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Economics

Economics

By the Project for Excellence in Journalism

The economics of the Internet are still new and still being sorted out, but for now and the foreseeable future the news industry is still betting on advertising revenue as its basis.

In 2007, online ad revenue continued to grow, but for the first time fell short of analyst expectations. And growth rates over the next several years are now expected to slow even more. Moreover, news is lagging other online categories in growth.

Despite all this, given even greater slowdowns in other platforms, at least one major research firm predicts that by 2011 the Internet will trail only newspapers and broadcast television in total revenue. What is less clear is how much news will be a part of that.

And all this may change if new forms of advertising or revenue grow, or if the portable technology of video, podcasting and cell phones, now relatively small revenue enhancers, increase beyond anyone’s expectations.

Growth in 2007

Ad spending online is still growing, but not as quickly as in recent years.

Through the first nine months of 2007, online ad revenue grew by 26% to $15.2 billion, according to Interactive Advertising Bureau. But that number was down from a 36% growth rate through the same period a year earlier.

Depending on the source, growth predictions for the full year 2007 vary. JMP Securities projected 26%, while Borrell Associates put the figure at a low of 10%.1

But whatever their differences in accounting and projections, most analysts agree that growth is slowing and they offer a number of reasons why.

First, the industry has not yet agreed upon an audience measurement, a source of complaints from online media and advertisers. As online measurement firms experiment with the most effective way to count online viewers, advertisers can only guess how many consumers are seeing their ads. ( See Audience section and Advertising chapter).

A weakening U.S. economy could also be slowing the online ad market. Real gross domestic product was expected to grow just 2.2% in 2007 and 0.8% in 2008.2

Some experts also contend that advertisers need to make their Web strategies a higher priority and bring digital out of the back room. According to a survey conducted by the Association of National Advertisers, the Interactive Advertising Bureau and Booz Allen Hamilton, only 24% of marketers believe their organizations are “digitally savvy.”3

But most marketers realize that online is now critical to their broader ad campaign strategies. According to the Interactive Advertising Bureau’s president, Randall Rothenberg, “Marketers large and small have come to accept digital media as the fulcrum of any marketing strategy.”4

Looking Ahead

Despite the slowdown in growth, as ad strategies become more and more directed toward the Web, most analysts see the Web’s piece of the pie growing.

By 2011, Veronis Suhler Stevenson predicts that online advertising will reach $35 billion, a compound annual rate of growth of 18% between 2006 and 2011. That projection trails only newspapers ($60 billion) and broadcast television ($53 billion).5

Advertising Spending
2007-2011, Spending in Millions ($)

2007 2008 2009 2010 2011
Newspapers
56,200
57,192
58,120
59,260
60,367
Broadcast Television
48,150
52,263
51,198
54,437
53,454
Cable & Satellite TV
23,452
25,925
27,830
30,545
32,492
Broadcast & Satellite Radio
20,725
21,386
21,733
22,604
23,143
Yellow Pages
15,914
16,173
16,481
16,836
17,233
Pure-Play Internet
19,093
23,106
27,462
31,246
34,780
Consumer Magazines
13,996
14,581
15,192
15,823
16,465
Business-to-Business Magazines
11,489
12,103
12,845
13,714
14,717
Out-of-Home
7,931
8,943
10,103
11,441
12,986
Entertainment Media
691
1,006
1,314
1,720
2,343
Pure-Play Mobile
810
1,259
1,755
2,235
2,707
Total
218,451
233,937
244,033
259,861
270,687

Source: “Communications Industry Forecast 2007-2011,” Veronis Suhler Stevenson

The market research firm offered two main reasons for the shift in priorities in years ahead.

First, it considers online ad rates a bargain relative to television and print, which will help it grow.

Second, the capability that online offers advertisers to both track and target audiences will be even more appealing once the industry refines its methods of measuring.

If the projections are correct, they carry one other implication. While online advertising may be slowing, it is still growing at a brisk pace, while the competition, newspapers and television, are expected to be basically flat.

Ad Dollars and the News

As the Web becomes a stronger advertising tool, news sites are not expected to grow as much. In 2006, the rate of growth for ad spending on news sites already had not kept pace with other leading categories.

Data from TNS Media Intelligence, based only on display advertising and excluding search and video, show that in 2006, ad revenue for news and current events sites grew by just 9% from the year before, to $767 million. And that rate of growth is down from 12% in 2005.6

Over all, news is the third-largest category of online advertising, behind portals and search engines, as well as business/finance/investing sites.

In 2006, portals and search engines such as MSN, Yahoo and AOL took in $1.3 billion, an increase of 13%. Business sites took in display ad revenue of $901 million, up 26% from 2005.

Top 25 Web Site Categories by Ad Revenue, 2006
Dollars, in Millions

Rank Type of Site U.S. Ad Spending % Change
1 Portals, search engines & ISPs
$1,277.9
13.1
2 Business, finance, investing
900.5
25.5
3 News & current events
766.8
9.1
4 Sports
715.4
31
5 Local news & guides
689
48.3
6 General interest/general entertainment
644.1
16.1
7 Computing & technology
523.8
62.6
8 Movies, videos, TV & cable
374
1.6
9 TV stations
340.9
21.2
10 Portals & search engines
318.6
5
11 Games
315
5.4
12 Health & fitness
282
-22.8
13 Travel
260.1
15.2
14 Internet service providers
229.7
3.2
15 Automotive
206.8
15.5
16 Cards & screen savers
199
16.3
17 Common cultures/communities
138.1
35.9
18 Music, broadcast & radio
134.4
-9.9
19 Real estate
116.4
11.3
20 Shopping
109.2
34.1
21 Special interests/hobbies
109.1
25
22 Food
107.7
31.1
23 Meeting places
85.1
21.5
24 Hispanic
81.3
64.1
25 Education & reference
75
27.9
Total
9,769.8
17.5

Source: Data from TNS Media Intelligence on more than 2,800 sites.
Note: Dollars are in millions for calendar 2006 and represent only display advertising; excludes search and broadband video. Percent change computed vs. 2005 data, not shown. No 1 is multi-service such as MSN, Yahoo and AOL and No. 10 is just portals and search engines such as Ask and About. Categories are from TNS.

Local vs. National Advertising

Another way of parsing Web ads is by their geographic focus — those aimed at a national audience and those targeting a more local one. As far back as 1998, national ads have accounted for a much greater portion of ad spending. While this continues to be the case heading into 2008, local ads are gaining ground.

According to Borrell Research, local ads are projected to increase 32% in 2007, to $7.5 billion, from $5.7 billion in 2006.12

National ads, on the other hand, are expected to grow 20%, though overall spending is still nearly three times that of local ads.

Local and National Online Ad Spending, 1998-2007
Design Your Own Chart
Source: Borrell Research, “What Local Media Web Sites Earn: 2007 Survey”

Newspapers (36%) continue to dominate the local market but “pure-play” Internet companies, such as Google, Yahoo and Monster, are closing the gap (33%). Following are YellowPages (12%), other print (such as local magazines, with 9%), television stations (8%) and radio stations (2%).13

In response to strong growth in local online advertising, Web sites also are beefing up their sales forces. The number of local online-only salespeople increased 26% in 2006, with budget figures for 2007 showing an additional 35% increase.14

Video Advertising

Online video advertising was expected to grow exponentially in 2007, though in sheer dollars is still a very small number.

eMarketer projected that advertising on online video will grow 89% in 2007, to reach $775 million. But even with that growth, it will account for just 4% of total online ad spending. By 2011, the market is expected to multiply by more than five, to $4.3 billion, but still less than 10% of all Internet expenditures, eMarketer projects.15

That $775 million does not include the videos that marketers are creating and posting on their own sites. A February 2007 Advertising Age article listed some examples, including “Unilever creating mobisodes for Dove Calming Nights”; “General Motors launching mini-documentaries as part of its MyCadillacStory.com”; and the ambitious Bud.tv project out of Anheuser-Busch, essentially the brewery company’s own Web entertainment network targeting 21- to 27-year-olds. (A mobisode is a brief episode meant to be seen on a cell phone.) (See Advertising Chapter.)

As Suzanne Johnson, a senior product marketing manager at Akamai, a company that has Apple, Audi and IBM as Web clients, put it, “We have to question what’s coming to be the ultimate ad format. Is it going to be a paid sponsorship? Marketers are also investing a lot on their own.”16

The industry seems unsure, even divided, over the potential of video ads online. Some marketers have found reason to doubt consumers are drawn to ads on online videos. A study conducted by Forrester Research in late 2006 found that 75% of Web video users ignore ads placed either before or after video clips.16

Others have found just the opposite. Research from DoubleClick conducted in 2006 found that video ads generated around three times as many clicks as image ads did.17

Another question is whether the classic 30-second format that works on traditional television will succeed online. In a summer 2007 Advertising.com survey of 500 consumers, 63% said online video ads should be shorter than television ads.18 And it is not just consumers who lean toward brevity. Another 2007 survey by Advertising.com, this one of publishers of a range of Web sites, found that 93% preferred 15-second ads, compared to 70% who favored the traditional 30-second format.19

Advertising.com also asked publishers which format they most prefer. Most seem to be moving toward in-banner ads, or ads that run within a banner, or pre-roll ads, which run before content begins playing. Ads that run at the end of the video, or post-roll ads, have become much less popular, the survey found, presumably because most viewers have clicked off by then.

Big, Bigger, Biggest

In the early days of the Internet, some writers such as George Gilder pictured an inherently democratic utopia where virtually anyone with a modem and computer could compete with the richest media companies.

But when it comes to advertising, the Web’s biggest recipients are big media companies, according to data from IAB/Pricewaterhouse Coopers. In 2006, the top four sites — Google, Yahoo, AOL and MSN — accounted for 85% of all online ad dollars, as measured in gross dollars (“gross” is the amount before reductions, deductions and taxes).20 In net dollars, or the amount after adjustments, the share of total dollars fell to 57% for the top four sites.21

Who receives the rest? The data suggest a large part filters down to other large corporate media sites, such as Disney Internet Group, Fox Interactive and New York Times Digital.

Altogether, the top-10 sites received 99% of all gross dollars and 70% of all net dollars.

Podcasting Advertising

As the science of audience measurement evolves, podcasting ads will continue to generate only a very small piece of the ad revenue pie, even over the next five years.

According to eMarketer, advertising on podcasts will grow to $400 million in 2011, up from $165 million in 2007 and the $240 million expected in 2008.22

“I definitely see growth in podcasts because they’re free and targeted,” says Chad Stoller, executive director of emerging platforms at Organic, which is part of the Omnicom Group.’ “But it’s still going to get lumped into that experimental media category until measurement improves and audiences grow.”23 (See Radio Chapter.)

Advertising on the Cell Phone

What about cell phones? For now, the number of Americans using their cell phones to keep up with news remains small (see Audience Section.) The same is true for advertising on mobile phones.

Data from eMarketer suggest that advertisers would spend $878 million on mobile phones in 2007, more than twice what it was in 2006 ($410 million). Although significant, $878 million still would represent just a very small percentage of total online spending.

Spending is expected to jump to $1.5 billion in 2008, $2.3 billion in 2009, and $3.2 billion in 2010.24

Business Model

What could a slowdown in online advertising revenue mean for the industry?

Revenue from media companies’ digital operations are still just a fraction of total gross revenues. According to Borrell Associates, newspaper online revenues account for roughly 3% to 8% of total dollars, and television and radio sites bring in even less, from 1.5% to 3.5% on average.25

Over the past five years, as the dust settled from the dot-com bust of 2000, major newspaper companies saw online advertising grow sharply. The five-year compound annual growth rate at 13 major newspaper companies during this time was 35%, according to Borrell Associates. But in the first quarter of 2007, growth rates fell to 18%.26

This is also true at Web companies with no links to old media, such as AOL, which experienced a major slowdown in ad revenue in the third quarter of 2007, growing just 13%, compared to 46% the same quarter a year before.27

The question that many continue to dodge: What will media companies do when it becomes apparent that online revenues will not compensate for sluggish growth on older platforms?

News organizations are considering or initiating a variety of solutions, including consolidating staff and experimenting with access to online content.

“We have to find ways to grow revenue or become more efficient by eliminating fixed costs,” said Joseph Lodovic, president of MediaNews Group.. “Why does every newspaper need copy editors? In this day and age, I think copy-editing can be done centrally for several newspapers.”

The New York Times reported in late September 2007 that it was dropping its Times Select subscription program, which allowed access to Times columnists and other features but not the newspaper’s basic menu of news, even after it generated $10 million a year in revenue. “[O] ur projections for growth on that paid subscriber base were low, compared to the growth of online advertising,” said Vivian Schiller, senior vice president and general manager of the site, NYTimes.com.28

On the other hand, after studying proposals that the Wall Street Journal drop subscriptions to the paper’s Web site, its owner, the News Corp., decided to continue charging, at least for now.

In 2007, The Journal charged about four times what the New York Times does for each ad shown on its Web page. If the Journal moved to a free model, critics contended, it could not command the same premium because advertisers would lose access to the highly educated, high-income business professionals who can afford the $100 annual subscription fee.

As of December 2007, another successful business news Web site, that of the Financial Times, offers its readers four options.

Unregistered users can read only five news articles in 30 days. Registered users can read 30 articles a month and receive news by e-mail. At the third level, those who pay an annual fee of $109 have unlimited access to news and commentary. And last, for $299 a year, premium subscribers have news and financial data delivered to their cell phones or PDAs.

“To get caught between all this ‘free’ or ‘paid’ is too simplistic,” said Ien Cheng, publisher of FT.com. “We see this as a third way.”29

But the Financial Times’ hybrid strategy — mixing both subscription and ads — clearly appears to be an exception to a broader trend. Most media companies, old and new, are shifting to a pure ad-based model on the Web.

MediaNews, a chain of 57 newspapers, now sees 7 percent of its sales come from online ads. Its CEO, Dean Singleton, says he wants to see that figure at 20% in five years. And at AOL, all signs point to an even greater reliance on online advertising, despite its setbacks in 2007. (See Ownership Section.)

“The business model for advertising revenue, vs. subscriber revenue, is so much more attractive,” said Colby Atwood, president of Borrell Associates. “The hybrid model has some potential, but in the long run, the advertising side will dominate.”30

The Top 25 Online Advertisers

Data from TNS Media Intelligence showed that spending by the top 25 U.S. Internet companies on display advertising, the second most popular format after search, increased 18% in 2006 compared to the year before.31

But eight companies on that list actually slowed down their spending, according to TNS. Those included overall leader Vonage Holding as well as 19th-place Time Warner, which decreased spending by 46%.

The 17 remaining companies – including second-place AT&T and Walt Disney Co., coming in fourth – increased spending over 2005, with a total growth rate of 86%.

Top 25 U.S. Internet Advertisers, 2006
Dollars, in millions

Rank Type of Site U.S. Ad Spending % Change
1 Vonage Holdings Corp.
$185.7
-32.7
2 AT&T
166.9
196.9
3 Dell
137.8
-13.3
4 Walt Disney Co.
133.2
46.7
5 General Motors Corp.
129.7
16
6 Experian Group
128.3
-29.5
7 Verizon Communication
123.6
-14.2
8 Apollo Group
123.6
38.7
9 IAC/InterActiveCorp
123
37.2
10 TD Ameritrade Holding Corp.
119.8
30.5
11 United Online
115.9
-23.2
12 Netflix
115.2
-15.8
13 Hewlett-Packard Co.
111.4
3.1
14 E-Trade Financial Corp.
106.9
49.3
15 Scottrade
105
23.3
16 Monster Worldwide
102.6
74.3
17 Ford Motor Co.
99.1
80.1
18 FMR Corp. (Fidelity Investments)
97.4
236.8
19 Time Warner
90.6
-46
20 Nextag
90.1
198.6
21 Dollar Thrifty Automotive Group
88
176.4
22 Microsoft Corp.
81.7
-20.7
23 American Express Co.
80.8
180
24 Sony Corp.
73.6
65.8
25 Charles Schwab Corp.
72.1
12.1
Total
9,769.8
17.5

Source: Data from TNS Media Intelligence on more than 2,800 sites.
Note: Dollars are in millions for calendar 2006 and represent only display advertising; excludes search and broadband video. Percent change computed vs. 2005 data, not shown.

Footnotes

1. Mark Walsh, “eMarketer: Online Ad Spending Growth to Slow,” MediaPost, February 27, 2007.

2. Economist, February 20, 2008.

3. “HD Marketing 2010: Sharpening the Conversation,” Booz|Allen|Hamilton, October 7, 2008.

4. Joe Mandese, “Online Ad Growth Rate Ebbs in Q3, But Continues to Outpace All Major Media,” MediaPost, November 12, 2007.

5. Communications Industry Forecast 2007-2011, Veronis Suhler Stevenson

6. Advertising Age, Digital Marketing & Media Fact Pack, April 23, 2007.

7. “Internet Advertising Revenues Continue to Soar, Reach Nearly $10 Billion in First Half of ’07,” Interactive Advertising Bureau, October 4, 2007.

8. Ibid

9. Ibid

10. Ibid

11. “Online Ad Spending to Reach $42B by 2011,” eMarketer, November 7, 2007.

12. “What Local Media Web Sites Earn: 2007 Survey,” Borrell Associates, June 2007.

13. Ibid

14. Ibid

15. “Online Video Ad Spending to Surge 89% in 2007,” eMarketer, November 6, 2006.

16. “Fifty Percent of US Population Will Watch Online Video in 2008,” eMarketer, July 25, 2007.

17. Abbey Klaassen, “Web-video vaults are full, coffers are not; Absence of ad model hobbling growth,” Advertising Age, February 19, 2007.

18. Brian Morrissey, “In-Stream Ads Annoy Web Viewers,” AdWeek, October 31, 2006.

19. “Video Ad Benchmark: Average Campaign Performance Metrics,” DoubleClick, February 2007.

20. “Bi-Annual Online Video Study: First-Half 2007 vs. Second-Half 2006,” Advertising.com, 2007.

21. “2007 Interactive Publisher Survey,” Advertising.com, 2007.

22. “News Media Internal Auditors Interactive Media Audit Perspectives,” presented by Mike Pearl, partner, PricewaterhouseCoopers, August 2007.

23. Abbey Klaassen, “Economics 101: Web Giants Rule ‘Democratized’ Medium,” Advertising Age, April 8, 2007.

24. “Heard the Latest About Podcasting?,” eMarketer, February 4, 2008.

25. Gavin O’Malley, “Podvertising To Grow Fivefold, But Remain Niche,” Online Media Daily, February 26, 2007

26. Advertising Age, Digital Marketing & Media Fact Pack, April 23, 2007.

27. “What Local Media Web Sites Earn: 2007 Survey,” Borrell Associates, June 2007.

28. Ibid

29. Time Warner Inc. Form 10-Q, filed 11/07/07 for the period ending 09/30/2007; Time Warner Inc. Form 10-Q, filed 11/1/2006 for period ending 09/30/2006.

30. Richard Pérez-Peña, “Times to Stop Charging for Parts of Its Web Site,” New York Times, September 18, 2007.

31. Eric Pfanner, “Financial Times Will Allow More Free Access to Web Site,” New York Times, October 1, 2007.

32. Richard Pérez-Peña, “Times to Stop Charging for Parts of Its Web Sites,” New York Times, September 18, 2007.

33. Advertising Age, Digital Marketing & Media Fact Pack, April 23, 2007.