December 16, 2013

With all the talk of newspapers as dinosaurs, you might be surprised to know that they will close 2013 retaining their position as the leader among legacy platforms in share of digital advertising revenue, according to Borrell Associates’ annual review and forecast.

But as Borrell looks ahead, the industry’s digital ad prospects are alarmingly weak. By 2018, the consulting firm predicts, newspapers share of all digital advertising will fall by more than half — from 7.1 percent in 2013 to 3.3 percent in 2018.

To be clear, Borrell is NOT saying that the industry’s current digital ad revenues — about $3.5 billion for dailies, $5.8 billion for all newspapers — is going to fall by half. In fact, the firm forecasts growth, though at a modest pace of 1.8 percent a year.

But in a period of explosive expansion in which digital advertising will pull even with all advertising in traditional formats, newspapers and legacy media will get only a little of that increase.

The vast majority of the growth will go to so-called “pure plays” — Google, Facebook, Yelp, BuzzFeed and a host of others. Pure plays will grow their ad revenues by a third each year, Borrell expects, raising their share of digital ad revenue from an already impressive 76.6 percent to 88 percent.

The growth and share shift are shown in these two charts:


While these figures include national advertising,  Borrell’s main focus is on local ad markets, which it measures with a proprietary formula developed over several decades. The firm, based in Williamsburg, Va., sells this information, consults extensively with newspaper publishers and organizes several conferences a year.

Like other analysts, Borrell sees the next wave of digital ad growth concentrated in mobile and social media or the two together. By 2018, 80 percent of all digital ad messages will be received on a mobile device, the firm predicts.

When Borrell’s full report is released sometime in the next several weeks it will also show that targeted advertising, as it predicted a year ago, accounts for the largest share of growth, Kip Cassino, Borrell’s executive vice president for research, told me in an e-mail interview. Search continues strong, but its growth has leveled out.

However, the pure plays dominate social media, and they are far ahead of legacy competitors in gathering data on user online behavior and buying interests — the core skill to support targeted advertising. As a result, Google has about 50 percent of mobile ad revenues and Facebook another 15 percent.

Cassino summarized the early strength and current slide of newspapers in digital ads this way:

Newspapers were early to the digital space, and they have left their imprint. Most web sites still use the newspaper “front page” format put forward in the ‘90’s, and we still talk about “classified” listings. By now pure-play sites garner the majority of local digital ad sales, but newspapers control the bulk of what’s left.

Beyond 2014, newspaper share is destined to shrink – unless more papers realize the web is a separate and distinct media and not just an expansion of the print product. Digital ad sales will move away from run-of-site banner offerings every year, toward (among other things) targeted display in mobile and social spaces.

As the second chart shows, other legacy media such as broadcast and cable TV will be increasing digital ad revenues a bit faster than newspapers, but they too will be losing share over the next five years. The impact will be relatively greater on newspapers because, as Cassino notes, they started from a position of relative strength. (In fact, newspapers were growing online revenues by nearly a third a year as the pure plays are now doing, from 2003 to 2006).

Sluggish growth in digital ad revenue is all the more threatening to newspaper organizations because their traditional base of print ads continues to fall — by 7 to 8 percent annually the last three years. Broadcast, by contrast, buoyed by political advertising and a good recovery in the crucial automotive category, is doing reasonably well with traditional ad formats (and is getting a windfall of growth in new retransmission fees from cable systems).

I asked what newspapers might do in 2014 to 2018 to improve on the growth and share numbers Borrell is predicting.

Cassino replied:

1. Understand that digital is a new space — not an extension of your current off-line product. It needs a dedicated sales staff. Our research has consistently showed for the last several years that dedicated sales staffs do far, far better than re-trained print reps who try to sell everything.

2. Expand digital product offerings to match market demand. Demand for run-of-site banners is dying, in favor of targeted display. Mobile and social have become the prime movers for digital marketing, and their role will only increase during the coming decade. Ignoring them limits the amount of market demand your sales team can address, severely limiting share.

3. Be careful to watch share. Many newspapers and other legacy media outlets are caught in the “YoY Trap.” As long as sales increase from year to year, they believe everything is OK. But if their increases are less than the true market growth, share may actually be decreasing. Nobody notices until there’s a spending downturn, when both share AND revenue plummet. This ugly scenario has already caught newspapers three times during the last decade — with recruitment, general merchandise, and real estate.

Gordon Borrell, the firm’s CEO, added:

It will be very difficult for traditional media companies to maintain their share of digital advertising over the next five years. In fact, I think it will slip significantly…   

If they wanted to maintain share, they’ll need to untether their digital ventures from their legacy organizations so they can move faster. All the pure play companies do is serve the market’s needs, day in and day out.  They don’t have to stop for a meeting about eroding circulation or newsroom integration or how to preserve declining automotive advertising. For a newspaper to experience share growth, its tone will have to be set precisely to a digital tuning fork, not to an analog one.

One might make the case (and I have) that to focus exclusively on advertising makes the difficult business situation of newspapers look even worse than it is. The industry has had success charging for digital access and raising prices for print + digital subscriptions, actually growing circulation revenues the last two years. Other activities — like offering digital marketing services or sponsoring events and newsletters — are beginning to cover some of the revenue gap.

While much smaller than they were in the mid 2000s, the great majority of newspapers are at least modestly profitable. In theory, they can continue for some time to come as smaller but viable enterprises.

But the Borrell forecast has at least two disturbing implications. With net revenues still falling year to year or flat, newspaper organizations will be forced to keep looking for expense cuts. Most places that will translate to still smaller newsrooms and less capacity for ambitious journalism.

Also the Borrell summary figures underscore how legacy media have become David to the pure plays’ Goliath. Newspapers are focused on strengthening their digital products, but they haven’t found the equivalent of a slingshot to take the pure play giants down a peg.

That probably foretells another five years in which the digital rich get richer and legacy little guys struggle.

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Rick Edmonds is media business analyst for the Poynter Institute where he has done research and writing for the last fifteen years. His commentary on…
Rick Edmonds

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