A Looming Threat to Newspaper Advertising  | American Journalism Review
From AJR,   May 1999

A Looming Threat to Newspaper Advertising   

Online shopping is growing fast.

By John Morton
John Morton (mortoninc@msn.com), a former newspaper reporter, is president of a consulting firm that analyzes newspapers and other media properties.     

The biggest fear that newspaper managers have about the Internet is that electronic competitors such as Microsoft's Sidewalk and CarPoint might steal away advertising, especially classified.

Now, I have never been especially worried about this, figuring that newspapers know how to sell advertising and will be able to do it on the Internet just as well as in print. Competition for advertising on the Internet likely will turn out to be fiercer, and therefore less profitable, than newspapers are accustomed to, but a paper's brand name should be a big advantage in the fray.

What I do worry about, though, is the ability of the Internet to eliminate the need to advertise in news publications altogether. Already some retailers have put up Web pages either acting alone or in alliance with a portal company providing access to the Internet. In effect, these retailers offer an electronic catalogue: Buyers can pick out products on the computer screen, pay with a credit card, and have them delivered to their homes.

The prospect of substantial retail sales becoming disconnected from the traditional advertising-supported media is very real. Half of all U.S. households now own a personal computer, and that will likely increase to two-thirds before long. A third of households are connected to the Internet, with more undoubtedly on the way.

So far online shopping, which has attracted the moniker "e-commerce," doesn't amount to much--about $8 billion last year out of $2.6 trillion in total U.S. sales, according to Forrester Research, a Cambridge, Massachusetts-based Internet research firm. But Forrester expects online sales to more than double this year, and it's not hard to envision the growth rate accelerating as more homes get hooked up and more people get used to the idea of purchasing online.

But there are some imponderables that, depending how they work out, could keep e-commerce from becoming a major threat to advertising spending. One is that some of the best-known Internet retailers, which have excelled in getting their stock prices to what I consider to be ridiculous levels, have also excelled in losing money.

An example is the online bookseller Amazon.com. Based on trading prices, the stock market recently pegged Amazon as somewhat more valuable than Gannett, which has nearly 10 times more annual revenue. (Amazon.com's revenue last year was $610 million; Gannett's was $5.1 billion, spokesmen said.) But it's not possible to compare the relative profitability of the two companies, because Amazon makes no profit.

Alan Abelson and Rhonda Brammer, the astute authors of Barron's "Up & Down Wall Street" column, recently noted that Amazon's losses have been rising faster than its revenues, meaning that "the more books Amazon sells, the more money it loses." They likened this to "the hog farmer who lost $50 on every pig he sold--but hoped to make it up on volume."

So it is possible that some of these e-commerce companies just will not turn out to be the powerhouses that the investors on Wall Street expect. From personal experience, I know that the shipping cost tacked on the price of goods sold over the Internet can be daunting, and this, and the wait for delivery, could eventually limit e-commerce.

Still, no less than Alan Greenspan, chairman of the Federal Reserve Board, told a U.S. Senate committee that Internet stocks would not have soared so high "if there weren't something fundamentally sound" underpinning them. Maybe the trick is to figure out what is sound and what is the Ponzi scheme of the '90s.

A second imponderable, and perhaps the most important one, is that shopping--going to the mall or downtown shops or big discount stores--is a social experience for many families. Most Americans seem to want to get out of the house to spend their money, and it could turn out that they will want to spend only a limited amount electronically at home, just as they spend only a limited amount now ordering from catalogues.

Drawing again on personal and undeniably anecdotal experience, there are female members of my extended family 10 to 13 years old who are Internet savvy and obsessed with Beanie Babies.

They get on the Internet's Beanie Baby chat rooms to learn what's hot, what's new, what's the current price for this or that bag of beans. But when it comes to buying, they don't beg their elders for credit card numbers.

No, they go to the mall, where they can see and squeeze what they want to buy. It's also where they can be among the swirl of people and the dazzle of stores and can pick up a burger and fries.

Maybe there is hope for news organizations.