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Essay
Economics
By the Project for Excellence in Journalism
It is here, on the question of money, that the future of
Internet journalism may really depend.
Increasingly, the evidence suggests the Web is journalism's
future. It is where the audiences are moving, especially and
most importantly the young. What is not clear is whether the
Internet will ever be as profitable as the old media.
If it isn't, most newsrooms may end up much smaller, and
spread thinner than they once were. The ability to cover the
waterfront of American life may be diminished. The quality
of American journalism, and thus of public knowledge, may
suffer.
In 2004, Internet journalism moved further toward establishing
its basic economic viability.
Online Advertising Revenue
After stunning growth in online advertising during the dot-com
boom, the bubble burst in late 2000 and early 2001, then staged
a strong and apparently stable recovery. Total Web advertising
ended 2003 at just under $7.3 billion, according to figures
from Interactive Advertising Bureau.
And in 2004 that growth appeared to continue.
How much Web advertising would ultimately increase in 2004
- the totals were not complete when this report was finished
- varied depending on the source, but nearly all forecasters
predicted growth, and most of them healthy growth. Internet
Week, a Web site that focuses on the business and technology
of the Internet, gathered growth projections for online advertising
for 2004 from 14 different market research firms and found
that they ranged from as small as 3.2% to as high as 30%.
It is difficult to determine why the range would be so great,
but the notable finding is that they all predict growth.
Projected Online Advertising Revenue Growth, 2004
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Data is based on projections made by 14 different research
companies
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Early totals for 2004 suggest that the high-end projections
may closer to the mark. One measuring source, Interactive
Advertising Bureau and Pricewaterhouse, found that in the
third quarter of 2004, Internet advertising revenue increased
35% over the same quarter in 2003.
Even with the growth, online advertising still has a long
way to go. A full year at that second-quarter rate would put
annual online revenue at around $10 billion. Broadcast television
collected $42 billion in 2003, newspapers $52 billion, and
cable $16 billion.
In all, online ad spending amounted to just 4% of overall
ad expenditures for all media in 2003.
That projected $10 billion, however, has grown from nowhere
in barely over a decade, and the projected growth rate outpaces
most other media. Jupiter Research's estimate, for instance,
that online advertising would grow 27% in 2004 to $8.4 billion,
far exceeds projected growth in other media.
As a further sign of economic health, a study sponsored by
Advertising.com shows that "online media continues to
have the greatest ad budget expansion plans among marketers,
with more than half planning to boost spending in the medium
in both 2004 and 2005."
The boost for 2005 is expected to be smaller than for 2004,
perhaps partly due to 2004's being a so-called quadrennial
year with extra market activity from the Olympics and presidential
elections. Still, the online media constitute the only industry
for which a majority of marketing executives say they plan
to increase spending.
Percent of Marketing Executives Who Expect to Increase
Ad Spending
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Projections for 2004 and 2005
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There are no data to suggest that an online site's parent
company is the force behind ad spending growth, but media
companies have begun making use of their cross-media offerings
nonetheless. General Electric's NBC, for example, now pitches
an ad package that will include exposure of a company's product
not only on NBC's network programming but also on MSNBC.com.
According to Mary Paris, director of business development
and cross-media sales for MSNBC.com, the number of cross-media
packages increased 10% during the 2004 upfront compared to
the previous year.
And all sites are not created equal when it comes to ad spending.
Newspapers sites, for example, averaged $17.70 of revenue
per print unit of circulation in 2003, a 22% increase. Among
Web sites of papers with over 200,000 circulation, though,
the average revenue was much higher, $27.10 per unit, a 33%
increase.
Newspaper Company Online Revenues
Looking deeper into the economics of newspaper Web sites
can provide a useful yardstick for the economic health of
the Web. Newspapers, both national and local, were quick to
embrace the Web, partly because of the ease of turning the
printed word into the electronic word.
Public newspaper companies, whose financial information is
more available than that of private companies, report major
growth in their online properties. Over all, for the nine
newspaper companies analyzed by Borrell Associates, 2003 online
revenue was up 34% from 2002.
In the first half of 2004, that growth continued, with public-company
revenues up anywhere from 21% to 57% over the first two quarters
of 2003.
The Success of Other News Sites
Several specific Web sites offer good examples of steady
growth. CBS Market Watch, for example, used rich media advertising
to create impressive revenue growth in the third quarter of
2004, increasing 71% to $19.8 million.
In mid-November, Dow Jones & Company bought MarketWatch
for approximately $519 million.
And in December 2004, the Washington Post Company announced
it was buying the Web magazine Slate.
Other old-line online media players have also matured financially.
Salon, for example, has now exceeded 90,000 paid subscribers,
according to David Talbot, founder and CEO, and has adopted
a "Day Pass" ad program where non-paying readers
can gain access to the site after watching an ad. Salon, partly
because it is a public company that has to entertain buyout
efforts, is also rumored as a potential media acquisition.
That potential flurry of acquisitions has a few people concerned
that the unique, independent feel of news sites like Salon
may wane in the wake of a buyout. As Talbot told the Online
Journalism Review, "My goal and the goal of the hundreds
of other publishers who jumped on Internet publishing in its
pioneering days was that we were doing something different
and building a new medium that was going to be more freewheeling
and more democratic and more spirited than the traditional
media business. Unfortunately, most of those visionaries crashed
and burned. And Salon is one of the only national independent
news sites left…I'm a little bit dismayed that independent
news companies have such a hard time on their own."
Growth Aside, Scale Is Still the Issue
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
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Figures are for 10 public newspaper companies from January-June
2003 and 2004
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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.
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%.
And the growth appears to be continuing; as of the second
quarter in 2004, they accounted for 40%.
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.
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.
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.
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.
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.
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.
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.
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.
Local Online Advertising
Looking specifically at local ads -primarily employment,
real estate and automotive - the signs are clearly positive.
In the past, local advertisers have been the last to buy into
a new medium, waiting to be sure it was solid before investing.
That was true of online as well. As of 2002, local ads totaled
just $1.7 billion, according to Borrell Associates.
But the figure rose to $2.1 billion in 2003 and was projected
to reach $2.7 billion in 2004.
The growth of local ad sales appears to have developed fairly
evenly across different types of Web sites. In 2003, online
newspapers received 39% of all local ad spending, almost identical
to 2002. That amounted to $811 million in 2003.
Meanwhile, AOL, MSN, Google and Yahoo! are estimated to have
received 15% of all online spending, or $320 million. Those
sites are able to advertise locally, mainly though search-engine
listings based on key words, city names or zip codes entered
by the user.
Profitability
Even more difficult than untangling revenues is trying to
pin down whether a news Web site is profitable.
One complication involves accounting procedures. Most online
news sites are small divisions of larger operations. But companies
differ in how much, if any, of their existing newsgathering
and overhead expenses they allocate to their online operations.
Some allocate to their online divisions only the additional
marginal costs of producing their Web sites. Others share
some of their overall newsgathering costs with their online
operations, but how much they allocate differs from company
to company.
A second complication is that organizations often sell ad
packages across different media. Thus profitability depends
on how much of that ad package is attributed to the online
portion of the deal. By changing the proportion, a parent
company can alter the revenue and ultimately the profits.
A third complication is that some newspapers include their
non-news-site revenues in their online profits.
In time, indeed, it may make less sense to even try to separate
online economics as its own category. Instead, newspaper companies
will be multi-platform news providers, as will TV networks
and others. (Gannett, for one, already treats the revenues
and expenses as part of its newspapers.) News, the nature
of the product, may be the category to examine, rather than
the delivery system. Yet there is no guarantee that that is
how the companies will define it.
With those caveats in mind, 2004 saw a number of sites either
reporting profits for the first time or continuing to turn
a profit. In the Borrell Associates survey of 463 newspaper
sites in 2003, some 83% were reporting profits, with an average
margin of 60%.
Local television news Web sites are not as successful. Revenues
were low in 2003 and less than 15% of the sites made a profit,
according to surveys of news directors.
Perhaps the biggest single profitability announcement came
from MSNBC.com, which turned a profit in the second quarter
of 2004 for the first time since the site launched in 1996.
It has remained one of the top three news Web sites for the
past few years, with around 20 million unique visitors a month.
Much of its success with traffic is owed to its ties with
the MSNBC cable network, NBC News, and the MSN network. The
profit came from annual revenue of $45 million - a drop in
the bucket for its parents, Microsoft and General Electric,
but a sizable amount for an online company. Ad revenue came
from a variety of sources, with 80% of from 60 different advertisers.
Online Economic Models
One important question, over time, is whether consumer attitudes
toward paid content and toward advertising online will change.
AOL's announcement in December 2004 that much of its content
would become free has only intensified the discussion. And
then in January 2005, Business Week published an article speculating
on whether The New York Times online would follow the lead
of The Wall Street Journal and begin charging subscription
fees.
There was a time, two generations earlier, when Americans
were aghast at the idea of what was then called pay TV. The
airwaves were public, and no one should have to pay for television,
the argument went. In the 1960s, a ballot measure to explore
pay TV failed in California.
In time, with the emergence of cable, an economic model developed
that has proven in many ways more durable than broadcast.
Cable is bundled by companies that charge consumers a subscription
fee, which is passed along to the companies that produce the
content. Thus companies like CNN, Fox or Discovery get revenue
both from advertising, like broadcasters, and from subscriptions,
passed on by the cable companies as fees for their content.
At the same time, satellite radio offers another variation
- monthly payment, with few ads - though it has yet to turn
a profit.
Is some model involving more subscription possible online?
Would consumers in time be willing to pay in some form for
access to content? People currently pay for online service,
much as they do for cable. Most consumers are probably unaware
that in one case they are paying just for access and in the
other they are also paying also for content.
If the pay-for-content model evolves sufficiently, it could
revolutionize the economics of the Web.
Online visitors spent $853 million on paid content during
the first two quarters of 2004, an increase of 14% from the
same period in 2003 ($748 million), according to the Online
Publishers Association. The increase is largely attributed
to an increase in music downloads.
Some financial news sites have been successful in attracting
paying subscribers, particularly The Wall Street Journal Online,
which reported in October 2004 an increase of over 2% in online
subscriptions in that third quarter.
Major League Baseball has also had success in getting people
to pay for subscriptions to receive streaming broadcasts of
games.
But even with the surge in dollars spent on paid content,
many in the industry are ambivalent about moving from a largely
free model. The skeptics feel they can forgo the revenue from
subscriptions and reach a larger audience with free content
that can create revenue through advertising. Charlie Tillinghast,
general manager/publisher of MSNBC.com, a free news site,
told CBS Market Watch.com in November 2004, "There's
been less pressure to develop a paid model. [But] even if
there were, we're not sure that as a general news site, what
subscribers would pay for."
Indeed, many industry experts think there is a future for
broad paid content only if it is deemed "must have"
information - The New York Times for the country's intelligentsia
and political leaders, for example, or The Wall Street Journal
for the business world. So-called-niche media providing information
specific to an industry or interest, such as Broadcasting
and Cable.com, are also considered viable.
Broadband Technology
One variable that could change the economic potential of
the Web is technological. Ever-faster broadband technology
may change the way consumers respond to Web advertising, and
more video on the Web may change the way ads are presented,
in part, by making the Web more like television. When we looked
to see if there was growth in high-speed connections as of
the first quarter of 2004, there were 17.3 million high-speed
Internet customers, up from 12.8 million in the same quarter
of 2003.
Furthermore, July 2004 Nielsen/Net Ratings showed that U.S.
broadband penetration was now over half (51%) the American
online population. That is up from 38% in July 2003.
In addition, Yahoo, Google and AOL are reported to be racing
to introduce video searching that would facilitate consumption
of video on demand and probably further boost broadband penetration
as well as rich-media advertising.
Broadband not only provides online users with faster service,
it also allows advertisers to use more sophisticated rich
media and streaming video to promote their products. Data
from Double Click, a New York-based organization that distributes
online ads, shows that the number of rich ads - a combination
of animation, video and sound with interactive features -served
by the company grew 54% in the first quarter of 2004 from
the same period a year earlier.
Yet for the first three quarters of 2004, DoubleClick said,
rich ads remained stagnant as a percentage of all ads distributed.
Some are skeptical about the future of broadband growth
in the U.S. While the growth in broadband penetration is significant
and the country has made great strides in ensuring broadband
access among rural and low-income populations, the U.S. is
ranked only eleventh in the world in broadband penetration.
Furthermore, the addition of 1.7 million broadband subscribers
in the second quarter of 2004 was less than the number added
in any quarter in the previous year, according to Leichtman
Research Group, Inc.
Could this suggest that the explosive broadband growth in
the U.S. has peaked? The bigger problem for broadband adoption
in the medium term is that the number of dial-up subscribers
has been fairly stagnant for the last three years and the
overall Internet population isn't growing much any more.
In the end, going into 2005, online economics is improving.
Increased portions of the advertising pie, growth in revenues
and profits and plans for further investments suggest that
companies and advertisers remain intrigued by the possibilities
of the new medium. Nonetheless, revenues are still small comparatively,
and the online industry will need to prove its competitive
value on Wall Street.
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