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US: The troubled economics of online advertising

US: The troubled economics of online advertising

It isn't a secret that the American newspaper industry is experiencing difficult times, as core print revenues and circulation are falling. Many think that online news, which has been accompanied by double-digit online advertising growth in recent years, can make up for the decline in print. But several studies and articles think otherwise.

"The Web audience is growing at a great clip, while print circulation is not. And online revenues are growing faster, too, albeit from a smaller base. If the trend continues, there's little doubt that -- "eventually" -- online becomes the main business," said Bill Keller, the New York Times Executive Editor, in a 2007 interview with IwantMedia.

But as sanguinity faces off with the numbers, perhaps we shouldn't hold our breath for "eventually."

Internet revenue is growing -- in 2003, newspapers collected a mere $1.2 billion from online advertising; last year the figure was nearly $2.7 billion. "We're growing at a double-digit rate," said Randy Bennett, of the Newspaper Association of America.

But there's a problem. Scott Karp, of Publishing 2.0, has dubbed it the "10% problem." Karp explains that looking at New York Times print and web circulation numbers, "What you find, with some modest rounding, is that print circulation is about 10% of total audience reach, while online advertising revenue is 10% of total ad revenue -- the economics are nearly the perfect inverse of what they should be."

Why, as audiences shift to the web, are advertisers not following?

Although newspaper websites are attracting a lot of visitors, they aren't keeping them there.

According to the American Journalism Review (AJR), the typical visitor to nytimes.com, which attracts over 10 percent of the entire newspaper industry's online traffic, spent an average of just 34 minutes and 53 seconds browsing its extensive editorial and interactive offerings in October. That's 34 minutes and 53 seconds per month - just 68 seconds per day online. By contrast, according to Scarborough Research, print readers report spending 16 minutes a day with their newspapers.

And as small as 68 seconds a day is -- it's actually about three times longer than the average of the next nine largest newspaper sites.

Although a minority of news hounds linger on the sites, Greg Harmon, director of Belden Interactive, estimates that as many as 60 percent of online newspaper visitors are "fly-bys," people who use the site briefly and irregularly. "Everyone has the same problem," explains Jim Brady, editor of washingtonpost.com. The news industry's continuing challenge, Brady says, is to turn "visitors into residents."

Thomas E. Patterson, of Harvard University, who has conducted a yearlong study of 160 news sites, also offers an intriguing, if not unsettling, theory: the web is a fundamentally different way of viewing information, and as such, web ads may not be as effective as the traditional kind. "I'm not sure [advertisers] are convinced yet about how terrific a sales tool [a Web display ad] is," said Patterson. "The evidence isn't strong yet that it can drive people into a store the way a full-page newspaper ad can. They're less confident about what they're getting online."

To add insult to injury, online newspapers face these challenges in a fiercely competitive new medium. "Unlike the print business, in which newspaper publishers generally enjoy near-monopoly status, the online news world is littered with entrants - from giants like MSNBC.com and AOL.com, to news aggregators like drudgereport.com, to blogs by the millions," writes Paul Farhi of AJR. "This makes it tough for any online ad seller to do what newspaper publishers have done for years - keep raising their ad rates." "Ultimately, it comes down to supply and demand," said Leon Levitt, vice president of digital media for Cox Newspapers. "And there's an awful lot of supply out there."

In the midst of this, the online ad growth is beginning to slow. The confidence-building, double-digit increases are fading fast. In the first quarter of 2007, the newspaper industry saw a 22 percent gain in online revenue - impressive, but less so when seen as the smallest uptick (in percentage terms) since the NAA started keeping records in 2003. In the second quarter, the industry rate slipped yet again, to 19 percent.

And even with these double-digit increases, newspapers' print ads still draw more than 20 times the revenue from online sales, having collected $46.6 billion in print ads last year.

The New York Times Co., the leading online newspaper company, derives just 11 percent of its revenue from the Web, and it not public how much of that 11% comes from nytimes.com vs. its other digital holdings, such as the popular about.com.

The challenge news sites face now is how to continue to move online, but bring advertisers with them.

It's "in the interest of both newspapers and advertisers to shift content to the Internet," said Philip Meyer, author of The Vanishing Newspaper.

Advertisers can focus their target audiences and can monitor consumers' behavior online, Meyer points out. At the same time, "newspapers can at last grow their businesses without being held back by the variable costs of newsprint, ink and transportation...In the recent past, newspaper owners have preferred to cut fixed costs, like editorial staff, which gives a quick boost to the bottom line but weakens their hold on the audience. Using technology to cut the variable costs is a better strategy even though the payoff takes longer."

Sources: The American Journalism Review, The State of the News Media 2007, Publishing 2.0, The New York Times



Sarah Schewe


2008-06-11 13:13

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