2005 Annual Report - Online Economics

Despite growth, however, Internet revenues continue to make up a very small percentage of total media company revenues. So far, most companies have been willing to invest in and promote their Web sites to be sure they are on top of the latest communication trend. Eventually, though, the sites will probably need to demonstrate their profitability as a company asset.

Online Revenue as Percent of Total Company Revenue

Figures are for 10 public newspaper companies from January-June 2003 and 2004

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Source: Borrell Associates, unpublished data, August 2004

Includes Media General Inc., Lee Enterprises Inc., Belo Corp., McClatchy Co., Washington Post Co., Knight Ridder Inc., New York Times Co., Tribune Co., and Gannett Inc. 2004 McClatchy data is an estimate based on company statements.

Online advertising takes three main forms: search ads, display ads, and classified ads.

Search ads are more targeted than display or classified ads because they appear only when a reader has searched for a relevant topic.¹⁷ Data from the Interactive Advertising Bureau and Pricewaterhouse Coopers show that use of search ads more than doubled between 2002 and 2003, to 35% of all online ads from 15%.¹⁸ And the growth appears to be continuing; as of the second quarter in 2004, they accounted for 40%.¹⁹ The growth, and the status of search ads as the most popular type of online revenue, mirror a trend in the online world toward a more targeted, individualized Web experience.

Display ads, also known as ad banners, are less targeted than search ads because their position is not determined by the online viewer's behavior or search criteria. Display ads make up the second-largest percentage of total online spending revenue, but they appear to be on the decline. They accounted for 21% of total 2003 revenue and were at 20% in the second quarter of 2004 -a significant decrease from their 29% share in 2002.²⁰

Classified ads are third as a percentage of total online revenue. In 2003, they made up 17%, and stayed at 17% in the second quarter of 2004. That was a slight increase from 15% in 2002.²¹

In addition to the three main advertising categories, there are some other sources of revenue online. According to the Interactive Advertising Bureau and Pricewaterhouse Coopers data for the second quarter of 2004, sponsorships accounted for 9% of revenue, rich media 8%, and e-mail, referrals and slotting fees 2% each.²²

The figures can differ by type of Web site. No one compiles data on the overall specific percentage of ad revenue that comes from online sites devoted to news, but some figures have been compiled about newspaper sites, and their ad revenues offer clues to the rest of the industry.

Classified advertising, for instance, is far more important to newspapers online than to the Web overall. Newspaper Web sites receive 60% of their revenues from classifieds, according to a survey by Borrell Associates. Of that total, 62% comes from employment ads, along with 19% from both automotive and real estate.²³

As revenues increase, online classified advertising is becoming more distinct from its print counterpart. In the past newspapers sold print and online ads in combination. Unlike the trend to bundle broadcast and online ads, though, online newspaper ads are increasingly being sold separately from their parent publication. In early 2004, 69% of the top 232 newspapers offered Web-only help-wanted ads, up from 45% the previous year.²⁴

Those online ads on newspaper sites still bring in far less revenue than their print counterparts. An ad that costs $200 for a month online costs $700 a week in print.²⁵ Nevertheless, given how large a share of newspaper online revenue classified ads make up, the success of newspapers (both print and online) depends on the percentage of advertisers migrating to non-news online sites such as Monster.com, Craigslist or ebay.

It is difficult to pin down exactly how much of an impact non-news online sites have had on newspapers' classified revenue. Monster.com, once the primary threat to newspapers, has seen its classified revenues drop by 21% since 2001 to $424 million, according to Borrell Associates.²⁶ Yet since then, other competitors have emerged as major threats. For example, eBay enjoyed a two-year increase of 72% to over $1 billion in 2003. Some of that shift is due to the popularity of the site itself, and some is probably tied to competition. And Craigslist, offering free classified sites, is a citizen-to-citizen site. It is not a revenue producer but a revenue destroyer.

Some industry insiders argue that a number of newspaper sites have become savvier about how to compete. Sites that offer shopping, classified ads, jobs, cars and other services in addition to news - such as the Lawrence, Kansas, World Journal online, SeattleTimes.com, Roanoke Times online - have done well against competitors like Monster.com. The battle is not over yet. Google and Yahoo are duking it out over the local search market, and that again is threatening newspapers. Some online advocates believe the ultimate threat is free services like Craigslist, which would demolish Monster.com as well as newspapers and turn classifieds into a free service.