AJR  Features
From AJR,   June/July 2010

Looking Up   

Despite the massive gloom and doom of recent years, some media executives and analysts see brighter days ahead for digital advertising on news sites. The iPad could play a big role.

By Bret Schulte
Bret Schulte (bjschult@uark.edu)is an assistant professor of journalism at the University of Arkansas. He profiled Gingrich for U.S. News & World Report in 2005.     

The slow, sad song of 2009 played on far too long. For the news industry, the refrain went something like this: "With all the advertising mediums out there, there was a hit. We saw tough times in our classified areas, our autos, our real estate. I think most people will agree to that. There was difficult advertising in every medium." Such are the lamentations of Bob McDonald, senior digital sales manager at the Chicago Tribune Media Group.

The numbers show the misery. Just peruse the recent "State of the News Media" report by the Project for Excellence in Journalism. With some exceptions, circulation continues to plummet for newspapers and magazines. Revenue for newspapers dropped by nearly a quarter in the last two years. And in local television revenue, last year alone saw a fall of 7 percent.

But all that is old media. What of the bright, shining future? Or is it actually dim? For the first time since 2002, the ever-widening stream of online advertising money shrank. For news sites, ad revenue declined from $11.5 billion to $10.9 billion in just the first seven months of 2009, compared with the same period in 2008. This happened, by the way, even as more Americans than ever went online to get their news.

One of the reasons for the decline of online advertising is obvious and carries hope for a cure: the great recession of 2009, which is already easing. The others are more problematic: the glut of space online, the inability of news organizations to make money from search-based advertising, the exodus of classified ads to craigslist. "It suggests a tough road ahead," says Amy Mitchell, one of the authors of the PEJ report. As if the journey this far hasn't been bad enough.

But there's another murmur out there, a different refrain: "We continue to bring in new advertisers," says Christian Hendricks, vice president of interactive media at McClatchy. "It's foolish to think that [digital advertising] is flat and it's over. It's like going back in time and saying 10 years after television came out, 'Well, it's plateaued.'"

Hendricks offers some interesting numbers. Sure, McClatchy advertising revenue was down last year--by a breathtaking 27 percent--but its digital advertising revenue grew. In fact, the nation's third-largest newspaper chain is experiencing double-digit growth in display ads online, and a partnership with Yahoo!, part of a consortium of newspapers, is bringing in millions of dollars. And it's not just McClatchy that's singing a happier song. For CNN.com, last year was actually better than 2008 in terms of online revenue. And 2008 was a campaign year, which is a quadrennial pot of gold for the politics-oriented news organization. Meanwhile, ESPN.com, which has a comfortable advertising base already, made the tough decision to sacrifice some eyeballs (to the potential irritation of advertisers) by moving more content behind a pay wall, dubbed ESPN Insider. And it's flourishing.

One more thing: There's strong evidence to suggest that the recession really was the primary culprit in last year's digital dive. As the economy revived, online revenue industrywide went gangbusters in the fourth quarter of 2009, posting a record $6.3 billion in sales, according to the Interactive Advertising Bureau. That trend has continued into 2010, with news outlets reporting stronger advertising revenue--overall, not just digital--in the first quarter over the same period last year. Indeed, Rick Edmonds, a media business analyst at the Poynter Institute and another co-author of the "State of the News Media" report, notes that "the macro numbers probably don't give you an idea that companies are making progress in the quality of the online ad base."

Ken Doctor, author of the book "Newsonomics," notes that digital advertising is growing faster than any other category. And it's not stopping. He predicts "it will probably surpass TV and newspapers in the next few years" in the United States. Furthermore, Doctor and Edmonds point out that the industry crisis has forced a massive paradigm shift. New advertisers, new partnerships, new platforms, such as mobile and tablets, are all being monetized. "It's a total mind-set change in sales at these companies in what you are selling and how you sell," Doctor says.

What you hear there is a faint note of optimism. Indeed, industry insiders say they're beginning to crack the code to making money online. The learning curve has been slow--likely because making money in media was so easy for so long.

Historically, industry execs pursued all the old models in the new digital world. The Internet looked like another display platform, so news organizations sold display ads. They still do. In 2008, display ads brought in more than $4.9 billion to news sites. No small coin. But display advertising online has never even come close to what it's brought in for print products. In short, the bucks have never really come pouring in through news sites--even though the audiences did. "It dawned on everybody that inventory on the Internet is infinite," says Doctor. "And selling infinity tends to push prices down."

But the big selling point was that the ads were clickable. That backfired. Audiences, as it turned out, don't click. The recent PEJ news media report points out that 79 percent of people surveyed said they never or hardly ever click on advertisements. Eye-tracking studies done on the effectiveness of display ads online also were not encouraging. "There's a lot of evidence that people just don't look at them," Edmonds says. "The generic display ads just don't seem all that effective." Nevertheless, says McDonald of Tribune, "banner-style advertising is what's really keeping the lights on now."

Today, display advertising is a smaller slice of the pie than search advertising--those ads that pop up when you're looking for a nice bed and breakfast in the country. Unfortunately for the news industry, search advertising has slipped its grasp, going to Google and others. And let's not forget the deep well that was classified advertising, which continues to evaporate, due to what Amy Mitchell dubs the "the craigslist effect." She surmises: "When you look at all this, it speaks even more strongly of the need for news organizations to find alternative, new and multiple revenue sources."

Many argue that is exactly what they are doing. While no one is saying that digital advertising will soon--if ever--support the type of news operations that a functioning democracy needs, things may be looking up. Hard figures on digital revenue are guarded like state secrets, but news organizations have become leaner and more imaginative with their online revenue sources. Now in vogue are digital partnerships, networks of niche sites, rich media ads (with bells and whistles), a wave of video commercials and promising new revenue streams from mobile phones and tablets like the iPad, which is getting a reception unseen since the advent of movable type. That is hardly an exaggeration, by the way. Listen to Larry Kramer, a media entrepreneur and industry consultant, who hails the iPad "as a new medium" that combines portability with audio, video and text. "It's every bit as important as the [printing] press was, as Gutenberg," he says. And we all know what the printing press did for the advertising business.

If there's going to be a comeback for news organizations on the digital field, it will be quarterbacked by the sales team. For years, especially for newspapers, selling ads in old media involved picking up the phone as the orders came pouring in. Not so anymore. Sales teams have had to relearn how to hit the pavement to make a sale. And they've struggled to make the adjustment to selling space and effective messaging on the Web.

Many news organizations couldn't even decide if the same people should be selling ads on the Web as well as in print or on TV. Should they be specialists or generalists? Now news organizations seem to have reached a consensus. They sell advertising solutions across platforms. Not simply space. That means salespeople have to know it all.

At the Chicago Tribune and the Los Angeles Times, both owned by Tribune Co., the interactive sales teams used to be separate units. "We ended up with interactive sellers that were crutches for the general sales force," says Andy Vogel, who manages the Los Angeles Times Media Group's local and digital sales. In September, the L.A. Times merged the sales teams. "Our approach was everybody is going to have to learn this," Vogel says, "and there's no time like the present. So, we kicked the crutches out from people's legs." Bob McDonald at the Chicago Tribune describes "a learning curve" for its sales staff. "It's not the psychology of the selling," McDonald says, "it's getting them comfortable with the product itself."

Vogel says the payoff of the converged sales teams will be reps better attuned to what works on different platforms and how to sell multiple platforms to a customer. They've already learned, for example, to avoid the coupon or "today-only" type ads. " 'Mention this ad and receive 15 percent off admission at the zoo' doesn't work" in an online environment, Vogel says. "That's someone who basically says, 'I'm going to take an ad from the newspaper and put it online.'"

What is working are ads dripping in digital magic, known as rich media ads: They grow or fly across the screen, liberate videos from the small player box or offer viewers a quick, simple game, like clicking to throw a football to a moving target. They also sell at a premium.

Ads tied to news content also are lucrative, such as those that allow a would-be traveler to book a trip through an ad for Kayak.com on a travel page. Web sites are also charging advertisers different rates for premium days and times when traffic spikes. For the L.A. Times, Vogel says, the result is "we do make money online, and we will continue to make money online."

The Times also now approaches advertisers with a portfolio analysis. The Times assesses the needs of the customer and then recommends the best strategy. "We've been known to go out and say, 'This is the best way for you to use your media budget, even if it's the media we don't have,' " such as radio and billboards, Vogel says. The Times does own a TV station, as well as a number of community papers (and their Web sites) that ring Los Angeles.

Those in-house local sales staffs of the Tribune and the Times and other newspapers across the country are being put to another use--as a prized asset for global Internet powerhouse Yahoo!. Forty-five companies, including McClatchy, Scripps and Cox, with more than 800 newspapers, have joined a consortium to sell local advertising on Yahoo!. Typically, a local or metropolitan newspaper may have a 15 percent to 30 percent reach in any online market. Yahoo! says this partnership makes that reach as high as 80 percent. So, when someone in Miami is reading about the new Ford Taurus on Yahoo! News, advertisements from Ford dealerships in Miami might appear on the page--courtesy of a salesperson from the Miami Herald.

The arrangement began years ago with Yahoo!'s Hot Jobs partners and continued to grow. For its part, Yahoo! gets access to sales staffs in markets across the country, and the newspapers get a cut of what their salespeople sell to Yahoo!. (Yahoo! won't say how much.)

The growing sales team savvy about what does and does not work online only helps matters. For McClatchy, the arrangement brought in $15.6 million last year, in what Hendricks calls "a ramp-up year" that saw a staggered start to the partnership across its 30 papers. The expectations for 2010 "are significantly higher," he says.

McClatchy is getting more aggressive in its fight for digital dollars. In April, it announced a partnership with Web Visible, an online advertising company. The new program blasts advertiser messages across multiple platforms: newspapers, Web sites, search engines, cell phones and navigation devices. In a trial run, the program quintupled ad sales over the course of a month. The idea is that no matter where a customer is searching for that Ford Taurus, he or she will find the ad from the dealership that advertises through McClatchy. All these efforts give McClatchy the potential to earn more than $200 million from digital ads annually, Hendricks says.

Exactly who will advertise on a news site, as opposed to a search engine, has also become a focus of study for the industry. So far, the money is coming from brand placement advertisers. Think Apple or Verizon or even the local car dealership. They aren't banking on online transactions. They're buying the attention for their brands, and sales will come in the old-fashioned analog world. But the ads can be alluring and interactive, and offer more custom opportunities for marketing, says Joe Mele of Razorfish, an industry leader in digital marketing that has worked with the Web sites of the New York Times, ESPN and CBS, among others. Mele sees more geotargeting (using data available about a specific person, such as a location, and aiming the ad accordingly) as well as more sponsorships and custom ads. For the launch of Microsoft's Bing search engine last year, Mele's agency tried something new for an ad on the New York Times homepage.

"What was important was that people not just heard about Bing but that we could get people actively searching and figuring out what it was," he says. The result was the first significant "over the page ad" with nytimes.com--also known as the push-down ad. When someone went to nytimes.com, the ad pushed down the content for several seconds. Inside was the Bing search tool, encouraging readers to give it a try. "It was hugely successful," Mele says. "It drove a ton of traffic and a ton of awareness."

News sites are good hosts for brand ads because they are popular online destinations, Mele says. Also benefiting online advertising: new industry standards for bigger and more aggressive ads online. That means sites can charge more to carry them. Increasingly popular are the aforementioned push-down ads; intro ads that viewers click through to get to a homepage; and interactive banner ads that do any number of things. Last year, Razorfish debuted a 3-D tour of the new Mercedes-Benz E-Class. The ad was expensive, demonstrated the mighty potential of digital advertising and got plenty of interest from potential buyers as well as dreamers.

"You want to be able to create a high-enough level awareness of the ad, but you don't want it be obtrusive to the point where it affects the user's enjoyment of the content," Mele says.

Video is also getting rehabilitated online. Earlier this year, the New York Times launched TimesCast on its homepage, a broadcast-style news video that runs daily at midday. It takes viewers into the Times newsroom and budget meetings, where editors and reporters discuss the day's hot topics. It's sponsored by big-budget advertisers, such as FedEx, which get a banner on the homepage as well as a commercial embedded in the video.

CNN.com, which expects double-digit growth in online advertising in the first half of this year, and triple-digit growth in mobile, has pursued similar strategies of video commercials and rich media ads. Last year, it launched a redesign of the site that plays to its strength in video from its two network news channels, CNN and HLN. Nielsen numbers show 130 million video streams a month, and those videos come with commercials. And as online commercials become increasingly divorced from their TV counterparts, they'll likely come in lengths that might suit the Web better than the 15- or 30-second varieties, as well as with interactivity.

CNN is also all over Twitter and Facebook--and is trying to sell sponsorships against big social networking events, such as its streaming video for the inauguration of President Barack Obama, which broke a record of 1.3 million people streaming concurrently. And CNN.com is a leader in homepage push-down ads. "We are consistently outpacing the marketplace," says Joe Dugan, senior vice president of digital ad sales. "We've had unbelievable success with having special launch partners and big rich media executions across platforms, from mobile to Web sites." Clients have included BlackBerry and Lexus.

For its part, ESPN.com is taking another look at subscriptions. It took the plunge years ago with its ESPN Insider page, which puts some popular content behind a pay wall. It was considered a moderate success. But subscription revenue started to flatten out on the site, and last year ESPN.com redoubled its push for Insider subscribers, who pay $39.95 a year. The site was redesigned and more content and full-time personnel were added for paying customers. Gary Hoenig, who runs Insider, says he often gets asked why ESPN thinks charging for content will work. "Oh, I don't know," he says, "because stuff costs money." Hoenig believes that news outlets have been too gun-shy to charge for their product. "Mercedes doesn't say we're going to give the car away because not everybody wants to pay for a Mercedes."

So far, several hundred thousand subscribers are paying for the Mercedes of sports coverage. (Hoenig won't get more specific.) Far from alienating viewers, ESPN.com has seen an increase in traffic since it began pushing Insider. And advertising hasn't slacked either. In fact, advertisers see Insider as a new opportunity to reach "a concentrated audience with high avidity," Hoenig says.

Sports fans might be one of the few types of news junkies willing to pay for their fix. But Hoenig argues that financial and political news junkies are just as hardcore. "The model can be reproduced," he says. Whatever the case, the industry continues to test the waters. The New York Times will introduce its meter system for heavy readers in 2011. And others will be waiting and watching to see if it succeeds. "I wouldn't say it's in the back of our minds," says the L.A. Times' Vogel. "It's probably at the front of our minds."

The future holds plenty of other uncertainty as well. Advertising on mobile and tablets and a renewed push for search advertising are all headed this way. But like everything else, no one knows what they will mean for the health of the news industry.

In Chicago, the Tribune is seeing some success with a Web site called Metromix, which focuses on local entertainment and serves as a small step toward reclaiming search advertising dollars. Users can do searches for what's happening in Chicago on a Saturday night, and advertisements pop up hawking concerts, drink specials and so on.

What tablets and mobiles will do for advertising revenue is a source of continued mystery and consternation. Hendricks of McClatchy thinks the technology is immature and uncertain but that players have to get in the game early. "A lot of these categories you're putting placeholders down for when the revenue does come," he says. "Mobile is one of them. It's not significant yet, but you have to have a placeholder." Hence all the iPhone apps.

CNN recently relaunched its mobile site, which has nearly 15 million unique viewers a month and features quite a few ads. Those ads will include video soon, so users can expect to watch more commercials on their phones. Its iPhone app sells for $1.99, but it's also ad supported. That has caused some irritated users to post rants about the product--demonstrating the tightrope walk that many news organizations face. CNN has optimized its Web site for use on the iPad. When an iPad punches up CNN, "we can send you an ad specifically for the iPad because of the way we've optimized and formatted it," Dugan says.

But what will this new generation of news delivery actually mean for the industry that delivers it? Is it a reset button? A chance for news organizations to start all over again and charge for the content they've been doling out for years? Will it change the way people read, get them to stay longer on a Web site? Spend more time reading stories? Interact more with advertisements? "I think tablet platforms are going to be very fertile ground for digital advertising," says Ken Doctor, the "Newsonomics" author. "I think they're going to be very effective for merchandising products and services."

Larry Kramer, a former editor of the San Francisco Examiner and former assistant managing editor of the Washington Post who launched MarketWatch in 1997, is also enthusiastic about the iPad's potential to reshape the news industry. The problem with mobile advertising on cell phones and digital advertising on computers, he says, is that compared to traditional publications like magazines, advertisers and editors lost control of the size and quality of the platforms. In short, storytelling (which includes the messages of ads) suffered. Tablets bring that control back.

"You can build the advertising into the messaging and you can control the message more effectively when you control how the viewer is looking at it," Kramer says. That will mean big things for display advertising in particular, he says. Noting that mobile devices and computers are ideal for search advertising, Kramer says that does little good for the news industry. The iPad promises a renaissance in brand-based and impulse-driven advertising--the sort of sexy ad that makes you want to buy that Mercedes E-Class.

"It's important to be able to tell a story if you're an advertiser," Kramer says, "and if you can do that with audio and video and text and interactivity, then that's what you're going to do." Kramer believes advertising on the iPad will "be graphically very engaging. It will include video and it will include interactivity, because it can."

It may also provide advertisers with a portal to the promised riches of social networking. "Advertisers have been trying to get into social media and trying to get into all the places where engagement occurs," Kramer says, "and this will allow that. It's a monster difference."

Industry executives are sounding more cautious, however. "We sell CNN first and then platforms second," says CNN's Dugan. At the Los Angeles Times, Vogel thinks the iPhone has proven that some people will pay for content, which is promising. However, "I think a lot of people view [the tablet] as a destination, and it's not. It's just another device. You can't change the approach based on the device."

That mentality worries analysts like Doctor. "I'm disappointed to hear relatively little going on" in relation to developing tablet-based products at regionally focused or locally focused media companies, he says. "It disappoints me, as someone who believes in the news, that news companies missed search [advertising], have been slow on video, been slow on mobile, been slow on social [media], and I don't want to see them miss what I think will be a major development in mobile news reading and mobile advertising. I think it's a huge opportunity for them."