begin to unravel as fast as a certain other print business that comes to mind.

If you are a newspaper publisher interested in diversifying away from print while building a valuable, defensible and sustainable digital revenue stream, then it’s time to think about the online directory and web-marketing business. How-to tips are coming up. First, here’s why I think the print YP business is ripe for the plucking:

About 43% of the 18 billion web searches conducted in the typical month are for products and services that consumers intend to buy from bricks-and-mortar providers, according to a study conducted by the Kelsey Group, a market research company. That comes to 7.7 billion shopping searches per month.

Kelsey also found that 53% of shoppers prefer searching the web to paging through printed directories. Young people don’t find the fat ad books to be environmentally acceptable. Older people, while also concerned about the environment, particularly hate squinting at type that seems to get smaller every year.

Taken together, the prevailing trends suggest a gloomy outlook for print directories.

Although a majority of consumers already favor online searches for products and services, most merchants keep buying YP ads because – as many of them have told me in so many words – “that’s what you are supposed to do.” The source of this wisdom usually is a YP salesperson.

Even most of the merchants who have built websites are wasting scandalous amounts of time and money on their online presence because they aren’t doing it effectively. That’s bad for them but great for astute newspaper publishers who can clue them in to the art and science of web marketing.

Web marketing matters because Google and the other search engines don’t care about the splashy graphics or clever copy that people fuss over when they build a site. The search engines only pay attention to the boring computer code you see when you click the “Page Source” tab on a web browser.

A fair number of the people who build websites – including folks at some newspapers – don’t know how to optimize the construction of a site so it gets included in the top results on Google. Poor search-engine optimization – or SEO, as the skill is called – results in an inferior position on Google. Since 95% of consumers never look past the first page of search listings, a business that doesn’t make the front page on Google is seriously out of luck.

Newspapers can take a whack at the YP piñata by becoming the unchallenged web-marketing experts in their communities. To do so, they first need to actually become experts. Then, they need to take the following steps:

Build an online business directory. Using readily acquirable business listings, create an attractive page where site visitors can search for businesses, map their locations and submit reviews of the companies. In addition to selling display advertising, sell upgrades to your free basic listings.

Offer site-building and hosting services. Working with in-house talent or widely available third-party resources, manage the construction and operation of sites for local merchants. This not only unlocks a new, recurring revenue stream but also creates a long-term collaborative relationship where you’re seen as a trusted partner, not just another money-grubbing vendor.

Provide SEO and SEM services. SEO refers to the maintenance (discussed above) that is required to assure a site readily gains high rank in a Google search. Because SEO is an ongoing process requiring regular attention, this creates another recurring revenue stream. SEM stands for Search Engine Marketing, which involves buying and monitoring the performance of keyword ads on Google and other sites. It, too, represents an ongoing revenue opportunity. You can build these capabilities in your own organization or partner with any number of outside firms.

Final advice: Don’t delay. This is a strategic slam-dunk.

(c) 2010, Editor & Publisher Magazine

Got digital ads?

The explosive growth of local online advertising represents a significant opportunity for revenue-challenged newspapers and broadcasters – if they develop the products and sales strategies to capitalize on the opportunity.

Local online ad sales are projected to grow 21.7% this year to more than $5.8 billion, according to Borrell Associates. Although the party won’t last forever (see graph below), the independent market research firm believes online ad sales will climb 31.6% to $7.7 billion in 2007.

In a gift from folks who usually get paid for this sort of thing, Borrell is providing for free a detailed, market-by-market analysis that will enable local media executives to measure their production against the total estimated digital sales in their market. Get your copy here; it requires registration but it’s well worth it.

Representing collectively a third of local online ad volume, real estate and automotive are the largest categories, according to Borrell. Media companies hoping to hedge against the softening of traditional advertising in the housing and auto categories should focus on digital alternatives that deliver cost-effective leads for Realtors and car dealers.

“In the near term, online ad spending will continue to migrate toward more targeted forms of advertising, such as e-mail and paid search,” says Borrell. “We also expect to see local video advertising become a trackable category in 2007.”

Although search accounts for 40% of all the dollars spent on online advertising, most media companies to date inexplicably have failed to add to their sites such local search capabilities as those available from Eurekster.Com. Similarly, they have conceded the direct-email initiative to start-ups like the edgy Flavorpill. (Disclosure: I am an investor and adviser at Eurekster.)

“The online advertising stampede in local markets has website operators scrambling to add hunters,” says Borrell. “About half the local web sites were adding to their sales forces this year…increasing the small but growing army of online-only sales people by about 37%.”

With this high-stakes land grab under way, the question is whether the spending-constrained legacy media companies are focusing the proper level of attention and resources on the best – and probably last – opportunity they will have to migrate their businesses safely into the digital age.

As Borrell notes, “the recent growth rates can’t continue forever.”

SeattlePI.Com, starting up from behind

The closely watched online incarnation of the Seattle Post-Intelligencer is starting its new life with a number of disadvantages – and almost certainly well in the red.

Crisp and rapid execution, including an aggressive sales effort abetted by an uptick in the economy, will be required to enable SeattlePI.Com to reach its full potential. At best, that would seem to be about $7 million a year in sales, according to the projection detailed below.

Because initial sales will be nowhere near that theoretical number, the Hearst Corp. almost certainly will face multimillion-dollar losses in the early days of an experiment being monitored by publishers eager to learn if life after print will be worth living.

There are too many variables to try to guess how deep the losses might run at the P-I or how long it would take to overcome them. So, we won’t try.

But we do know Hearst has elected to limit its exposure by staffing the site with 20 journalists and 20 advertising sales people who probably represent a total of $4 million a year in operating expenses. In the unlikely event the site generated zero sales, the maximum potential hit of $4 million would be better than the $14 million the company lost on publishing the print product in 2008.

The new site is being watched widely in the newspaper industry because it represents the first major metro to go paperless. Publishers thinking about trimming or eliminating their print production schedules will want to see the sort of audience and advertising the P-I attracts.

As valuable as feedback from the Seattle experiment will be, it is worth noting that it is a decidedly atypical situation.

Because the P-I is exiting from a joint operating agreement managed by the Seattle Times, it is starting its newly single life without an ongoing classified advertising business.

With the Times in possession of the existing classified business, the P-I hastily affiliated with Kaango for free ads, Kelley Blue Book for cars and HotJobs for employment. There is nothing more than a link to Zillow on the real estate tab of its site. These relationships suggest few P-I visitors actually are placing or consulting many classified ads.

Classified advertising matters because it historically generated a significant portion of newspaper web sales. Given the collapse in the three primary classified verticals in recent years, this disadvantage may be less disadvantageous than it would have been in an earlier era.

A far bigger issue is that the P-I is starting with no ad sales operation, because the newspaper agency handled ad sales for the P-I prior to shutdown of the print paper last week. Hearst is in the process of hiring a sales staff.

Meantime, the site is heavily populated with the cheap banner ads that publications run in lieu of empty space, including pitches from a Google AdSense wannabe called Pulse360 that features tummy tighteners, teeth whiteners and colon cleansers.

It also is not clear the P-I is starting with all the web traffic to which it otherwise might be entitled. Because the Seattle JOA operated an umbrella website for both papers called NWSource.Com, it is entirely possible that some readers over the years became accustomed to going to NWSource and then clicking through to the P-I. If you go NWSource today, there is no route to the P-I.

Add these factors together and it is clear that the P-I is beginning life as more of a struggling start-up than a typical, standalone newspaper would be.

In trying to assess the potential of the business under these circumstances, the toughest part is figuring out the size of its audience.

Until the “About Us” page on the P-I site was removed last week, the publisher claimed 4 million unique visitors per month, a figure that is impossible to believe because it represents more than twice the adult population of the Seattle-Bellevue-Everett metropolitan area. Nielsen Online credited the site with 1.8 million unique visitors last month, but even this figure is hard to swallow because it is equal to the entire adult population of the metro area.

By contrast, SeattlePI.Com barely registered a pulse prior to the shutdown of the print paper on such popular online traffic-measuring services as Alexa, Compete and Quantcast.

So, I asked Greg Harmon of Belden Interactive, a marketing research service specializing in newspapers, to give me a realistic estimate of the potential audience for the new P-I. Here’s the result:

After studying the web traffic at hundreds of newspaper sites for years, Harmon says he generally has found that a paper will attract about 20% of the adults in its market. Out-of-market visitors, he says, boost the traffic of a typical site by 30% beyond the local audience. In the case of Seattle, this translates into potential traffic of about 732,000 visitors per month.

As the second paper in a two-paper town whose identity is confused by the former NWSource.com affiliation, Harmon says the 20% figure likely would be the best imaginable share of the local market for the P-I.

Harmon says the typical visitor at a metro site generates an average of 26.5 page views per month, which would put what he calls the “best-case” potential for the P-I at a bit less than 19.5 million views per month.

Assuming each of three ad positions on every page were sold at an average net rate of $10 per thousand visits per ad, annual revenue would come to a bit less than $7 million. (Classified advertising was not taken into consideration because its immediate contribution would be insignificant.)

If the expense of operating the site were $4 million, then Hearst would reap a profit of $3 million if the site achieved its full revenue potential. But the revenue number is distinctly theoretical.

Although the above analysis assumes every available ad will be sold, this seldom happens in real life – especially during the sort of difficult economic times we are experiencing today. The true percentage of the inventory likely to be sold will depend on the success of the P-I’s audience-building effort, its sales force and the future health of the economy.

Suggesting that scant time was allocated to planning the site before the presses were stopped in perpetuity, the P-I had a less than auspicious launch from an editorial point of view. It remains to be seen whether the comparatively small staff running the site can come up with an effective formula for efficiently producing compelling and viral content.

The average $10 ad rate may prove to be too generous because of the enormous amount of unsold advertising inventory all over the web. Online ad rates dropped by almost half last year as the result of the glut of unsold inventory, according to Pubmatic.Com, a company that specializes in online ad placements.

Pubmatic reported that the average cost per thousand for the sort of backfill banner ads appearing at the P-I was less than 40 cents in the final quarter of 2008. Once the P-I organizes its own, dedicated sales force, it should be able to do better than that.

Other Hearst newspapers have been having considerable success selling targeted advertising on Yahoo as members of the consortium of nearly 800 publishers who have partnered with the web portal. Assuming the P-I participates in the program, its share of those sales will help to enrich its revenue stream.

If traffic, ad volume and ad rates fulfill or surpass the above estimates, then Hearst would move from losing $14 million a year in Seattle to making a respectable, but modest, annual profit of a few million dollars.

If the economy doesn’t cooperate or the citizens and merchants of Seattle fail to embrace the site, the publisher will be faced with the choices of trimming the staff, funding another hefty operating loss or shutting down the experiment that many observers hope will show the way to the future.