Monday Note

Here’s the tragedy of our business model: Swelling demand, shrinking revenue. News is much in demand in these turbulent days.  The number of viewers is on the rise.  And, at the same time, the money we manage to extract from these swelling audiences is shrinking inexorably. We are about to pay the price — so to speak — of our dependency on the advertising market, one that is highly sensitive to deteriorating economic conditions.   If, during 1929’s Great Depression, the cost structure of media had been what it is today, how many news organizations would have survived to report it?
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In the US market, newspaper web sites attract more users than ever. Last week, the Newspaper Association of American (NAA) reported a 16% surge of the online audience during the third quarter, rising to 68.3m unique visitors. This is the highest increase since 2004 (when NAA began tracking such data). Not only online are readers more numerous, but they are getting more “engaged” — an important notion in the new jargon: the number of page views rose by a hefty 25% for the period.
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Rejoice? Think again. Here is another record in the annals of the NAA: for the first time the online revenue of American newspapers decreased by 2.4% in the second quarter versus the same period in 2007. This marks the end of seventeen quarters of “unreal” growth. (We don’t dare extrapolating these numbers for the last two quarters of this year).

What’s wrong with this picture? Two things.
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First, we lose a frightening amount of money when our readers move from print to online. A few years ago, looking at the move from print to online, we feared the revenue per reader would drop in a 100 to 20 ratio. Now, estimates are more like 100 to 10. A survey conducted last year by Inland Press Association, showed that American newspapers web sites generate a $5 to $10 per unique visitor and per year; this is less than one-tenth of the revenue generated by print subscribers. These eighteen months old figures seem even more optimistic that our conclusions exposed in the Monday Note #53 (see: “The economics of moving from print to online: lose one hundred, get back eight“. By measuring pure player news sites and so-called “Superblogs” (more than 1m UV/month), we end up with annual revenue per visitor between $1.2 and $3, well below the 100 to 10 ratio.
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Second, the advertising base is much smaller for newspaper websites than for their print version. This is because the entire segment of listings — classifieds, entertainment guides, or business data — disseminate among a flurry of pure players. At the same time, online papers are increasing they pages inventory at a high pace. Consider this: the home page of the New York Times contains between 500 and 600 links. Even if only half of these links are new on that very day, the number gives us an idea of the volume of stories and other news elements added day in day out by such big news organizations. Such an organic growth begets a dangerous spiral: by a large margin, the inventory of pages available to advertisers outgrows the volume of ads filling web sites. (And I believe the gap keeps widening in this recession). Therefore, pages deprived of ads are on the rise. For many sites, the unsold level is well above 50%. Of course, the “ad-less” content is often in the least viewed tier of those sites.
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What to do with these tens of thousands of  non paying pages? Removing them would be the negation of an Internet that is all about depth, multilayer reading, etc. Plus, in technical or economical terms, such surgery isn’t practical, too much work. The remaining option is bargain basement prices. Enter the ad networks, the new bottom-feeders of the Internet value-destroying machine. Instead of charging  $10 to $40 per thousand impressions (CPM) for premium placement, surpluses are sold for a $2 or even $1 CPM. Ad networks are doing quite well, thank you: they live off a 50% cut of the prices they charge advertisers and their business is swelling. A study made by Bain & Company for the Internet Advertising Bureau (and quoted by the New York Times) reviewed seven big (undisclosed) American news sites: in 2006, only 5% of their ad spaces was sold through ad networks; a year later, the proportion rose six times to 30%!  Undoubtedly, for ad networks, such a surge in business enhances their pitch to advertisers. This explains the price of recent ad network acquisitions: $275m paid by AOL for Tacoda,  $700m by Yahoo for Right Media. Most of the serious players in the field have been acquired for top dollar in the last two years.
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Massive reliance on ad network isn’t necessarily a great idea. It is a short-term tactic, it drives down the value of news.  Dumping the price for automatically generated pages such as weather or search results is understandable.  But doing the same for a well-crafted report just because the item in question is three-years old is another story, a dangerous devaluating move.  Yes, managing unsold (and sometimes aging) news inventory is a difficult task, one that requires more effort than a “flick of the mouse” disposal into the netherworld of desperation-price ad-networks.  There are better ways, free modules are good tools to promote special features and reference material, to give them a new life. And the need for such clever internal data mining is obvious considering that a single visit to a news websites generates only 3 to 5 pages views on average. Using whatever it takes to increase this pathetic ratio should be the priority for online publishers. Of course, it requires adequately trained curators and a true promotional strategy. But in the end, it will boost the revenue way more than accepting a value close to zero for 50% of a news inventory. –FF
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