Sunday, September 23, 2007

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!”


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