Monday, November 26, 2012

Online sales are flat-lining at newspapers

With total ad sales sliding 5.1% in the third quarter of this year, newspapers have set what must be some sort of record in the annals of American business by having their primary revenue stream fall for 25 quarters in a row. 

In 75 months of unremitting declines, the industry’s consolidated advertising sales have plunged from an all-time high of $49.4 billion in 2005 to what I estimate will be no better than $22.5 billion in 2012. The year-end revenue projection is based on historic trends. 

It is a testimony to the legendarily high operating margins of the industry and the considerable cost-slashing skills of contemporary publishers that nearly all the newspapers in business in mid-2006, when the trouble began, are still plugging along today.   

But no industry ever cut its way to success. And the question, as newspapers mark six-plus  straight years of contracting revenues, is what, if anything, they are going to do to turn things around.  The nearly universal answer we have heard from editors and publishers is that they are going to transition from print to digital publishing.  

That is the right answer.  But the objective record shows that, to date, they have manifestly blown the opportunity.  Let’s look at the numbers: 

On the eve of the Thanksgiving weekend, the Newspaper Association of America quietly updated its website on Wednesday to report that print advertising revenues in the third quarter fell by 6.4% from the prior year to $4.5 billion, the lowest level for the period since 1982. To put the decline in perspective, $4.5 billion in 1982 dollars would be worth more than $10.3 billion today.   

On the plus side, the NAA, a publisher-funded trade organization, reported that digital revenues advanced by 3.6% in the third quarter to a bit under $759 million.  But the $23.5 million year-to-year gain in digital sales was too small to offset the $311 million year-to-year drop in print revenues. Thus, newspapers in the quarter lost more than $13 in print revenue for every $1 they gained in digital sales.  

Unfortunately, as illustrated in the chart below, the pivot from print to pixels has been far too feeble for the last six years for digital sales to come anywhere close to replacing print revenue. Here is the long-term trend:

After peaking at an all-time high in 2005, print ad sales at newspapers began what would prove to be a six-year dive in the middle of the next year, falling by 2.6% in to $11.2 billion in the third quarter of 2006. That means print sales in the third quarter of this year were $6.6 billion lower than they were in the comparable period in 2006, reflecting a 59.5% decline.  

In the same six-year time frame, digital sales at newspapers rose 19% from $638 million to $759 million.  With the $6.6 billion drop in print revenue dwarfing the $121 million increase in digital sales, newspapers between 2006 and today lost a staggering $55 in print revenue in the third quarter for every $1 in new digital dollars. 

But, wait, it gets worse: 

As illustrated in the green line along the bottom of the chart below, digital advertising growth at newspapers has been all but flat in the last six years at the same time the over-all market for digital advertising (orange line) has grown explosively. 

While the Internet Advertising Bureau has not yet reported digital sales for the third quarter of this year, I have projected from historic trends published by the trade association that the figure will come in at approximately $9 billion in the period.  

Assuming my projection is correct, then the over-all market for digital advertising between Q3-06 and Q3-12 grew by 114% while digital sales at newspapers increased by only 19% in the same period.   

One of the reasons newspapers are underperforming the market is that they have built their interactive businesses on the two weakest digital advertising categories: banner and classified advertising.     

As reported on page 21 of this IAB presentation, the percentage of digital ad dollars spent on banner advertising in the first half of the year has dropped annually for the last three years.   The percentage of dollars spent on online classified advertising has tumbled by more than half since 2006.  

The single most significant digital ad category is search, which consistently has accounted for nearly half of all expenditures since 2008, according to IAB. Notwithstanding the growing desire of advertisers of all stripes to target specifically identifiable customers, transactional search is a format where newspapers never invested and never have been able to compete. By their inaction, publishers have been shut out of nearly half the digital market. 

Now, the same thing appears to be happening again. While the IAB reports that mobile advertising has doubled in each of the last three years, most newspapers have only rudimentary capabilities in this rapidly developing area. Publishers also are weak contenders in video, the next-biggest area of growth after mobile.  

The challenges will keep coming.  Not the least of them will be the innovative, target-marketing capabilities bound to be developed by Facebook, Twitter and dozens of other social media to capitalize on their expanding audiences.  And who knows what lies beyond?  

While publishers are preoccupied with managing the epic decline in print, they are losing sight of the future. 


Blogger Unknown said...

Typically spot on, Alan. Newspapers' original sin was inventing themselves for the Web in their own image. It never was about being a newspaper online, and until the vast powers that be realize this, they will continue to suffer. Meanwhile, they continue to poke at the dying carcass of what used to be. It's beyond sad to me, because the signs were all there, and the geeks knew what they were doing.

8:23 AM  
Blogger scf said...

Of the hundreds or perhaps thousands of traditional media of newspapers, television stations, and other, that attempted to move online, not one, not a single one of them, was capable of innovating to the point of matching Google.

They all failed. Miserably. That is the beauty of capitalism in a nutshell. In communism, socialism, or crony capitalism, where we must always defer to the experts to lead the economy, the googles of the world never come into existence.

11:45 AM  
Blogger Martin Langeveld said...

Small correction: since the downtrend started in Q3'07, Q3'12 is actually the 25th consecutive quarter, 75 months, of shrinking revenue. Also, keep in mind that much of that digital revenue is actually the allocated portion of print/online combination buys. At McClatchy, which has been upfront about this in its annual and quarterly SEC reports, in Q3 digital-only revenue was $26.9 million out of total digital revenue of $48.5 million, or 55%, and was up 12.7% vs. prior year. McClatchy said that the other category, digital that's part of combo print/digital sales, was down because of the decline in print sales. So, assuming this is true across the industry, (a) quarterly digital-only revenue is more like $400 million, and (b) because of the combo sales the print decline is holding down the overall digital growth. Not that this makes a big difference or negates anything you wrote.

2:47 PM  
Blogger frank h shepherd said...

wait until the daily newspapers begin to lose their Sunday insert delivery business.. with most dailies in the United States those Sunday inserts deliver almost 100% of their monthly profits... once those begin to disappear profits will tumble faster than an avalanche and dailies will be forced to drop days of publication... the insert business generate approx. 80% profit margin... once gone you can color dailies gone... sad sad sad...but ugly truth...

6:15 PM  
Blogger Hinton said...

Maybe newspapers and magazines need to rethink the business that they are in. The good pizza restaurants are not in the pizza box business but the pizza business. The successful pizza places in the future could be the ones who realize that the box was only good until some other way of getting pizza to customers come along. Maybe the newspapers and magazines are not in the container business but the content. They should focus on delivering to the customers just the desired individual articles content.

Leave the container business to others such as Apple, Amazon and etc.. Focus on delivering content that customers will buy.

Thomas Smith

10:42 PM  
Blogger Tony Russo said...

I agree with Thomas. The difficulty in newsroom where I work is, while we made a pretty good move by early adoption of e-readers and a paywall, we haven't made real strides in content. After years of newsroom bloodbath, it is going to take an investment no one seems willing to make in reporters to justify digital subscription.
What is worth considering is how top-heavy newspapers' sales divisions are and how utterly committed to the print model. Trading out circulation numbers for page views won't help. The way the papers are sold needs to be rethought.

4:12 AM  
Blogger eclisham said...

As I have ranted elsewhere, I long for the day when those who report and comment on newspaper revenue numbers include more than just advertising. We have all acknowledged that advertising alone won't pay the bills in the future, so when do we start talking about revenue from things like events? E-publications? Sponsorships? Memberships? Until we do, we're just as guilty as publishers of legacy thinking.

4:19 AM  
Blogger Tim Wohlford said...

Oh, c'mon. Doesn't anyone teach accounting in J-school?

Part of the "cost cutting" is that newspapers, when gone digital, don't need printing presses. Or printing people. Or typesetting machines, or newsboys, or distributors. Not to mention a fleet of vehicles and all of that expense. In theory, a digital "newspaper" won't need nearly as much "revenue" as they did when they print the DTE.

The problem isn't the decline in REVENUES. Rather, it is a decline in PROFIT. Which may -- or may not -- mirror a decline in revenue. Some venues seem to do okay as digital only. Others seem to flounder badly.

Quite frankly, many floundering newspapers can't sell a digital ad, let alone ad campaign, to save their lives. Many legacy DTE's still don't understand that the "Web" is 20 years old, and isn't just an adjunct function. They don't get it that a Web publication is different than X column inches with Y words. Getting themselves into financial trouble, they cut their best content makers, and from that point on it's an end game.

10:10 AM  
Blogger Unknown said...

The question is not "how do we squeeze more money from the same old stuff we've had since Gutenburg?" with more gimmicks and tricks (like events, sponsorships, memberships and whatnot). The question should be "how do we offer more of what people want (even if they don't know they want it) in ways no one has thought of yet and make money off it?"

For starters people want information. Look, there is a company out there who's mission is to "organize information and make it accessible and useful" and they make a *huge* ton of money at it. But if you think about it, "to make information accessible and useful" was once the roll of the Press, back when accessible meant "on your doorstep" and useful meant "well edited". So what happened? Well, times and technology changed, but the press by and large hasn't.

It's not going to get better until newspapers actually start thinking and investing and taking the real risks that come with real innovation.

11:21 AM  
Blogger reinan said...

It's been pointed out -- maybe here, maybe by Rick Edmonds at Poynter, can't remember -- that digital subscription revenue at the NY Times is now sufficient to cover the cost of the newsroom. So that gets to the point Tim Wohlford is making. It may be possible for at least some papers to field a substantial news operation on digital subscriptions alone, if they don't have to bear the legacy production costs.

3:55 PM  
Blogger Gadfly said...

Overall online ad sales increases almost totally "cover" the lost amount of print ad sales for newspapers over that time period. True, magazines and other print venues also lost print ad sales, so this isn't a totally fair comparison. Nonetheless ...

11:36 AM  
Blogger Bill Garber said...

As Anderson, Bell and Shirky have so convincingly noted, industrial media supported by advertising are terminal.

No reason to be surprised by advertising declining toward true flat-lining heart rhythms.

9:22 AM  
Blogger Rip Woodin said...

I've listened to all the dire warnings to "innovate, innovate"—and I believe them—but I haven't heard the first good suggestion as to "how". I suspect that of the billions in digital advertising, nearly all of it goes to four or five companies like Google, Facebook, etc. As a small community daily, we don't have the money or the expertise to develop search advertising or Real Time Buying. Maybe a localized consortium is a possibility. For us caught in this Gordian knot, the Advance Publication model may be the only way but that jury is still out. I'm hoping for a great idea before I die of old age still scratching my head.

12:23 PM  
Blogger ddsea said...

Good for Rip Woodin to indicate that the Emperor has no clothes. Lots of pontificating out there but no one ever says what the future news model will look like. That's because no one really knows. Time will tell and like Rip, we all hope we don't die of old age before hand.

11:46 AM  
Blogger ddsea said...

Good for Rip to indicate that the Emperor has no clothes. Lots of pontificating out there about what is not being done right, but no comments on exactly what "right" it. That's because no one really knows at this time. Hopefully, like Rip, we will not die of old age before we figure it out.

11:50 AM  

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