local online advertising: the paradox of the growth imperative by lincoln millstein, hearst...
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Local online advertising:
The paradox of
the growth imperative
By Lincoln Millstein, Hearst Newspapers
The basics: Total online ad revenue
6
7.3
9.4
11.5
0
2
4
6
8
10
12
2002 2003 2004 2005 (p)
Will hit $11.5 billion this year
Have surpassed billboards
Are neck-and-neck with magazines
Will pass yellow pages by 2006
May rival radio by 2009
May hit $20 billion by 2010
– Accounts for more than 2/3 of all online time
How $2.7 billion in local online spend is divided Source:Borrell Assoc
YP6%
Paid Search5%
Newspapers44%
TV4%
Pure Plays40%
Radio1%
This medium is maturing faster than is reflected in many surveys because of its usage in the workplace
2/3 of all online time– Quickly becoming
more multimedia• Smaller markets
now growing faster
Internet usage is actually close to critical mass
2000 2001 2002
Total Americans who use the Internet 66.9% 72.3% 71.1% Internet use at home 46.9% 58.4% 59.3% Students who use the Internet at school 59.9% 72.9%
73.7% % who use the Internet at work 42.3% 51.2% 51.2%
HOURS ONLINE
Average numbers of hours online per week 9.4 9.8 11.1
UCLA Internet Study
Consumer time spent online has stopped growing in U.S.
• In some communities, it’s a long way from Tipperary … Fayetteville, NC is not Greenwich, CT
• Market is Top 20 DMAs• Virtually no demand in our YP markets for online
products
Looming paradox: The internet cannot produce enough quality inventory to meet demand:
Major search engines defer a significant percentage of the available budgets of booked advertising from winning bidders because they lack sufficient inventory to display those ads.
Yahoo executives voice concern over ad inventory a year ago.
ESPN Motion is sold out, limiting its upside for multimedia spend
Quality publishers – CNET, About.com - experience severe inventory shortages in key verticals – finance, tech, travel
Click fraud aggravates problem as advertisers lose confidence in cpc model
Pharmaceutical spend online is limited by inventory constraints - Weightwatchers has already saturated its web buy and is looking for reach on TV
Consequences of shortage of quality online inventory …
• Site-based media businesses will not scale to the same degree as their analog counterparts; will have marginal impact in the marketplace as a result
• Three or four portals will continue to dominate• Pricing elasticity is stretched to the limit, putting
the medium at risk of being non-competitive• Big-Iron publishing model is dead; Network
publishing model is king• Online remains viable for DR (cpc, cpa); but
suffers as a branding medium – already happening to hotels industry
Case study of Company X - the ‘Big-Iron’ model (or why the internet will never produce a WSJ, NBC or NYT - or even a Houston Chronicle – in scale)
• Company X is publisher in key vertical• Has ad rev of $35m • Has ebitda of $8m• Has 6 million uniques and 130 million PVs a month• Company X is already at an 80 % sell-through rate • Company X is trading at 90 times trailing earnings (ttm)• Company X’s upside is severely limited by its size and
ability to grow as the medium reaches maturity
Conclusion: Company X does not scale
Portals must meet huge growth imperative; they are the first to leverage the tail
• That’s why Google launched AdSense and is launching a new product – or buying a new company – every minute: Blogger, Keyhole, Desktop Search, Gmail, science search, Picasa, Urchin, etc. Same reason why Yahoo! Acquired Flickr …
• That’s why Google is looking to leverage the sales force at BellSouth and others …
• Google and Yahoo eyeing every small and large business in America and plan to be there when that business wants to connect to customers – instantly, seamlessly and without regard to geographic boundaries
• IAC (Ask Jeeves), AOL, MSFT not far behind …
So how are we doing? Here is one assessment:
“ … despite some exceptions, online newspapers are mostly cluttered sites that do a mediocre job of displaying the wealth of local content that they possess. They typically also don’t showcase their advertisers very well or offer a very satisfying user experience.” – Greg Sterling, Kelsey
“Any momentum that newspapers are starting to build online is challenged by the “commoditization” of news (Yahoo! News is the No. 1 news site), also the emergence of local search and a growing number of other sites that offer local information and classified listings. Craigslist and eBay are the most obvious and prominent examples.”
Incumbents (yellow pages and newspapers) attempted to force the big-iron model onto the internet
• Most of the content not readily seen• Expect user to gravitate to web site• Fails to serve the intent of the user• Publishing is the wrong model online –
pulls users with content; online, model must be built around user’s intent; lean-back medium vs lean-forward medium
Online Revenue as % of Total Gross Revenues
Copyright 2005, Borrell Associates Inc.
2001
2002
2003
2004
Washington Post Co. 3.6% 4.2% 5.4% 6.6%
Belo Corp. 1.8% 2.7% 3.3% 4.1%
Knight Ridder 1.4% 1.9% 2.7% 3.8%
New York Times Co. 2.1% 2.4% 2.9% 3.8%
McClatchy 1.5% 2.1% 2.5% 3.5%
Gannett 1.2% 1.5% 2.1% 3.0%
Tribune Co. 1.5% 1.9% 2.3% 3.0%
Media General 0.6% 1.2% 1.8% 2.5%
Lee Enterprises 0.9% 1.5% 1.4% 1.7%
Journal Register 0.9% 1.0% 1.2% 1.3% Sources: SEC documents, company statements.
Recent M&A pointing to a desire to play in this new sandbox …
• Dow Jones acquires MarketWatch for $460 million
• BellSouth, SBC acquires YellowPages.com for $100 m
• NYT acquires About.com for $410 m• Three Bears – KRI, TRB, GCI – acquires
Topix.net for ?• Yahoo! buys Flickr• IAC acquires Ask for $1.9 b• Google acquires Urchin
How to win: shedding the big-iron publishing model and embracing the open architectural of participation
• Big-Iron: Proprietary content, controlled distribution, competitor lock-out, pull audience to content
• Open architecture: Free content, organic distribution, leverage competition (Google’s top search term is ‘Yahoo’), meet and serve audience intent – not publisher’s
Winning with local search – newspapers and YP publishers joining forces
• One search box serving a single intent • Harnessing the best knowledge of the
community to serve that intent, arrayed against services and commerce targeted to that intent
• Riding the distribution of the internet• Feet on the street selling to those services and
SMEs• Leveraging our traditional media assets
Our core strengths• Most trusted local brand – in a world of
unlimited and “unfettered” content, users will trust the guiding hand of newspapers; opportunity to enable and assure a network of high quality blogs (March 25 headline in WSJ - ‘Many Advertisers Find Blogging frontier is still too wild’)
• Create a local network where advertisers trust where their ads appear
• Feet on the street sales force
New economic imperatives of ‘unlimited’ choice in content RSS and blogging are early enablers of this
model – adopt them Google is a massive distribution point – learn to
exploit it, instead of having Google exploit you Leverage the distributed assets of the internet Use a light-weight oversight model to ensure
quality control Serve your customers; they will reward you
with their loyalty Aggregate, aggregate, aggregate Network, network, network
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