Online Economics - 2006 Annual Report

Revenue in 2005

One way to illustrate the economics of online advertising is to talk about one sector. Newspapers are the biggest recipients of online advertising, and in 2005, it appears spending on them continued to surge.

According to research by Borrell Associates, online revenue for daily and weekly newspapers owned by publicly traded companies grew by 47% in 2004, from $811 million in 2003 to $1.19 billion. For 2005, Borrell projected revenues would climb another 28%, to $1.52 billion. 11

Online Revenues for Select Newspaper Companies, 2004

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Source: Borrell Associates, ‘‘What Local Web Sites Earn,’’ March 2005

And the partial-year data suggest the projections were on target. For the first two quarters of 2005, online ad spending on newspapers grew 29%, according to estimates released by the Newspaper Association of America. By comparison, total spending on print advertising in the period had grown just 2%.12

At the New York Times Company, to take one case, online advertising revenues were up approximately 30% while overall advertising, for both digital and print operations, grew only 0.9%.13

Indeed, many newspaper companies have turned to their online ad growth as a remedy for their rather anemic print ad revenue. In May of 2005, Merrill Lynch estimated that half of first-quarter ad revenue growth for public newspaper companies came from their online operations. And in the second quarter, a Bank of America report indicated that more than 100% of the growth for some of the biggest companies — Dow Jones, Journal Register, Knight Ridder, and Tribune — was credited to online. Percentages were lower at other newspaper companies, but the median for all companies researched was nearly 80%.14 15

Despite their importance as a growth sector, however, online ads still contribute only a small percentage to their companies’ overall revenue — between 1% and 7% of total newspaper advertising revenue. Newspapers currently can charge only a fraction for online ads of what they charge for ads in their print editions. The reason for that was a much-discussed topic at Forecast 2006, the latest in an annual conference on the future of media: the question of engagement. Namely, how much is an online ad worth if the viewer is not as engaged with the ad as he or she is with advertising placed in other media, particularly print media? The answer, at this point, is that no one really knows.

Online Revenue as Percent of Total Revenue, 2001-2004

Select companies

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Source: Borrell Associates, ‘‘What Local Websites Earn,’’ March 2005

* Revenues are print revenues only

Newspapers in the Future

Looking ahead, at least one market research firm, Emarketer, projects that online newspapers will contribute as much as 8% to total revenue by 2009 (compared to 4% and 5% now).16 Yet even if strong growth occurs, there is reason to believe that online ad revenue won’t be able to compensate for many years of struggling print revenue . Rick Edmonds of the Poynter Institute, a collaborator on this annual report, has estimated that if online revenue grew annually by a third, and newspapers ’ print ad revenue grew by just 3%, online revenue wouldn’t surpass print revenue until the year 2018. Yet as the discussion here makes clear, sustaining annual 33% growth rates online is probably unlikely, and may only get harder, especially if competitors like Google, Yahoo and craigslist remain growing players. 17

Online Revenue vs. Newspaper Revenue
Revenue in millions

	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Online	3	4	5.3	7.1	9.5	12.7	16.9	22.5	30	40	53.3	71	94.6	126.1	168.1
Print	97	100.9	104.9	109.1	113.5	118	122.7	127.6	132.7	138	143.5	149.2	155.2	161.4	167.9

Source: Rick Edmonds,"An Online Rescue for Newspapers?", January 27, 2005, Poynter Institute
Projected revenue growth through 2018 is based on 2004 growth numbers of 4% for newspapers and 33.3% for online.

This is one of the critical questions for newspapers: will revenue from online advertising, even as it grows, be enough to bolster the struggling newspaper industry, which has long prided itself on its ability to do difficult investigative work that costs a lot of money? If not, will anything else take up the slack? Could quality journalism become a philanthropic exercise? Could local interests begin to invest in journalism, and invest more, because they expected smaller returns than Wall Street and publicly traded media companies have typically demanded? As noted in past years, this is the probably the most fundamental issue underlying any discussion of media economics today.

Rich Media

Defining “rich media” may be as difficult as agreeing on one definition for blogs. It may include video, graphics, text, animation or audio. Still, there are certain characteristics of almost all rich media, most notably that they are digital and interactive.

While spending on rich media has increased in the last few years, it has not yet increased its share of the online advertising market. After the first six months in 2005, rich media accounted for an 8% market share of all online advertising, as reported by IAB, the same as in the first half of 2004.26 In 2004, total spending on rich media grew 32%, increasing to $963 million from $727 million.27

Video, of course, is a large component of rich media. Many extol the new technology as a gateway to economic viability on the Web. As the New York Times described it, “new Internet video programming is a way to cash in on the demands of advertisers who want to put their commercials on computer screens, where new viewers are watching. And for many Web sites, viewers can’t skip the video commercials, the way they can when using TIVO and other video recorders.” 28

There was considerable discussion in late 2004 that 2005 might be a breakout year for online video. Based on audience and preliminary economic figures, online video use is widespread, although regular use appears to be relatively small. But based on the increasing number of video clips that have become available on the Web, particularly on news sites, higher levels of both use and revenue from advertising seem likely in 2006.

Research from Comscore shows that nearly 60% of the online population consumes online digital media (streams and downloads) every month.29

Regular online video consumption, however, is small. As of 2004, just 5% of online users said they watched video over the Internet daily.30

There is some evidence that online video may surge during very large news events, particularly those that provide dramatic news footage. For example, online video traffic performed extremely well during the aftermath of Hurricane Katrina. Media coverage of the storm’s aftermath generated 10 million video downloads on CNN.com on August 29; MSNBC.com generated 10 million video downloads by mid-afternoon on that same day.31

Meanwhile, survey research shows that news clips are the most commonly watched type of online video, even surpassing movie trailers. Fully two thirds (66%) of online video watchers say they watch news or current-event videos on the Web, compared to movie clips and trailers (49%), music videos (29%), and sports highlights (27%), according to the Online Publishers Association.32 33

It seems marketers have so far remained cautious toward investing in online video advertising. According to Jupiter Research, just $121 million of the $9.5 billion spent by advertisers in 2004 was spent on online video. Two research firms, Jupiter and eMarketer, however, project that video will grow exponentially over the next several years, with Emarketer projecting $1.5 billion by the end of the decade.34

Several technological developments were made in 2005 that could lead to both higher penetration and more ad spending on online video in the immediate future. Google and Yahoo added links to video search engines on their home pages. Those two are, of course, the world’s largest search engines.

Other media companies have also made moves to showcase their growing online video inventory. In September, the New York Times reported that Time Warner and Viacom were beginning to post some of their video on the Web that could ultimately be indexed in online search engines.35

What’s more, the former Internet titan Lycos announced in October that it had launched technology to take video publishing to the small-scale content operations — even the one-man show. Its technology, said the company’s CEO, Brian Kalinowski, will allow users to self-publish their own videos. Users would have to post the video on the Lycos Web site, but they would maintain ownership of the content.

And as further evidence that online video is now being taken more seriously, the Internet Advertising Bureau announced in late November it had issued new guidelines for online video advertising and had formed a Broadband Committee to develop the standards for tracking commercial figures.

Though spending on rich media should grow, are there obstacles to overcome? Challenges may be “a dearth of inventory, with publishers unable to create content fast enough; technological obstacles to transferring high-quality video online and to broadband penetration; and consumer resistance.” 36Also, a lack of standardization among online video players is a critical concern, and some consumers may not want to take the time to download the players from the Web. 37

In addition, production costs may still be too high for many marketers. Right now, an Internet commercial costs about $15 to $20 for each 1,000 viewers, nearly as much as broadcast networks charge. The price may be high because there is much more demand from advertisers than there is Internet video programming available — though that might change as software companies make it simpler and cheaper to upload video on the Web. For example, the Cambridge , Mass.-based company Brightcove allows amateur videographers to post their work on the Web and even make money through advertising.

Survey research among business leaders also seems to suggest cost may be an issue: 78% of executives reported that impressions on home pages, vertical channels, and rich media cost more in the second quarter of 2005 than in the first quarter.38