Can Newspapers Maintain Their 20% Plus margins in 2006 On Print Ad Revenue That Could Actually Decline By 1.5%? The Answer May Rest On The Advertising Opportunities Their Own Web Sites Provide.

Philip M. Stone - January 12, 2006

If a publisher takes as a basic premise that the trends of past years will continue in 2006 – that print advertising growth will be less than 5% -- the bears say it will actually drop 1.5% and fear that is too optimistic -- and that Internet advertising will grow from 20-30%, is there any way to continue the usual 20% plus margins?

The answer may rest in how well newspapers are exploiting the Internet them. For while advertising revenue from the Internet currently produces perhaps some 5% of a newspaper’s revenue today the fact is that newspapers sites should be prime benefactors in the Internet’s success – indeed this year there is good evidence to show that advertising companies will be looking for crossover opportunities that combine print and online campaigns.

The point needs to be reinforced that the newspaper industry is still very profitable, but the problem for public newspaper companies is that existing profit margins are not leading to higher share prices. Just how good is good? Gannett, the largest newspaper group in the US, has about a 28% profit margin, but its share priced is still considered low for that performance. Knight-Ridder produces about 20%, the share price remained low, and the three largest shareholders told management to put the company up for sale.

Cost cutting throughout the industry is still savage -- redundancies, closing foreign bureaus, bringing back home expatriates. – but revenue grows very little and costs continue to climb – newsprint alone is expected to jump another 12% this year to all-time highs.

But there is some good news. US newspaper sites saw their monthly readership reach around 39 million readers in 2005, a growth of some 11% in an environment where print circulation for the last six-month reporting period dropped by 1.2 million, a 2.6% loss. While major newspapers like the New York Times, Washington Post, USA Today, Los Angeles Times and the San Francisco Chronicle’s SFGate may hog a disproportionate share of the total Internet newspaper readership, there are still plenty of readers left who are looking for local information and who visit their local newspaper site first, and it is they that newspapers must mine for all they are worth.

The numbers tell the story. Advertising on newspaper sites in 2005 was around $2 billion, triple what it was just three years ago, according to Borrell Associates, and now equal to around 17% of all US Internet advertising. But that is still a far cry from the $48 billion that print advertising pulls in. Trouble is, its been around $48 billion annually for the past five years – next to no growth -- and there are no signs that is going to get much better.

But there are a couple of Internet advertising trends being forecast for 2006 that are of particular importance to newspapers. If they want to keep the print advertising even at current levels they will need to offer prime Internet opportunities, too.

More and more advertising houses are recommending to their clients that at least 10% of any campaign spend should go on the Internet. And it will be the smart newspaper that has package deals already to go to meet just such demands. It will be the sorry newspaper that cannot satisfy an advertiser’s online needs.

And the way for an Internet site to really rake in the advertising revenues is to offer animated and video opportunities rather than just static graphics.

Nielsen/Net Ratings says that companies averaged paying $10.81 for every 1,000 viewers of animated ads during Q4, 2005, compared to just $2.85 per thousand viewers for banner ads.

And are there enough advertisers willing to pay such premiums for animated ads?  The research company says spending on animated ads increased last year by 23% over the year before while banner ad spending more than doubled. Credit Suisse is projecting that 2006 sales of online ads that have animation, sound, or interactive features will increase by some 66%, so, yes, advertisers are willing to pay the premium and that is where the big profit margins are.

Automobile advertising is a prime example of why newspapers must offer the right Internet opportunities themselves.  Car ads have always been a mainstay of newspaper advertising, and yet in 2005 automobile makers were spending fully 25% of their ad budgets online, while local/regional dealer groups were spending up to one-third of their budgets online, according to a survey by Classified Intelligence and Belden Associates.

That doesn’t mean that automobile ads will leave print – but that big spend on the Internet is not new money – it came out of the pockets of the traditional advertising sector, and it is up to that sector to try and get some of it back again. It can do that by offering the type of opportunities and viewers that automobile companies need and cannot deliver themselves onto their own web sites.

Credit Suisse, based on a survey by TNS Media Intelligence, says that major companies are planning to increase their Internet spend by some 30% in 2006. While sponsored search ads have made Google by far the world’s largest capitalized media company will continue strong, and banner ads will remain popular, Credit Suisse believes that interactive ads will overtake the banners by 2008.

Newspapers just have to look at the overall Internet advertising projections to see their way forward. By 2010 many forecasters believe that about 11% of the total advertising spend will be online compared to about 4.7% today. 

And it appears 2006 may be the year that those large budget advertisers who have taken a mostly wait-and-see approach have seen enough. They want in and that could cause the US online market to grow by some 25% a year for the next five years.

It’s unlikely that even all of that will make up for the losses that print could well suffer in those same five years. But for newspapers without their own impressive Internet presence participating in the web advertising bonanza,  those days of 20% plus margins will only be fond memories.

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