Borrell’s Blog

The World Association of Newspapers (WAN), recently asked Gordon Borrell to offer his vision of newspapers in 2020. Here is an excerpt of that essay.

Looking 13 years into the future with any hope for accuracy is a tricky thing. I’m wondering what futurists might have told us about today, 13 years ago. In 1994, would they have predicted the overwhelming rise of the Internet and the success of eBay, Google and Yahoo – none of which existed at the time? Would they have anticipated the precipitous decline for North American and European newspapers, even though they were experiencing strong growth in the mid-1990s?

To look forward to 2020, it’s best to look back.

First, daily newspapers as we know them have been around for nearly four centuries, so it’s hard to imagine – even in this age of the digital media – that readers will abandon them in 13 short years. The fact is, newspaper circulation worldwide has been increasing at an impressive rate. There are 450 billion newspapers in circulation every single day, with one-third of all adults reading a newspaper. The number of newspapers in circulation has been increasing steadily for centuries.

In the strongest market, the U.S., the picture is vastly different. Circulation has been declining for 20 years and slipped below the magical point of “critical mass” – or half of the U.S. households – two years ago. Forty years ago, 81 percent of all households got a newspaper. Today, it’s 48%. Things look bad.

Between now and 2020 I see a transformation of newspapers. They will move from the 100-year-old model of paid circulation and black-and-white news and advertising to a mostly “free” distribution model with lots of color and graphics. In essence, they will need to differentiate themselves by become less like newspapers and more like local magazines.

by Kip Cassino

Anyone who has watched “lifeboat” movies knows how they progress. As the days lengthen, the crew stretches rations to a few morsels of food and a single sip of water. The weak are cast into the sea as they swoon. But, eventually, the rations run out and the remaining survivors begin to look to each other as the awful remaining alternative.

To some extent, that grim scenario is playing out in the media industry. Newspapers, for example, have cut staff to levels never contemplated in years past, in order to preserve the “core product.” But beyond the cuts, it’s pretty much business as usual, even though the ad categories responsible for the majority of past revenue – the auto dealers, department stores, real estate, and recruitment – have all continued to slip as the century nears the end of its first decade. But cuts assume that things will ultimately be better … that the lifeboat will be found, and those still onboard rescued. What if that’s not the case? What if the lost revenue is not coming back?

An evaluation of the trends driving the downturn in advertising spending for each of these categories does not hold promise for a return to the past. Without getting too technical, the statistics show the opposite: that there has been a break between past spending patterns and those in place now in every one of these ad categories. Return to the past is unlikely. Nor is it likely that some major new ad category will arise to take the place of the lost revenue. A look through the lists of businesses and their ad spending patterns does not show promise in any market, large or small.

There are no quick fixes for the current situation. There are indicators, however, that – when taken together – at least show the direction newspapers must go to regain their market strength:

1. Be aware of how you got here. Newspapers are in the situation that exists now because they chose to measure revenue and ignore share. So, when revenue dropped, the reduced share caused even greater reductions – unanticipated by past results.

2. Find out where the money is going. In both recruitment and real estate, the lost share did not all go to some online intermediary. In many cases, it moved to the advertisers’ websites themselves. This means the “Upsell,” the classic vehicle newspapers have used to become the largest local online advertisers in the markets they serve, is ending. The online money is now moving to paid search engine placement, e-mail marketing, online promotions, and streaming audio/video.

3. Play to win. That means measuring share, and looking to win it. Just counting money isn’t enough. If your revenue isn’t growing faster than the whole pie, even if it’s growing you’re still losing ground.

4. Get measured. Newspapers have the reputation among advertisers as resistant to measurement. Yet measurement is, increasingly, what advertisers demand. Programs to offer reasonable metrics in this area must be developed.

Newspapers are not going away, though they may change dramatically during the coming decade. However, the longer they continue their “lifeboat syndrome,” the more painful their transition will be.

~ KC

By Colby Atwood

Imagine you are an entrepreneur setting up an advertiser-supported Web site in your community. Now imagine that you are in a meeting with some prospective investors and you tell them, “We’re going to sell ads only to those businesses that happen to be advertising in the newspaper these days.” You’d be crushed in the stampede for the door.

In effect, though, that’s exactly what many local media companies are telling themselves when they base their online strategy on “convergence sales,” “upsells,” “joint sales,” or “packages.” By whatever name, this strategy is, at best, transitional, and at worst, doomed.

Selling to your existing advertisers is a seductive strategy because it generates quick, high-margin sales. It makes sense to go after the proverbial low-hanging fruit, harvested from the folks you already know, who already trust you. Online revenue growth looks good, and the temptation is to stick with a proven formula – especially when times are getting tough for the core medium.

But as we explained in our 2002 report, “Disruptive Technology and Local Media,” it is essential for long-term growth that local media companies resist that temptation. They must force themselves to invest in the future of their online operations by going after new business – online-only business – before those easy sales have been exhausted.

The conclusions we reached in 2002 are still valid – and widely unheeded. The commitment shown by local media companies to extending their online businesses has been uneven. Some have actually taken a step backwards in the past couple of years by reigning in their fledgling online-only sales staffs and putting online sales back on the plates of the core medium’s salespeople.

We’re concerned about this tendency for two reasons. First, it sends the message that the online operation exists primarily to support the core medium, rather than to evolve into its own business. Second, it limits the site’s growth potential by neglecting new classes of customers in favor of “over-serving” existing customers. All of this is taking place in an environment of unfettered competition. You can bet that the entrepreneurs running the “pure-play” Internet firms active in your local market are looking for ways to serve anyone who might possibly be a prospect, not just people who happen to be advertising in the newspaper these days.
- Colby Atwood

By Kip Cassino
Borrell Associates, VP Research

Two headlines caught the attention of Wall Street during the past week:

1. Newspaper revenue continued to slide, the victim of faltering classified ad sales.
2. Google’s revenues, though stellar, were below investment community expectations.

The former was really no surprise to any media industry observer. The latter was mildly surprising, unless you are a Borrell subscriber. If you are, you have known it was going to happen since this time last year, if not before.
Newspapers have been losing share of real estate spending for some time – since 2002 at least. However, the strong market for home sales masked the drop in share, since the revenue continued to rise. Only when real estate sales declined did the loss of share reveal itself. This same scenario has been played out twice before in the last decade: in 1998 with recruitment advertising, and in 2000 with department stores. Yet the newspapers continue to remain stubbornly surprised when it occurs. Online ad sales do not have the remedial effect they have had in past years, either. Spending on the “standard” online formats has slowed and will decline in many markets this year, as online advertisers turn to paid search engine placement, e-mail marketing, streaming audio/video, and online promotions instead.
That should be great news for Google. Indeed, it has been in the past few years. But paid search is changing, too. National paid search has reached its peak, and will now begin to degrade in favor of other online marketing choices. Local paid search is still very much on the rise, but brings less revenue with it. A local business seldom gets as many “hits” as a national brand. As localized search replaces unfocussed/”national” paid search, Google and others who rely upon this particular flavor of online marketing expenditures will see growth rates drop. That is, unless things change.
Change is endemic in online marketing. Trends that used to take years to appear offline erupt in months on the web. At Borrell, we spend most of our time examining and projecting the impact of these changes. It helped us get these numbers right, a year or more before they became headlines.
KC

By Gordon Borrell
Walter Hussman’s letter (“How to Sink a Newspaper”) in The Wall Street Journal on May 7 lay blame for the industry’s dwindling circulation on fellow publishers’ strategy of giving away their local news content on the Internet. While Mr. Hussman outlines a perfectly logical concept, I must point out that smart businesspeople in many other companies –Woolworth’s, IBM, Kodak, and many others – followed similar instincts when faced with a disruptive industry trend. They applied their tried-and-true business model to the new business of discount department stores, minicomputers and digital photography – and failed to achieve new net revenue.
There is a reason that all but a half-dozen of the 1,450 daily newspapers in the U.S. have abandoned the model espoused by Mr. Hussman, whereby Web visitors must either subscribe to the newspaper or pay to access local news content.  It’s because they are absolutely committed to keeping their generations-long domination of the local advertising marketplace. And it’s because they know an interesting little secret about the industry:  Roughly half of the people who read their newspapers are not interested in the local news at all. They’re interested in the advertising, according to surveys by the Newspaper Association of America.
That’s why newspapers such as The Palm Beach Post began several years ago digitizing all their most valuable content – advertising – and placing it into a searchable databases online. When you look into any local market using Scarborough Research data, you’ll find that Internet users are two to three times more likely to go to the Web for local advertising content than they are local news.  They are very comfortable, thank you very much, getting their local news from TV or the printed newspaper.
I wouldn’t write off the newspaper industry just yet. While circulation dwindles and key advertising sources shrink, long-term strategies are at work.  To wit:

• In 2002-2003 we conducted an applied research project with Clark G. Gilbert, then a professor at Harvard University, with four of the largest newspaper companies – Tribune Co., Media General Inc., Knight Ridder Inc. and Belo Corp. Using some of the findings from Prof. Clay Christensen’s work on how smart businesses failed when faced with a disruptive technology, we laid the groundwork for the newspaper industry’s understanding of how they might fail as well when it came to the Internet.
• By 2004, the newspaper industry commanded a 44% share of all locally spent Internet advertising – the largest single share of any industry segment.
• By 2006, newspapers operated the largest-grossing Web sites in 95% of all U.S. markets.  And 60% of those Web sites were generating more cash flow for their companies than the largest-grossing terrestrial radio station in those markets.
• Today, newspaper companies are averaging 8% of their total gross revenues from Internet advertising, while these operations now contribute an amazing 25% to 35% of gross company profits.  In several large markets, the newspaper Web site is generating more than $10 million in cash flow.

The story doesn’t stop there. The newspaper industry has seen its local online advertising share slip from 44.1% in 2004 to 35.9% in 2006 – a disturbing 8.2-point loss in just two years. The reason is that publishers have not yet realized that they must go beyond merely up-selling their print advertisers with a “convergent” package. That slice of the pie has been thoroughly picked over by now. They are falling into the fatal trap identified by the disruptive technologies scenario – missing the larger opportunity at hand to use the Internet to grow the business into new segments – serving customers they have never served before – rather than merely protecting their existing segments by selling to current customers.
If you were an entrepreneur starting an independent local Web site, would you tell your investors that you were going to sell advertising only to people who happened to be advertising in the newspaper?
Through the American Press Institute, the industry has launched a project called Newspapers Next.  Part of that project, keyed off the early research on disruptive technologies, has focused the newspaper industry on becoming the disruptor instead of the disrupted. The result is that – believe it or not – of the $161 million spent on local video advertising on the Web last year, newspapers were collecting half of that. They have beaten their local TV competitors to the punch!  Many newspapers have used the Web to launch what amounts to their own TV stations without an FCC license – including The News Journal in Delaware, The Naples Daily News, and The Virginian-Pilot – and they are targeting television advertisers. They are also aggressively launching online directories and selling against their local Yellow Pages competitors.
Mr. Hussman is correct that daily circulation at The Columbus Dispatch has fallen 5.8 percent since it dropped its subscription model for content on its Web site. What he did not state, however, was that The Dispatch’s Web reach went from five percent under the subscription model to more than 25 percent under the free model, according to Nielsen data. According to Gerry Barker, general manager of the company’s digital operations, “The resulting growth in online revenue dwarfs anything we could ever generate as a paid site.  This is about building a sustainable business model and positioning our company for the future.”
I do not know whether the newspaper industry can make the transition from a purely analog world of ink, paper and printing presses. But I do know that even though their erosion in circulation may be partly their own doing, it’s a necessary consequence of changing to survive in an increasingly fragmented – and “free” – world of content.
 

I've had quite a few requests for the text of my speech at the UBS Warburg Media Week conference Dec. 4 in New York.  I shared the dais with Jim Conaghan, vice president of research for the Newspaper Association of America.   Below is the text of that speech.  It's a bit long for a blog, but chock full of interesting information.

By Gordon Borrell