What’s Behind Fall in Papers’ Web Rev. Growth

Amidst the plague-like conditions newspapers are facing — the locusts eating up print ad revenue, a flood of ill will from Wall Street, the arid credit markets, and crushing loads of debt — publishers could once at least find relief in the steady, often strong growth of online ad revenue. For several years, executives touted the double-digit rise in online dollars as the reason to keep believing in newspapers.

At the start of summer, that comfort vanished.

The Newspaper Association of America (NAA) released its quarterly numbers for the industry in September — and for the first time since the association started tracking and breaking out online ad revenue five years ago, the category dipped into negative territory. In Q2, online ad revenue fell 2.4 percent year over year to $776 million. Online ad revenue had grown 7.2 percent to $804 million in the previous quarter. “The only good news, other than cost reduction, was largely the growth in digital that newspapers have had,” observes Christopher Vollmer, a partner and practice leader for the U.S. media and entertainment group at consulting firm Booz & Co. “Now it appears to have stalled.”

One quarter does not a trend make, and growth abates as revenue rises. But online revenue is still a very small piece of the total ad pie — in Q2 it represented only 8 percent — and too little to excuse a slowdown. As Harry Hawkes, a vice president at Booz & Co. who leads the firm’s newspaper work, quips, “When it was growing, they were still trading nickels for dollars. The increase wasn’t that great when it was good.”

Nevertheless, newspaper publishers have been counting on double-digit advances in online revenue to help make up for the loss of print ads. It was the last tool they could use for positive spin. So are the latest results only a small jolt? Or are newspapers in for a real shock in quarters to come?

The problem? It’s classified
“Alarming?” Gordon Borrell of Borrell Associates asks about the downturn in online ad dollars. “We have been telling people this fire has been coming in this direction for years.”

For Borrell and several other sources interviewed for this report, one of the main reasons for the downturn is an over-reliance on classified advertising and combo sales packages. About 60 percent to 70 percent of online revenue for the industry as a whole comes from classified, confirms Randy Bennett, the NAA’s senior vice president of business development. He believes Q2 declining results are “primarily tied to classifieds and the dramatic drop in classifieds overall, and newspapers’ reliance on classified dollars to drive online.” Adds Wachovia senior analyst John Janedis: “Even online, these companies in the industry have too much exposure to classifieds.”

The technique practiced for years is to upsell classified print ads by tacking on an online ad for additional dollars. For a long time, it worked.

Display advertising, not listings, is where the growth is, at least in the first half of 2008: The IAB reported it rose 19 percent to $3.8 billion.

“To get the big numbers and big increases as they were touting this as a panacea of print decline, they were riding up the escalator of classified sales,” says Ken Doctor, an affiliate analyst with Outsell Research and author of the Content Bridges blog.

The problems with this strategy is: One, when print ad revenue drops off a cliff, so does online classified revenue when it’s tied to the former. Two, classifieds, even those sold purely on the Web, are exposed to the elements of the economy no matter where the listing appears. The Internet offers no more protection than print.