Newspapers Losing Ground to Other Local Media

If newspaper publishers are to stop the bleeding, they may need to aim for complete dismemberment. A new report makes crystal clear that newspaper companies are not positioned to counteract the steady decreases in print revenue they’ve been facing. Perhaps the only way they can generate the online growth they need to balance their print revenue declines is to sever online operations from their print operations.

A report released today from BIA Financial Network and Borrell Associates shows weak growth rates for newspapers’ online revenues over the next few years. For example, online revenues for newspaper firms such as Morris Communications, McClatchy, Tribune and Gannett will grow from between 5 and 10 percent of gross revenues to between 7 and 13 percent in 2011. Online revenue for publishers with larger Web sites, including New York Times Company and Tribune, will reach only around 12 percent by 2011. In comparison, this year, online operations will comprise over 15 percent of gross revenues for directories including AT&T Yellow Pages, Yellow Book USA and White Directories, hitting over 20 percent by 2011.

“Unfortunately people have tied [their online operations] too closely to their legacy media which is in decline,” said Borrell Associates CEO Gordon Borrell. “That’s just hitching their wagon to a falling star,” he contended.

Reliance on legacy ad formats and advertiser clients isn’t helping newspapers either, suggests the report, titled “Valuation Metrics for Local Web Sites.”

“Specifically, their reliance on revenue from classified and display advertising will continue to result in slower growth rates over the next few years than what they experienced a few years ago,” noted the report. “Additionally, nearly one-third of their Web clients are local real estate companies and automobile dealerships, two categories of retailers that are cutting back their overall advertising outlays.”

The median newspaper Web site is worth an estimated $3.5 million, according to the report.

In the midst of the steepest decline in print classifieds seen in decades, online ad revenues went from double-digit growth rates to single-digit trickles between Q1 2007 and Q1 2008. According to the Newspaper Association of America, total online ad revenues for newspapers in the first quarter of 2008 represented a 7.2 percent boost over Q1 2007, a considerable slow-down from the year-ago period’s 22 percent growth rate.

The report suggests pure-play Internet firms, along with television and radio Web sites, are better poised for future growth than newspaper publishers. This year, while pure-plays such as AOL, Google, Yahoo, vertical directories and city sites comprised around 68 percent of all online ad revenue, newspapers accounted for around 11 percent. The estimated value of the median television site is $3.1 million; the report also shows the median pure-play site is worth $2.4 million, and the median radio site is worth $1.2 million.

Local newspaper site revenues have grown 33.5 percent since 2002, and will reach $3.7 billion this year, according to the report. Local TV sites will hit just $1.2 billion, but have grown at a much higher rate (67 percent) since 2002. Growth of local radio site revenues, expected to reach $255 million this year, is on an even steeper incline — up 70 percent since 2003.

Local online ad revenues for pure-play sites have risen nearly 30 points since 2004, accounting for more than 53 percent of local online ad revenues this year, according to the report. By the end of the year, newspapers will see about a 27 percent share of local online ad dollars.

What might help fuel online revenue growth for newspapers and other local media firms is creating new advertising opportunities. As standard ad formats such as banners and classified listings are set to decline from a 50 percent share of online digital formats this year to 13 percent by 2013, share of streaming audio and video and e-mail will triple to 33 percent and 26 percent respectively, according to the report.

Borrell believes pure-plays “have an historical leg up” because their businesses are not tied to traditional media. However, although the report shows firms with legacy operations such as those in television and radio have more growth potential than newspaper publishers, “They’re sitting there on an asset that they haven’t yet mined,” he said. Whether such companies are able to take advantage of growth opportunities depends on management and whether they dedicate resources to their digital units, Borrell suggested.

The report suggests all firms with traditional media arms will have to continue investing in new, dedicated online staff. Borrell isn’t so sure they will. “Most of them feel this is a convergence opportunity and convergence to them means they don’t need to hire new staff,” he said.