My speech last week for Borrell Associates to the World Association of Newspapers Advertising Conference in Paris received good play in The Guardian of London, MarketWatch in the U.S., PaidContent.org, and from WAN itself. Yet, most of the news stories focused on a comparison I made between the values of print edition readers and online edition readers.
That was a good ‘take-out’ quote for those stories to use. However, I made that comparison towards the end of my speech just to show the newspaper advertising executives that they must greatly increase their online revenues, particularly if their readerships continue shifting from print to online.
Other points I made were that American newspapers are earning significant revenues online, particularly now that local advertisers are going online. However, newspapers are in danger of losing local online advertising revenues, not to TV or radio stations but to ‘pure-play’ Internet competitors such as Google and Yahoo. And that newspapers must their expand their online advertising focus well beyond just the traditional classified advertising categories of jobs, properties, and automotive, because those three categories account for just a fraction of the monies advertisers are spending online.
So, for the record, here’s the text of that speech:
Thank you. My name is Crosbie. Vincent or Vin Crosbie.
I apologize to my French hosts: I regret that I do not speak French sufficiently well to do my presentation in that wonderful language. I must use my native English. Je regrette que je ne parle pas votre langue bien. Pardon!
Besides working for my own company, I am senior associate at Borrell Associates, a company that provides executive strategies to media companies. I manage Borrell’s business outside of North America.
Earlier today, Martha Stone of WAN’s Shaping the Future of the Newspaper Project showed us several case studies about American newspapers’ success online.
I will reinforce the points that she made. I’ll show to you the overall picture online in the United States:
- I will show you how the United States has become the epicenter of a seismic shift in the newspaper business, from print and to online. How the Internet has become as important to Americans as television.
- U.S. newspapers earned billions of dollars online last year, and those revenues are growing at nearly geometric rates.
- I’ll also show what type types of advertising revenues were earned online and what newspapers’ market shares are in each.
But speed is of the essence in this shift. Newspapers must serve online advertisers as soon as possible, or else forever lose the classified advertising business, plus other forms of online advertising, to’ ‘pure play’ Internet competitors. In fact, as more and more people shift their news reading from print to online, the newspaper industry must dramatically increase its online advertising revenues or else die. I’ll show you why.
Permit me to show just one PowerPoint slide about whom we at Borrell serve. These include major newspapers, broadcasters, banks, and Internet companies. Yes, this slide is an advertisement about Borrell, but then this is an advertising conference, no?
But the data and findings that I will show to you are based upon my company’s core research: This research includes:
- Local advertisement spending data from any and all American media markets.
- We also have local online advertising revenue data from the websites of 2,300 newspapers, television and radio stations, and Internet ‘pure-play’ companies in America. (Do you know this English-language Internet business terminology ‘pure play’? It indicates media companies that operate only online, that do not have newspapers, magazines, broadcast stations, or directories. Companies such as Google, Yahoo!, and America Online.)
- We have also performed more than 250 local market audits of advertisement spending.
- Plus, we regularly consult with national and local advertisers, media companies, and the ‘pure-play’ companies, plus a panel 400 local-market advertising experts.
Notice that I have emphasized the word local. That word will become important in this presentation.
We believe that the United States will become the epicenter of a seismic change in the newspaper advertising business. I say seismic because the ‘continent’ of print is colliding with the ‘continent’ of the Internet, and changing the American media landscape.
During the past ten years, the Internet has become ubiquitous within American households. Nearly 70 percent of households now have Internet access, and nearly half of those have high-speed ‘broadband’.
More U.S. households now have Internet access than purchase daily newspapers.
In only 10 years, Internet access has become almost as pervasive as television in American households. It was accepted as quickly as television.
Most importantly for us, the Internet, like television has, more and more is becoming a primary source of news for people &151; particularly among younger people:
- Thirty-six percent of Americans who are between 18 and 29 years of age say that it their primary source of news.
- Thirty-one percent of Americans between ages 30 and 39.
- And 29 percent of Americans who are in their forties.
To profit from this change, every American daily newspaper has launched a website.
The results are encouraging. From a population of 300 million Americans, including 150 million adults, the websites of American newspapers serve more than 50 million people each month.
The average persons who visits a newspaper website visits almost eight times per month. He reads more than 45 newspaper webpages and spends more than 40 minutes on newspaper websites each month.
Some surveys report that 40 percent of those 50 million persons are people who never read printed editions of newspapers.
But look at this: The number of people who read a newspaper online (53.8 million) is now almost equal to the number of people who read a weekday edition in print (54.6 million). Yes, the frequencies of use are different, but the sheer numbers are not.
But almost all American newspaper website is free. Only 35 of the more than 1,500 daily newspapers’ websites charge for access. Many have tried, but discovered that readers will not pay. So, newspaper websites must get advertising revenue to profit.
Fortunately, online advertising revenues are rocketing. Online advertising is the most fast growing form of advertising.
Here is an illustration that shows the trends in advertising market shares for newspapers, radio, broadcast television, cable television, and the Internet, during the years 1949 to 2005:
- Newspapers are the top, steadily declining, line.
- Broadcast television, which has been our most formidable competitor, is the line that arches up and then slowly down.
- Our oldest broadcast competitor, radio, is the mostly flat yellow line.
- Cable television, which was our newest competitor, is the faint blue line slowly rising up.
- And the newest, Internet advertising, is the only rising trend line. It’s sharply rising.
But here is the interesting thing: Internet advertising is overtaking advertisements on cable and radio (it already has surpassed radio in the U.K.), and will make it overtake U.S. advertising on broadcast television and newspapers sometime during the next ten years.
Advertisement spending on the Internet in the United States surpassed 17 billion dollars last year..
It will surpass advertising spending on ‘yellow page’ directories this year. It will surpass radio advertisement spending during the next 12 to 18 months. It has already surpassed advertisement spending on outdoor billboards and magazines.
How much of the 17 billion dollars in online advertising did newspapers capture?
American newspapers earned nearly 4 billion dollars in online advertising. That included more than 1.9 billion from national online advertising revenue, 1.7 billion from local online advertising, and 222 million in ‘direct’ referral online advertising.
By comparison: American television stations earned more than two billion dollars. Various online directors earned more than one billion. Magazines and other print media earned nearly 400 million dollars. And radio stations earned more than one hundred million.
Yet, ‘pure play’ Internet companies, such as Google and Yahoo, earned more than half of all online advertisement spending during 2005: Almost nine billion dollars. Almost 53 percent of all online advertisement spending in the United States.
Newspapers however earned most of the local online spending by advertisers: a 41 percent share.
Nevertheless, the ‘pure play’ Internet companies captured nearly a 32 percent share of local spending. Google, Yahoo!, and companies of that type are now in the local advertising business.
Online is an explosive advertising market! Here is a table that lists the online revenues of some American media companies. The far right column shows the compound annual growth of these companies’ Internet advertising revenues from years 2001 through 2004. Over four years.
The companies I have marked in yellow are newspaper companies:
- The Gannett Company: 43 percent compound annual growth in online revenues.
- Knight Ridder company: 39 percent.
- Media General: 63 percent.
- Lee Enterprises: 45 percent growth.
- Even giants such as The New York Times, Washington Post, and Tribune companies: 25 to 28 percent compound annual growth over these four years.
Plus, these newspaper companies enjoy excellent profit margins from their websites. The average profit margin at an American newspaper website during 2004 was 68 percent, before taxes, depreciation, and amortization.
Most of the revenue growth by U.S. newspapers last year was from online.
Here is a graph that illustrates the growth rates according to newspaper circulation size. The smaller the newspaper, the higher its growth rate in online advertising revenues.
That is because local online advertising is causing most of our industry’s growth in online advertising. Local online advertising!
Outside of online, all advertising advertising in print, broadcast, and other traditional media is very evenly balanced between national and local. In America: 49 percent is national and 51 percent is local. But for online, it’s closer to a 80-20 mix, a phenomenon that was seen in the early years of broadcast TV when the vast majority of television advertising was national.
The reason why local is catalyzing online advertising is because that advertising are now moving toward equilibrium online. More and more advertising is going online, shifting online. Moving from 23 percent of balance to approximately the same as all other advertising: equilibrium. An equal balance between national and local.
Local advertisers in America are doing what they always do when a new advertising opportunity comes along: They wait until it hits ‘critical mass,’ or reaches a majority of all households, then they begin experimenting with small portions of their advertising budget.
In America, the Internet reached 50% of all households at the end of 2003, and in 2004 we began to see a very strong increase in local advertising on the Internet. While it is growing rapidly about 35% to 40% per year it has a lot of room to grow.
Today, online advertising represents less than 4% of a local advertisers’ budget. We think it will eventually hit 20%, perhaps more, over the next five years.
Remember that newspapers are the dominant local advertising medium online: In local markets, newspapers typically get a 43% share of all locally spent Internet advertising. ‘Pure-play’ companies like Google, Yahoo, Realtor.com, Monster and others get a 27.8% share. (I should point out that there are typically many local newspapers in one market, so while their Internet share is 43%, the average share for an individual newspaper is 18%.)
Indeed, newspapers hold a 43 percent share of the local online advertising revenues in America. The ‘pure play’ Internet companies hold only 28 percent, but that percentage is growing.
Newspapers and ‘pure play’ Internet companies such as Google and Yahoo hold control more than 70 percent of local online advertising in America. Directories, television, radio, magazines, and other printed medium control the remainder.
But newspaper web sites in 2005 were still heavily dependent on classified advertising. In fact, 70% of their revenues were derived from the three classified verticals.
The remarkable thing is that these three categories represent less than 10% of the overall online advertising expenditure in most cities, according to Borrell’s WebAudit data. That is, newspapers are deriving 70% of their online revenues from just 10% of the ad spend.
This, by the way, is a major focus of our research and I want to this point for emphasis:
Newspapers are falling into the ‘Disruptive technology’ trap. They are focusing almost all their online advertising efforts on the declining side of their businesses the 25% of the money that involves print classified categories the old-fashioned side of the business. And they are missing the bigger opportunities the 75 percent of the online advertising that doesn’t involve those old classified categories. This must change if newspapers are truly going to profit from online.
Nevertheless, let us examine the three traditional classified categories from which newspapers are getting their online revenues:
- Forty three percent of American newspapers’ revenues online comes from recruitment classified advertising.
- Then automotive classified comprises 15 percent of it.
- And property classifieds (which in the United States we call ‘Real Estate’ advertisements) are 12 percent.
- All other categories of classified and display advertisements including Web banner ads comprise the remaining 30 percent of revenues.
Recruitment advertising is rapidly shifting online. During year 2004, employers spent only 1.2 billion dollars online but 4.5 billion dollars in newspapers. Last year, however, they spent 3.5 billion online and 5.4 billion in newspapers.
This table shows how rapidly recruitment advertising is shifting toward online. Total recruitment advertising in all media grew by only 1.6 percent. Fortunately, newspapers’ share of those revenues grew by 17 percent. But online media’s overall share grew by 175 percent.
We predict that within two years the online spending for recruitment advertising will surpass spending on recruiting ads in newspapers. American newspapers that have not launched classified sites online have been badly damaged.
In similar fashion, the amounts that Property advertisers are spending in newspapers has begun to decline while the amounts that they spend online rapidly increases. Within three years, we predict that in America online advertising for properties will surpass newspapers advertising for properties. Newspapers very actively need to launch online property sites.
Here is a headline from The Wall Street Journal one month ago (‘Auto Ads Veer Off Newspaper Pages, Head to Web’). A few years ago, there was a very popular movie in America entitled Thelma & Louise, in which the heroine ultimate drove off a cliff. That is what automotive advertising in America newspapers is doing: driving off a cliff.
During the month of December, according to The Wall Street Journal, automotive classified advertising at the McClatchy Company, publishers of many large Americans newspapers, dropped 20 percent. At the Tribune Company, 16 percent. At Lee Enterprises, 15 percent. Those are 3 of the 5 largest newspaper companies in America.
According to Deutsche Bank, automotive classified advertising in printed newspapers is ‘trending down significantly.’ The Wall Street Journal reports that ‘the slippage may be turning into a landslide.’ And many auto dealers in the United States now think that advertising in printed newspapers no longer works. They know that 8 out of 10 car purchasers last year went online before entering the dealers’ showrooms. Most auto dealers in cities of more than 50,000 people are now hiring an Internet sales manager. If American newspapers are to keep automotive classified business, those newspapers must launch online automotive sections very quickly and actively.
What I tell you is no longer theoretical; it is actual. There is no time to waste.
This is a chart of daily newspaper circulation in America from the year 1960 to 2003. Circulation has declined steadily for more than 20 years. Although this chart shows a drop from only 63 million weekday copies in 1985 to about 56 million in 2000, remember that the U.S. population
doubled increased almost 45 percent during that time.
Moreover, this has gotten much worse. Last year, during a good economy in America and a year full of news, most newspapers suffered significant accelerating declines. The Los Angeles Times lost 6.5 percent of its weekday circulation last year. The Chicago Tribune, 6.6 percent. The San Francisco Chronicle, 16 percent. The Boston Globe, 8 percent. Printed newspaper circulation in the United States is now in free fall, like a skydiver but without a parachute. Anti-telemarketing lists and new Audit Bureau of Circulation rules have little to do with these real declines.
Many publishers will tell you, don’t worry. They will tell you that they may have lost tens of thousands of readers for their printed edition, but that they have gained hundreds of thousands of readers for their online editions.
That sounds good. However, I will tell you why it is a false solution today.
This is a chart of how much American newspaper websites earned during 2004 per user. Each column represents a different print circulation range of newspapers. The range shows an average of 5.89 dollars per user per year at small newspapers to 25.17 dollars per users per year at metropolitan newspapers.
I say again: these are revenuers per user per year.
How wonderful that these online revenues are growing at 25 to 60 percent compound annual rates!
However, there is a problem: The printed editions of these newspapers earn between 500 and 900 dollars per consumer per year. That is the combination of direct circulation revenues plus indirect revenues from advertising (adveretising revenues divided by circulation). The printed edition earns nearly 20 to 100 times as much per consumer than per consumer of the newspaper’s website.
So, for every print edition reader we lose, we now must gain between 20 and 100 website users to replace lost revenues.
If American newspapers continue to lose 2 to 16 percent of their print circulation each year, they will need to gain 40 to 1,600 percent more website users just to stay even. Unless we can greatly increase our online advertising revenues!
So, the United States is the epicenter of a seismic shift in the newspaper business from print and to online. As the Internet becomes a primary source of news, advertisers and their spending follow.
Because people will not pay to access newspaper websites, advertising revenues become paramount online.
More than 17 billion dollars were spent on advertising online in America and newspaper received nearly 4 billion of that. Those revenues are growing at nearly geometric rates. Local online advertising is fueling that growth, and newspapers are excellently positioned to capture it.
But speed is of the essence. Newspapers must serve local online advertisers as soon as possible, or else forever lose the classified advertising business, plus other forms of online advertising, to ‘pure play’ Internet competitors. Some experts say the battle is already lost in America because newspapers did not move fast enough.
Indeed, as more and more people shift their news reading from print to online, the newspaper industry must dramatically increase its online advertising revenues or die. This trend is happening in North America, and please don’t think it won’t also happen elsewhere. It’s happening in Scandinavia and The Netherlands. It will soon happen in the rest of Western Europe. And it will happen during our career lifetimes elsewhere in the world.
We must make the revenues we earn from online readers equal or more than what we once earned from the people who no longer read us in print.
Thank you for your time today. Merci Beaucoup! I hope that I have given you some things to think about.
I look forward to the presentations tomorrow by Jim Chisholm about similar topics.