Borrell’s Blog

Thank you for the opportunity to be here today. I apologize for being a few minutes late, but I’m sure some in the newspaper industry would actually be elated to hear me introduced as the late Gordon Borrell.  As Brian said, I run a research firm that tracks local advertising.  We work with hundreds of local media properties tracking the flow of local advertising through their markets by providing detailed market reports for spending on all forms of media:  cable, out-of-home, radio, broadcast, TV, newspapers, etc.  Because of the tremendous growth in interactive advertising and the resultant threat it is giving traditional media, our strongest focus is the amount being spent by local businesses on online media. 
We’ve watched this very, very closely for the past five years and have noticed some remarkable trends.  It is not unlike the period in the early 1960s when many newspaper companies were watching the growth of another new medium they had spawned: local broadcast TV station.  It was only then – a dozen years after the birth of these commercial stations – that local TV stations began emerging from their money-losing adolescence and broke away from their radio and newspaper parents to become stand-alone operations that eventually gained significant market share of local ad dollars.  Like the Internet today, newspapers seized broadcast television and began evolving into media companies.  Newspaper-backed The Milwaukee Journal created W-T-M-J…. The Cedar Rapids Gazette started K-C-R-G …. The South Bend Tribune W-S-B-T, and of course The Chicago Tribune’s W-G-N, which stood for The World’s Greatest Newspaper.  What we’re beginning to see now is local Web sites breaking out of their adolescence and beginning to pull away from their newspaper parents.  And get big.

What I wanted to do over the next 15 minutes is to give you a glimpse of what we at Borrell Associates have begun to see with regard to the local online advertising landscape and in particular how we see newspaper companies growing as a result of their aggressive focus on the Internet.  First, this is our view of the local online world for the U.S. — $5.8 billion this year out of a total $284 billion in all advertising spent across all media.   The total for online, nearly $24 billion, looks high to a lot of people.   It’s because nobody seems to count the “local” portion of online advertising.   It’s huge – nearly $6 billion this year – and growing faster than anything else.    It’s extremely difficult to count “local” in any form of advertising – online or offline.  There are tens of thousands of Indians out there, from independent phone books to AM religious radio stations, to shoppers, to low-power broadcast TV stations.  All get little snippets of ad dollars, and it all adds up.  The situation is the same online, perhaps even more complex, with some markets having dozens of local Web sites trying to sell advertising.  And we’ve seen a new phenomenon as well:  national companies for the first time are taking a significant share of local ad dollars from a marketplace without even a physical presence or feet-on-the-street sales force in those markets.  I’m talking about companies like Monster.com, Craigslist, Google, Housevalues and Yahoo! to name a few.
We track this very closely and in fact have collected data from more than 2,700 local Web sites in the U.S. and Canada that report their Internet revenues to us throughout the year. These local sites have turned into extremely interesting, highly profitable businesses.   Many are now generating tens of millions of dollars in gross revenue and millions in EBITDA.  In slightly fewer than half of the markets, the largest newspaper Web site is grossing more money than the largest-grossing radio station.  And while the margins in radio are routinely 40 to 50%, the margins in these newspaper Web operations are north of 60%.Overall, the newspaper industry — daily and weekly newspapers included — will gross about $2.4 billion from their Internet operations this year.   Some of these newspapers have established large sales staffs dedicated to doing nothing but selling online products.  Not print-and-online combos or up-sells, but just pure online.  The San Diego Union Tribune has 18 online-only salespeople.  The Virginian-Pilot in Norfolk and The Dallas Morning News have 25 each.  The SeattleTimes, 12.   The Washington Post, 26. 

But there's trouble behind the numbers.  Newspaper companies were the first aggressors on the Internet scene, establishing formidable Internet sites and racing after advertisers.   By 2004 they had captured 44% of all locally spent online advertising.  But in the past two years they've lost 10 points of local online share.  This is mainly because they tied their existing online advertising sales to print advertisers, in essence hitching their wagons to a fading star. The average newspaper Web site gets 75% of its revenues from the three classified categories of real estate, automotive and recruitment; some of them even get 90% of their online revenues from these categories, facing the threat of the Internet head-on but neglecting the opportunity to use this new medium to attack new-to-newspaper categories.  Many of them have told us this year that their up-sells — or the print packages that have an "up-sold" online component — have begun running negative.  So they've been rushing to hire salespeople who sell only online advertising.  They've also been making plans to aggressively tackle the highest-growth categories:   local paid search, local email advertising, and streaming video advertising.  In all cases this is very good news because these advertising segments are more opportunistic for newspapers.  That is, they have begun using the Internet to attack rather than to defend.    Newspapers have begun to use the Internet less as a shield to their core products and more as a saber, slashing away at their competitors in Yellow Pages, Direct Mail, and, in a in a very big way, local broadcast Television.   One-third of newspaper sites are already offering video, and some of them are selling commercial spots to auto dealers.  This is a direct shot over the bow of TV stations.   The most aggressive newspapers – Newsday, The Chicago Tribune, The Los Angeles Times, The Atlanta Journal, The Denver Post, The Boston Globe, to name a few – have employed a video platform developed by WorldNow, an Internet services provider for 170 TV stations, and are absorbing the expertise and sales knowledge it takes to compete in the world of broadcast. 

Another phenomenon I wanted to point out is that while many newspapers have tried to cultivate their Interactive initiatives from within their existing organizations — rushing to embrace the holy grail of "convergence" — some of them have seen this as an altogether separate business opportunity.  One of them is Media General, one of the very few companies that still has a separate Interactive division, reporting its Internet expenses, revenues and profits separately, as they should be.  Rather than view this as something to turn a profit from immediately, Media General has taken the time to invest in the Internet opportunity and keep the pressure on online initiatives.  As a result, Media General Interactive is showing one of the highest compound annual growth rates over the past five years – 53.7% — and in fact is one of the only newspaper companies that has consistently gained share in its markets.   Admittedly, MG is in smaller markets where this is generally easier to do, and it is heavily reliant on print up-selling, but it stands out as an example.   Other companies that seem to "get it" when it comes to the Internet are Belo, McClatchy and The Washington Post.   Each has taken the time to develop brilliant initiatives in targeted advertising, including local search and email advertising, rather than merely selling run-of-site banners and listings to existing print advertisers.

I don’t want to seem exclusive by naming only a few newspaper companies that are doing well.  In fact, we have seen some amazing agility in the great gray battleship.  The industry contains some of the brightest people in the interactive world…..and to prove it, one need only look at who’s getting recruited by the big Internet media.  Some of the key leaders from Knight Ridder Digital have wound up at Yahoo or Oodle.com, while bright minds from the industry’s Classified Ventures and The Philadelphia Inquirer have landed at Google.

I’d like to end by giving you some very practical advice.  We are asked often what to look for in a newspaper company’s Internet operation to determine its value.  The mere size of these operations – their revenue generating capabilities and their cash flow – aren’t enough.  I was sitting with the managers of a publicly held newspaper group last week and heard how ecstatic one publisher was that his 20,000-circulation daily in would be generating more than $1 million this year from online advertising sales.  Yet virtually all of his sales were to existing print customers.  He’s not building a new business.
So what’s the practical advice?  I have four key questions you can ask that will help you determine whether a newspaper company is actually building a new business, or whether it’s just building a house of cards by merely raising the bill for its print advertisers.
They are:
·        Of all the online advertising dollars, what percent comes from non-print advertisers?
·        What is your current market share of locally spent online advertising, and what are your plans to grow that share?
·        How many salespeople do you have that sell only online advertising?
·        What percentage of your online revenues comes from the three classified verticals – automotive, real estate and recruitment advertising?
The business of daily newspapers isn’t a pretty one these days.  Circulation is slipping, major advertisers are fleeing, and classified advertising is in a never-ending freefall.  But I have no doubt that the industry is doing what it did 50 years ago with the creation of local TV stations – using its formidable market position to both respond to a competitive threat and seize a new opportunity.  In the end, many – but not all – will survive as stronger, more diversified, and more profitable companies.
Thank you.