TRENDS IN AUTOMOTIVE ADVERTISING Pt. I

June 14, 2007 at 4:27 pm · Filed under Internet, Online Auto Advertising

Gordon Borrell was recently interviewed by a trade journal about trends in automotive advertising. Over the next several days we are posting excerpts from that interview. Here is the first installment:

Q: Which ad channels are currently making the biggest gains? Getting hit the hardest? And which ad mediums will be the biggest winners and losers over the next 5 years?

The biggest channel gainer in the automotive space is obviously the Internet, with cable not too far behind. Over the next five years the trend changes a bit, with the Internet and cable continuing to do well, but with TV also doing just fine. We're projecting online automotive advertising to grow 86 percent over the next five years, cable to grow 46 percent, and broadcast TV 20 percent. The channels getting hit the hardest are all the ones related to print. That includes direct mail, newspapers, yellow pages and local auto magazines. All face declines in the next five years — yellow pages down 31 percent, newspapers down 25 percent, direct mail down 21 percent and magazines down 7 percent.

Q: Why do you think this is so?

It all relates to the "buying funnel" and auto advertisers trying to entrance and lure car buyers as they pass through that funnel. At the beginning of the process car buyers are dreaming about which car they'll buy next. Television commercials — including cable — can sell the image of a new car better than any other medium. They can also — and this is an interesting phenomenon — deliver Web site traffic better than any other medium, including the Internet. A TV promotion can drive Web traffic like crazy, probably because of the incredible amount of multitasking that people do between the PC and their TV. The manufacturers are plowing money into their Web sites and have a strong incentive to get people to visit there as early as possible in their buying process. At the narrow end of that funnel, when people start looking at availability and pricing, print media is losing out. That's because of the dramatic audience shift toward the Internet that has occurred during the "research" phase of the car-buying process. It's also because of media economics. Newspapers, directories, direct mail and local magazines need to pay for printing presses, paper, ink, and delivery to get their products into the hands of consumers. The Internet has no such cost structure, so the print products have wound up competing with online sites that can deliver ad messages at pretty much any rate they choose.

Q: How would you describe the current franchised dealer advertising landscape/situation? What are the most significant trends/issues you uncovered in your study this year? What ad channels are making the biggest gains with franchised dealers now? Suffering biggest losses? And where do you expect that to go in the future?

The biggest trend with franchise dealers is that they've pulled back on advertising and allowed the manufacturers to take over. While this typically happens when car sales slow down, the way they're adjusting their marketing dials is fascinating. Dealer spending for the past two years has been flat, but they are absolutely moving money around different media channels. A lot of money is chasing lead-generation programs and paid search advertising. Both are the holy grail for any advertiser — the dream of being able to pay only when someone walks in the door or rings the phone. I suspect the dealers will continue to invest in their own Web sites and in any media advertising that will drive traffic to those sites. They will also continue to use traditional media channels, but to a lesser and lesser extent over time. They're finding, I think, that they've overspent on these channels in the past. Now that they've cut them back and have seen no significant difference, they have no strong reason to increase their spending levels.

Q: What about the new-vehicle advertising side?

New-vehicle advertising is continuing to get more creative. Manufacturers are looking for target demographics, not so much for mass audiences, and they want to engage those potential customers as much as possible. If Chrysler airs 100 spots for the Town & Country, they're looking for media channels that can deliver moms, exclusively. Better yet, car-buying moms. If Ford creates a campaign for the F-150 and you're a guy between 30 and 50, you're probably going to get hit 10 different ways — on ESPN, in Hunting & Fishing magazine, on the MLB.com, or via email. Ford will give you a dozen reasons to engage by going to its Web site to enter a contest or watch a gleaming new pickup truck amble over some rocks. Some are finding ways to market their models on interactive online game sites like Second Life or by creating their own space on MySpace. It's not your father's Oldsmobile commercial anymore.

Q: What about the used-vehicle advertising side? How are newspapers and Internet marketing faring with used retailers now? How will these channels fare in future?

This is an oft-neglected and somewhat messy sector of the automotive advertising market. It's a relatively small slice of total auto marketing — $4.2 billion out of a total $30.5 billion ad spend — but one that has been utterly dominated by newspapers and auto magazines. But as I said earlier, the narrow end of the funnel is where the big squeeze is happening for media. For used cars, that end of the funnel pretty much the only part of the buying process that print media has served — to answer the question of "who's got a late-model car, in decent shape, that I can afford?" Cable, radio, and outdoor will do a good job of branding and reminding people of the used-car dealers in town, and online media will do the best at capturing those wallet-ready buyers. We see newspapers and auto magazines losing out the most here.

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How to REALLY Sink a Newspaper

June 10, 2007 at 8:22 am · Filed under Internet, Newspaper Industry

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.
 

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Media Week Comments: Newspapers’ Opportunity

December 19, 2006 at 1:44 pm · Filed under Internet, Newspaper Industry

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

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.

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The Albatross of Convergence

November 3, 2006 at 12:00 pm · Filed under Internet, "Convergence"

By Gordon Borrell

I spoke at the National Association of Broadcasters small-market TV symposium in San Diego a few weeks ago, and despite the fact that I had to follow an animal act that included a 20-foot python, the speech seemed to go reasonably well.  That is, until I mentioned that convergence was an albatross.

In front of me were a few hundred broadcasters, most of whom had been laboring under the delusion that God created Web sites to help them sell more TV commercials.  All of a sudden their faces melded into an image of that 20-foot python, and  I was feeling a lot like a small toad.
 
Convergence is a poison pill for broadcasters and publishers alike.  It represents a glimmering dream for media executives who believe that their multimillion-dollar investment in printing presses, broadcast towers, talent and writers can yield even greater profits by merely sending the final product to another delivery channel and charging their advertisers more for it.
 
TV stations are hell-bent on selling convergence packages.  Online programming is the sizzle that helps sell more broadcast commercials. 
 
Newspapers are ecstatic about print-and-online packages – the famous “up-sell” that has driven billions in print advertising sales.
 
Radio stations are falling all over themselves with the idea of convergence, littering their sites with banner ads for every advertiser that buys a radio spot.
 
A DEATH KNELL

We heard the first faint tolls of the death knell for convergence this fall as media companies prepared their 2007 budgets. Managers of the most aggressive interactive units told us that they were adding online-only salespeople at a rapid clip because their “combo” sales were beginning to run negative. That is, online revenues driven by print or broadcast components were actually declining.  

Why?  Two reasons: They had reached a saturation point by up-selling all the traditional advertisers they could, and the online combos are declining as well because many advertisers are scaling back print or broadcast advertising.
 
In short, they realized they were drinking from a bucket with a large hole in it.
 
There’s a bigger problem with convergence.  It has the dual effect of raising an advertiser’s bill for a medium that’s already considered overpriced, while undervaluing what has become a very valuable medium – online.
 
Name me a single local media company – a TV or radio station, newspaper, magazine, yellow pages directory, or direct mail company – that is successful in using its existing sales force to sell another form of advertising. Know of any TV salespeople who also sell radio spots?  Newspaper reps who also sell direct mail?  Radio reps that sell cable spots?   I’m sure there are some who do a little cross-selling, but I’m equally sure that it’s “a little” in the strictest sense of the word.
 
DISRUPTIVE TECHNOLOGY

Four years ago I worked on an applied research project with Clark Gilbert from Harvard Business School.  We examined Harvard’s research into how incumbent businesses responded to a disruptive technology, then studied how five major media companies were responding to the Internet. 
 
We found the same pattern of behavior that has afflicted so many other industries – a focus on using existing staff to sell the new technology to current customers. It was only when the incumbent business hired a separate staff and located it elsewhere, away from the conflicting goals of the core business, that it was able to generate long-term growth in the new business. In every instance where an incumbent business tried to manage the new technology with a “converged” staff, it failed miserably.
 
History is against the idea of convergence ever being successful.  The largest and fastest-growing online companies today – Google, Yahoo, eBay, Amazon.com – have no ties with the traditional media they compete with.   If convergence were such an advantage, why aren't we going to Britannica.com to look things up or Barnesandnoble.com to buy books?  Despite that both those companies grasped the Web early, they spent far too much time strategizing how the Internet would serve their core business than they did merely pursuing the new opportunity.  For an example of how a traditional business can stifle growth quickly, just recall fast-growing AOL’s acquisition of Time Warner six years ago.
 
Selling online ads to current print or broadcast customers was a good first step for local media companies – picking the proverbial low-hanging fruit. But as a strategy, it’s a trap.
 
The lure of profits has cast a spell on many local media companies, transfixing them on high-margin up-sells making them reluctant to hire online-only salespeople. In the short run, it’s working: media companies are reporting profit margins from their Web operations that are north of 60 percent. 
 
For the long run, media companies should put their online profits toward finding new ways to serve the vast majority of advertisers who have never done business with the newspaper or the TV station.
 
It is the only way media online operations can keep growing as fast as the online ad market.        

 

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