Closing the Revenue Gap

There's an argument you hear all the time from traditional media types when they talk about their internet business: The problem, they moan, is that you can't make enough money selling ads on the Web to cover the cost of a first-class news operation.

Well, yeah. Now. At the moment. But that complaint shows a striking lack of vision.

It's like saying in 1953 that television just wouldn't be a mass advertising medium. Or, for that matter, like saying in 1995 that the internet wouldn't be a ubiquitous information and communications medium (at high speeds, no less). It's trying to frame the future based on today's data.

The fact is, internet advertising revenue is increasing at a breakneck pace. Three data points from this past week illustrate that: Media buyer ZenithOptimedia forecast a 29 percent increase in online ad spending in 2007. The Newspaper Association of America reported that ad spending on newspaper Web sites grew 23 percent in the third quarter—and predicted a 22 percent increase in 2007. Gannett said it sees revenue at USAToday.com rising by as much as 20 percent next year.

Even at the low end, those are hefty increases. And I suspect they're conservative estimates, given the explosion in online activity we've seen over the past few years. Advertisers have been very slow to understand how to use the Web and to make it a big part of their ad spending plans, but that's changing. Kraft Foods and Anhueser-Busch, two of the biggest national advertisers, doubled their online ad spending this year, for instance. The numbers are still relatively small as a percentage of their total ad buys—about 10 percent and 5 percent, respectively—but they still illustrate the trend. Another data point: in Britain, financial services companies are spending 30 or 40 percent of their ad dollars online. ("The U.S. is so behind,” Yahoo CEO Terry Semel said in a recent speech. "It’s certainly lagging the U.K. by at least a year or two.")

All of these trends are much better than what's happening in print, where "flat to down" is a kind way of describing what's happening to ad revenue. With circulation dropping and big advertisers switching to other media or consolidating, print newspaper advertising revenue was down 1.5 percent in the third quarter, according to the NAA, while online revenue was skyrocketing. Which business would you rather be in?

No, the revenue from online advertising isn't enough—yet—to cover the cost of running full-fledged news operations. But that's changing, and newspaper companies need to understand that. Yes, there is a day coming in the next few years when newspaper Web sites will be able to pay their own way as newsgathering organizations, not just repurposers of a print product. As newspaper analyst Gordon Borrell told The New York Times this week, in terms of ad revenue, "10 years out, many newspaper Web sites could be as large as the newspapers that spawned them."

At that point, the transition from print to Web, which still seems so hard for many media companies to see right now, will be just about complete. And I'll bet it comes sooner than 10 years.

(Note: Most citations in this post are from The New York Times and Wall Street Journal, meaning they're behind registration or subscription walls—another form of undertapped revenue, btw—so I couldn't link to them.)

Comments

[Mary Specht]

I agree with you, advertisers will begin to see the light in less than 10 years.

And I'd go one step further than Gordon Borrell to say ad revenue will be much larger than that of the current print editions simply because there are more readers--millions more, in the case of major newspapers like the Washington Post and the New York Times.

[Mark Potts]

Mary: Your last point is excellent. Newspapers already are seeing considerably higher readership because of the Web, since they are now available around the world via the Web rather than just in the area their delivery trucks can reach.

In the case of Washingtonpost.com, which you mention, 90 percent of site traffic is from outside the Washington area. Distribution of the paper outside of Washington, by contrast, is just a few thousand copies. That's a huge change, and it has fascinating implications for editorial philosophies and for advertising opportunities. I'm planning on writing about this sometime soon.