Does the Lifeboat Need a Lifeboat?

The Wall Street Journal reports that the growth of revenue from online newspaper advertising is slowing.

On the face of it, that's Not Good. Newspaper companies are looking to their Web operations to be the lifeboats that will rescue them from declining print revenue. If Web revenue doesn't make up the difference, then the lifeboat, well, goes down with the ship. Right?

Not necessarily. As with all statistics, the Journal's are worth a closer look.

First of all, growth of all Web advertising is slowing, largely because it would be almost impossible for it to continue growing at the dizzying pace at which it's been growing. Quoth the Journal:

EMarketer, a market-research firm, predicts the overall growth of U.S. online-ad revenue will slow to 18.9% this year from 30.8% last year. It predicts newspapers will do slightly better.

Let's face it: 18.9 percent growth is not shabby. If you start with $100, grow it 30.8 percent to $130.80, then grow that number by 18.9 percent, you get a $24.72 increase--only slightly smaller than the first increase. And that's just an estimate anyway--advertisers are getting smarter about online marketing and moving more money into it. It's not unreasonable to think that the 2007 increase will be larger than predicted.

But even more interesting is this tidbit:

One major issue for many newspapers online: Roughly 70% to 80% of their online revenue is tied to a classified ad sold in the print edition -- known as an "upsell," says Paul Ginocchio, a newspaper analyst at Deutsche Bank. And as newspapers see a sharp erosion in classified advertising for real estate and jobs, their Web sites are being hit as well.

In other words, same-old same-old--the same advertising category that's getting hammered offline is threatened online (thank you, craigslist). That's what happens when you paste a business model and product onto a computer screen, rather than try to truly innovate. Newspapers are still applying the old offline models online, making themselves doubly vulnerable. The lifeboat, it turns out, is just as leaky as the mothership.

As the Journal story says, newspapers need to be looking hard for new advertising and revenue sources online, seeking business models that will offer true growth rather than cannibalizing the already cannibalized print business. This means moving beyond classifieds and banner (display) ads to become more aggressive in search-based advertising, targeting smaller local advertisers that aren't already in the newspaper, creating specialty products that attract higher-CPM specialized advertisers and providing non-advertising services to customers (such as Cars.com's pioneering car-dealer inventory-management services, a significant value-add that goes way beyond advertising).

Just as slapping the newspaper on a screen is a losing strategy, replicating the old print advertising models online leads to diminishing returns—as the numbers are now showing. If newspapers want their online products to be a lifeboat to the future, they need to truly innovate and aggressively create new sources of revenue to replace the ones they're losing.