U.S. newspapers see growth in online advertising slow to a crawl
By Stephanie Clifford
Monday, October 13, 2008
NEW YORK: Already facing a grim economic forecast, U.S. newspapers are digesting another piece of bad news: The growth in online advertising they saw as their salvation has slowed to a crawl.
In the past few years, newspaper companies have been rapidly expanding their Web presence - adding blogs, slide shows and podcasts - in the belief that if they built it, advertisers would come. But after 17 quarters of ballooning growth, online revenue at newspaper sites is falling. In the second quarter, it was down 2.4 percent from a year earlier, to $777 million, according to the Newspaper Association of America. It was the only year-on-year decline since the association began measuring online revenue in 2003.
The decline in revenue came even as overall online advertising increased. Display advertising, the graphics-rich ads that newspapers carry, grew 7.6 percent in the second quarter, according to TNS Media Intelligence.
Newspaper executives say the new features have drawn bigger, more engaged audiences, which they hope will translate to more advertisers. Unique readers this August were 17 percent higher than a year earlier, at 69.3 million. They also point out other factors for the decline, like the economic downturn and the continued flight of classified advertisers away from newspapers and their sites.
But the advertising glut, particularly in display advertising, on which companies based their optimistic projections, has shrunk. As newspapers keep adding pages, they are required to sell ads at cut-rate prices.
While large papers like The Washington Post, The Miami Herald or The New York Times (whose global edition is the International Herald Tribune) can sell premium ad space on, for example, a newspaper's homepage, for $15 to $50 for every thousand impressions, other papers have increasingly relied on middlemen - known as ad networks - to auction less desirable space, typically for 60 cents to $1 for every thousand impressions, and networks keep that data for themselves.
"Unwittingly, I think, the publishers commoditize their own inventory," said Paul Iaffaldano, the general manager of TWC Media Solutions Group, which sells advertising for The Weather Channel and Weather.com.
According to a recent study from Bain and the Interactive Advertising Bureau that examined seven high-end publishers (their identities were not disclosed), about 53 percent of newspaper sites' ad space would go unsold without networks, up from 50 percent in 2006.
Given the choice of showing an ad-free page and making no money, or using an ad network and making a few cents, many publishers choose networks. In 2007, 30 percent of their sold ad spaces came from networks, up from 5 percent in 2006, according to the Bain study.
"If we sold every scrap of inventory, we wouldn't use ad networks, but right now it makes some sense for us," said Jeff Webber, publisher of USA Today.com. At Gannett, which owns USA Today.com, online revenue in the United States rose a modest 3 percent in the second quarter. Results from other newspaper chains have been more grim. In the second quarter, online revenue dropped about 12 percent at A.H. Belo, 8 percent at E.W. Scripps newspapers, 4 percent at Tribune and 9 percent at Lee Enterprises, all compared with a year earlier.
Denise Warren, chief advertising officer of The New York Times Media Group, said NYTimes.com used ad networks despite some concerns. She said they were useful when traffic spiked; this September, for example, the financial crisis spurred lots of page views.
"We couldn't sell that inventory because we didn't know it was going to exist, so if we have an ad network we're able to have all those extra CPMs," she said, using the industry term for cost per thousand impressions.
Internet revenue at the Times' News Media Group, which includes The Boston Globe and regional newspapers, rose only 0.9 percent in July and 7.9 percent in August, well below the usual double-digit growth rates.
Warren said that the two months were anomalies, adding that display-advertising growth at NYTimes.com alone had been much higher, though she declined to specify a figure.
As for the blogs and video content that the site is adding, "those investments will definitely add to advertising revenue," she said, but "those things are just getting started right now."
Steve Stup, the vice president for advertising sales at Washingtonpost.Newsweek Interactive, said he began using networks this year only because the site had unpredictable traffic flows because of the elections. He added that some advertisers might start to see networks as an inexpensive substitute for dealing with papers directly.
"It's still a situation where if advertisers even perceive they can reach your audience, they might be inclined to go with a network, and that's a concern I have with networks in general," he said.
This has meant a spurt in networks. There are now more than 300 networks, most offering targeted ads of some sort, and they are popular venture-capital investments and acquisition targets. Last year, Microsoft bought the network DrivePM, Yahoo bought Blue Lithium and AOL bought Tacoda. "The ad networks have actually been using the presence of publisher inventories as part of their selling story to ad buyers," said John Frelinghuysen, a partner in Bain's media practice. Many publishers join only the networks that do not disclose what sites they include, but even so, savvy advertisers can guess.
In response to the downturn, some publishers are also exploring a larger, counterintuitive strategy: instead of creating more ad space, they are limiting it.
"We're going to reduce the number of ad sizes we use and the number of units," said Christian Hendricks, the vice president for interactive media at McClatchy. "It is a case where yeah, you could probably sell another advertiser by creating another ad space," but that could hurt overall revenue, he said. Online revenue at McClatchy rose 12.5 percent in the second quarter; a year earlier, it had dropped 2.2 percent.
McClatchy also tries to avoid ad networks, Hendricks said. "We don't want to get in the habit of filling every little space we have with remnant," he said.
Frelinghuysen said limiting the number of ads per page could be smart. "That high level of unsold inventory often creates a real challenge in terms of sustaining pricing or growing pricing," he said. "In most media, especially in television, the traditional model has been that you drive sellout, and that gives you the ability to drive pricing over time." Some Web sites unaffiliated with newspapers have also tried limiting inventory and banning ad networks, and many report good results.
Weather.com limits its ad spaces so it can sell out each day, and it does not use ad networks, Iaffaldano said. Prices there have increased 10 percent to 15 percent over last year, he said.
Forbes.com stopped using ad networks this year, as did ESPN.com, CNN and other Turner sites. (Turner and Forbes then created their own networks, which they say are different from the remnant networks because they focus on narrow subjects.)
"As more and more sites like ourselves forsake networks and are public about it, the ability for the agency to think for themselves, or even suggest to a client, that they're going to get quality expressions, will get harder and harder," said Jim Spanfeller, the chief executive of Forbes.com.
At CNN.com, where online advertising rose 17 percent in the second quarter, the site does not use ad networks and limits available space.
"We want to get as much value for our product as possible, and that means not having an endless supply of inventory," said Greg D'Alba, executive vice president and chief operating officer of CNN Advertising Sales.
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