|By the Project for Excellence in Journalism
The 2006 battles among online owners were largely about jockeying for position, debating the rules, and trying to assimilate, often by acquisition rather than invention, the hottest innovations.
The lineup of the most popular news sites remained relatively stable. Yahoo News showed some signs of pulling away from the pack, but it is also suffering bigger corporate problems at the same time.
Google continues to rise, in news and elsewhere, including with its acquisition of the “it” site of the year, YouTube.
And the confusing fight over the Internet’s financial rules — the brouhaha called “net neutrality” — dragged on, though one of the major combatants, AT&T, left the field to make a major acquisition. It bought back Bell South, one of the baby bells it once had to divest.
Online News Leaders
Four sites continue to dominate online news. At the very top is Yahoo News, followed by MSNBC, CNN, and AOL News — the same order as in 2005.
But now Yahoo News appears to be separating itself from the pack. Two separate firms tracking online use found substantial two-digit growth for Yahoo News in 2006. Nielsen//Net Ratings had Yahoo growing by 18%, to 28.4 million unique visitors a month. ComScore, the other major tracking firm, showed its growth at 16%, or 31.4 million a month.
Several factors may account for the growth. Yahoo News redesigned its homepage in July, making access easier. The homepage also offers a boutique of non-news components — e-mail, music downloads, search, and instant messenger — that get heavy use and are generally not on other news sites.
Whatever the reasons, Yahoo News outdistanced its three chief rivals in traffic in 2006. At the end of 2005, for instance, the distance between Yahoo News and its next competitor was around a million, according to both tracking firms. A year later the lead has expanded considerably, from roughly three million in Nielsen’s list to 5.5 million according to comsScore.
What happened at the other three top sites is less clear, but none of them grew at the pace of Yahoo News.
At No. 2 is MSNBC, with about 26 million visitors a month on average.1 But the two major rating services differed on the trend line. Nielsen says its figure represents an increase of 9%; comScore has that as a 1% drop.
In third place is CNN, with 24.3 million unique visitors a month in 2006, according to Nielsen//Net Ratings. This was an increase of 10% year to year.2
And in fourth place is AOL News. As we have discussed in previous annual reports, online audience figures for AOL News vary substantially depending on the tracking firm one consults. That was true again in 2006. ComScore shows AOL News much closer to the other three leaders, with a monthly average of 21 million, an increase of 1% and just 300,000 fewer than CNN. But Nielsen//Net Ratings puts AOL News at 16.8 million, around 7.5 million fewer than the 24.3 million that Nielsen reports for CNN.
The Rest of the Top 20
Of the remaining 16 news sites among the top 20 in audience in 2006, some were individual sites, such as the New York Times, and others were collections of multiple sites under one corporate brand, such as Gannett. But all save one, Google, were traditional news organizations.
Among individual news sites, the New York Times was sixth overall with an average 12.4 million unique visitors a month in 2006, followed by the USA Today (10 million) at No. 9, ABC News (9.8 million) at No. 10, Google News (9.4 million) at No. 11, CBS News (8.3 million) at No. 12, Washington Post.com (7.9 million) at No. 13, Fox News (6.9 million) at No. 18, and the BBC News (6.2) at No. 20.
The top aggregated sites, meanwhile, were Gannett Newspapers (12.9 million) at No. 5, Internet Broadcasting Web sites (12.2 million) at No. 7, Tribune Newspapers (11.3 million) at No. 8, Associated Press (7.7 million) at No. 14, Hearst Newspapers Digital (7.6 million) at No. 15, World Now (7.3 million) at No. 16, and McClatchy Newspapers (6.4 million) at No. 19 in 2006, according to data from Nielsen//Net Ratings.3
Traffic data suggest that television news Web sites experienced the largest gains in 2006, According to Nielsen//Net Ratings. ABC News was up 22%, followed by CBS News at 29%, and Fox News at 17%. Perhaps what most distinguishes those sites is the heavy inventory of video as well as the strong goodwill the public generally shows to the network news industry.
Finally, two other sites that exhibited strong growth in 2006 were Google News, at 20%, as well as the Associated Press, at 75%, whose investment in online video the last couple of years has been well documented.4
Online Media Ownership Trends
Although blogs and other forms of citizen media are becoming increasingly popular news sources for Americans, the most popular news sites are still largely owned by the richest media companies. And until the Federal Communications Commission (FCC) rules on the so-called “cross-ownership” ban that bars companies from owning newspapers and television stations in the same market, we should expect relative stability in 2007. (For a more detailed discussion of future FCC actions in 2007, see the ownership section in the local television chapter).
Of the top 20 most popular online news sites ranked by Nielsen//Net Ratings, 16 are owned by the 100 largest media companies in terms of total net revenue generated in the U.S. in 2005 (latest figures available), according to Advertising Age magazine.5 Time Warner generated the most revenue in 2005 ($33.7 billion), according to Ad Age, and owns the third (CNN) and fourth (AOL News) most popular news sites among the online audience. And Gannett, 12 th on Advertising Age’s list of leading media companies with $6.4 billion in revenue, owns the fifth (Gannet Newspapers other than the USA Today) and ninth (USA Today) most popular news sites.
The number of sites owned by the top 10 richest companies, however, continues to fall. The figures were 32% in 2004, 25% in 2005, and 21% in 2006.
Two of the four sites among the top 20 in popularity not owned by leading U.S. media companies are Internet Broadcasting and World Now, aggregations of many local news sites. The other two are the Associated Press, a non-profit cooperative, and BBC News, which is financed by a television license in the United Kingdom.
Mergers and Acquisitions
The year 2006 was one of smaller but more frequent mergers and acquisitions than we have seen in some earlier years.
Through the first nine months of 2006, there were nearly twice as many acquisitions as in the same period in 2005. But the total monetary value of the transactions came to just 60% of last year’s figures. According to data from the media investment bank Jordan, Edminston Group Inc., there were 131 deals in 2006, up from 72 in the same time in 2005. The total value of these deals was roughly $5 billion, compared with $8 billion the previous year.6
Part of the reason for the smaller deals could be that some attractive marquee acquisitions have become just too expensive. In March 2006, for instance, the New York Times reported that CNET, whose News.com site covers the business of the technology industry, was rumored as a potential acquisition. But the reported asking price of $3 billion was considered too high.7
The one major exception to the trend in 2006 was the blockbuster announcement in October that Google had agreed to acquire YouTube for $1.5 billion in stock. The Wall Street Journal reported that Yahoo, News Corp., and Microsoft were also interested suitors.
The deal had surprising elements. First, it bucked the trend of smaller acquisitions and companies investing in existing properties.
Second, some analysts noted that Google could be inviting a wave of potential copyright violations from content providers. In late October, the site removed clips from “The Daily Show with Jon Stewart” and “The Colbert Report.” Then in November, the Wall Street Journal reported that not only was YouTube forced to negotiate with media companies, but also publishers, video producers and even actors. There was less risk of all this earlier, when YouTube was a startup without any resources. Now that it was part of giant Google, potential copyright lawsuits, contracts and lawyers came more into play.
It’s possible that marketers could shy away from YouTube altogether. A poll conducted by Media Life magazine found that 15% of media buyers would not advertise on a user-generated site such as YouTube. According to an article on the research that appeared in Media Life, media buyers “saw the sites as too risky because of the possibility that their client’s ad might end up next to something risqué, controversial or libelous.”8
It’s not clear whether media companies would be successful in a lawsuit against Google/YouTube. According to Market Watch, to win, media companies “would have to prove that YouTube is marketing itself as a distributor of copyrighted material and that the major use of YouTube is the viewing of copyrighted material.” But so far, there doesn’t appear to be much argument that such is the case.
Rather than fight Google and YouTube in the courts, many media companies may form partnerships and sign licensing deals. After all, there is a lot of revenue-sharing potential for content providers to stream their videos over YouTube, which generated 16 million unique visitors in the U.S. in July 2006, and 63 million worldwide, making it the 17 th most-visited property worldwide during that month.
Moreover, YouTube may actually increase the audience size for traditional media platforms. In November, CBS attributed a boost in its TV viewership to its presence on YouTube. After CBS had uploaded to YouTube more than 300 clips from its talk-show programming, which averaged 850,000 views a day over a one-month period, the network announced viewership increases of 5% to the “Late Show with David Letterman,” and 7% to “The Late Late Show with Craig Ferguson.”
“Although the success of these shows on YouTube is not the sole cause of the rise in television ratings, both companies believe that YouTube has brought a significant new audience of viewers to each broadcast,” CBS and YouTube said in a joint statement.9
Google vs. Yahoo
In 2005, Yahoo and Google were both regarded as desirable choices for investors. In 2006, however, the companies seemed to be heading in different directions. As 2006 came to an end, Google’s financial performance was perhaps the strongest it had ever been. At the same time, it was reported that Yahoo was considering some potentially major changes as the company sought to close the gap with Google.
Google, the giant of online search and aggregation, made headlines in 2005 for its extraordinary economic performance, much of it fueled by revenues from online advertising. The giant showed few signs of slowing down in 2006.
By June 2006, Google had 45% of all the advertising revenue for search engines, an eight-point increase in market share over the 37% share it had in June of 2004.10
Some analysts predicted that Google would capture as much as 25% of all online advertising in the U.S. IN 2006, according to a report published by eMarketer.11
One reason, according to the eMarketer analyst David Hallerman, is that its size and range of search enable Google to squeeze more revenue from advertising than Yahoo and its other rivals. Some analysts also think Google has strengthened its command over advertising because its ad “network,” Adwords, allows marketers to find out specific demographics about its readers, including their age, sex, and income, which they can use to further target the ad’s audience.
Another indicator of Google’s success is the swelling of its staff and the capital it has available for investment and research. In 2004, Google had 2,290 employees and $1.6 billion in the bank; by the end of 2006, it reportedly had 7,900 employees and nearly $10 billion in the bank.12
When it comes to news, with a computer algorithm to select relevant news stories in any given search, Google’s investments are primarily related to software, hardware and engineering. Very little investment appears to be specifically earmarked for traditional news-gathering functions.
If anything, Google seemed to further solidify its identity as a technology-centric company in 2006 by investing heavily in upgrading its hardware and producing new software. There was even talk that the company was interested in making its own microchips.
As Google’s market position strengthens, the company has run into its share of legal challenges, in addition to possible lawsuits in the wake of its acquisition of YouTube.
Google also encountered more trouble for one of its better-known but more controversial projects. For some time, the company has been working on a project to scan and reproduce the collections from some of the largest libraries in the world. The project, known as Google Book Search, allows readers to search within books but not download or read them without paying if the book is still under copyright (according to Google’s corporate Web site). If a book is not under copyright, the entire contents of the book would be displayed. Moreover, Google says ads will not be displayed alongside book results unless the author gives the company permission to do so.
But the library project received a major setback in October 2006 when a number of U.S. publishers, including McGraw-Hill, Simon & Schuster and Penguin, announced they were suing Google for copyright infringement. Quickly on the heels of that announcement, members of the International Publishers Association passed a resolution opposing Google’s project.
The lawsuit may have larger implications — making it harder for Google to digitize other media formats. According to Business Week, a legal ruling against Google “could hobble attempts to apply the same method to existing media, like books, film, or sound recordings in programs like Google Print and Google Video.”13 It seems doubtful Google’s search business would be disrupted, though. Web publishers have generally accepted the way Google reproduces and displays Web content.
Google increasingly is thinking globally, but here too there have been challenges. First, it was criticized both in the press and on Capitol Hill for supposedly colluding with the Chinese authorities to offer censored versions of its search results.
And in France, President Jacques Chirac announced in April 2006 that he was creating an agency to develop a new search engine to compete with Google. The agency would mainly be funded by the French government, but would receive some support from the Germans as well.
The international arena may not prove as friendly to Google as its native country has, according to David A. Vise, who co-authored The Google Story: Inside the Hottest Business, Media and Technology Success of Our Time. He writes:
In contrast to Google, 2006 was a difficult year for Yahoo. A disappointing economic performance raised new doubts on Wall Street and in the financial press about the company’s identity and long-term vision.
Though Yahoo’s revenues and profits were up from the previous year, the stock took a beating in 2006, falling 37% for the year. That resulted in a reported loss of roughly $20 billion in shareholder wealth, according to the Los Angeles Times. Investors have soured on Yahoo largely because of the perception that Google’s online ad service offers a far superior performance and that Yahoo has not done enough to catch up.15
Yahoo received more bad press in the fall when it lost out to Google in the derby for YouTube, and again later in the year when it apparently failed in its bid to acquire Facebook, a social networking site for college and high school students.
Yahoo also fell further behind Google in the lucrative search advertising market. While Yahoo captures roughly 18% of the total online ad market, that represents a modest drop. In early January 2007, Yahoo told Online Media Daily that “most of its U.S. search advertisers had converted to its new ‘ Panama’ search marketing platform, but that revenue gains from the new system wouldn’t appear until the second quarter of 2007.”16
Yahoo, it seems, is competing not just with Google but also with a growing list of Web sites particularly popular with younger consumers. According to David Cohen, senior vice president of Universal McCann, a media buying agency, many marketers were reducing their budgets set aside for Yahoo and spending more on ads for MySpace and sites developed by Viacom, which include Comedy Central and MTV digital properties.17
After a much-publicized push to begin offering more original content in 2005, Yahoo, more often described as a media company than Google, largely a technology company, has decided to reduce those efforts and concentrate on showcasing content created from either media companies, such as video from CBS’s “Sixty Minutes,” or even user-generated material. While the company hadn’t completely abandoned its original content ambitions, which include the multimedia blog of the journalist Kevin Sites, it announced it would develop only a few new online ventures in 2006 and not the dozens that had been announced in 2005, the New York Times reported in March 2006.18
This departure has led to questions about Yahoo’s overall business strategy. “Yahoo has lost its appetite for experimentation. They used to be a lot more like Google, where someone would come up with a cool idea and run with it,” said Toni Schneider, a former product development executive at Yahoo who now runs a blogging software company.19
In late November, an internal memo obtained by the Wall Street Journal detailed Yahoo’s frustration with its apparent inability to focus on its core businesses, and discussed revamping its management structure and cutting as much as 20% of its workforce. In the words of senior vice president Brad Garlinghouse: “I’ve heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular.” A month after the memo was made public, the company’s CEO, Terry Semel, announced a major reshuffling of his top management.20
The shifting tides are a reminder of how young an industry the Internet remains. And unlike media titans of old, such as CBS or NBC in broadcasting, the barriers to entry in this realm are small, and the pace of change rapid. Google didn’t exist a decade ago. YouTube is about two years old. And other companies, a half-dozen years ago major players in search, no longer exist.
A New Chapter for AOL
AOL still seems to be in a transition period. A year ago we reported that it seemed to have turned a corner with a new business model that promised improved financial performance. In 2006, the Dulles, Va.-based company found it had to make even more changes, however, as revenues from online advertising failed to make up for losses from its subscription plans.
First, it moved toward becoming fully dependent on the online-advertising model. Second, it almost completely abandoned its dial-up subscription efforts, including laying off 1,300 customer-service jobs, a step it hoped would satisfy pressures from Wall Street and shareholders.
AOL’s subscription base was 19.5 million at the end of 2005, down from 26.5 million in September 2002. Even though online advertising revenue increased 46%, overall revenue declined 3% in the third quarter of 2006, thus showing AOL’s existing dependency on subscriptions for revenue.21
But AOL’s future, according to analysts, is clearly tied to online advertising. It has a long way to go to catch up, and critics contend it hasn’t taken enough steps to distinguish itself from competitors.
One area where the company could do that, industry analysts speculate, is in online video. In late November, AOL tapped Randy Falco, an NBC executive, to become the company CEO. According to the New York Times, “AOL is gaining an executive well versed in video and advertising, but with limited Internet experience.”22
By the end of 2006, its efforts seemed to be paying some dividends, with a number of analysts applauding AOL’s strategy.
As the Web becomes an increasingly larger part of the social fabric, politicians and regulators have increasingly had to grapple with new problems. The most publicized, and in some ways confusing, is the one that has been dubbed “net neutrality.”
The debate is over whether the telecommunications companies that build the pipes through which most Internet traffic travels can chargea premium to companies producing certain kinds of content that take up more bandwidth and in turn provide that content to at higher speeds. The result would be fast lanes and slow lanes on the Internet.
Currently, all content is transmitted equally over the web.
On one side of the debate are telecommunications companies, such as AT&T and Verizon, that provide consumers with Internet access. (The cable companies have largely stayed out of the debate so far). The telecommunication companies want a free-market approach that would allow them to set Internet speed and pricing based on the content of a particular Web site.
Under such a policy, the Internet providers could charge a fee to companies (like Google) that offer content that uses more bandwidth, such as video. Those fees, the telecom companies argue, would help them absorb some of the costs needed to maintain and upgrade high-speed Internet networks.23
“Companies like AT&T who are making significant investments to build a private backbone should have some leeway in the services we are offering on that backbone,” the AT&T spokeswoman Claudia Jones told the Christian Science Monitor in March 2006.24
On the other side are Google and Yahoo, which don’t want to be charged a premium for putting content on the Web. They are aligned with public interest groups such as the Consumer Federation of America and Consumers Union.
If the current system changed, critics fear that the result would be unfair to some content producers. Rich companies could afford higher fees to produce content that required more bandwidth. Their sites would run at lightning speed. Start-up companies and those that were struggling might not be able to pay premiums, and their sites would run more slowly.
The critics argue that consumers would naturally be drawn to the faster sites, creating a leg up for the big companies online. “Our nation should not allow the creation of bandwidth ‘haves’ and ‘have-nots,’ ” said Michael Silberman, president of the Online News Association. “Net neutrality will protect both big media organizations and the small sites that are most likely to offer diverse points of view and least likely to be able to afford high fees to distribute those views.”25
A number of Web companies support maintaining the current system, in which all Web content is available to the consumer at the same price and at the same speed. Establishing a hierarchy like the one advocated by telecommunication companies would represent a “break with the commercial meritocracy” that now rules the Web, wrote one such advocate, Christopher Stern, a media policy analyst with Medley Global Advisors, in the Washington Post in January 2006.26
In late December 2006, AT&T, once a vocal supporter of new laws, agreed to maintain net neutrality to facilitate its proposed acquisition of Bell South Corp. Net-neutrality supporters were quick to declare victory. But some still urged Congress to enact legislation in 2007 that would preserve the status quo.