Brass Tacks Design

As the revenue outlook weakens, newspaper executives point to their Web sites as a viable means of maintaining margins.

But Warren Buffett warned last week: "For newspapers that have pinned their revenue hopes on their Web sites, the economic potential of a newspaper Internet site…is at best a small fraction of that existing in the past for a print newspaper facing no competition."

Picture a boxing match: A lion of the old economy vs. online newspaper execs, duking it out over the future of newspaper company profitability:

In this corner, weighing in like an 800-pound gorilla, the second richest man in the world, the Oracle of Omaha, Warren Buffett.

And in this corner, the challenger, weighing in at 98 pounds (based on his revenue performance) is every newspaper webmaster.

Buffett's jab last week was tough to duck. As a major stockholder in The Washington Post and The Buffalo News, he must know something about newspapers.

The challenger counters with "Revenue models continue to evolve, while online revenue continues to grow at a double-digit pace."

The challenger's quote is just a "Jimmy's World" composite, but it accurately reflects the pervasive sentiment of newspaper webmasters and online executives who continue to crow about the future of online.

So whom should you believe? The man who has proven he knows how to make a buck – billions of them – or the guys who can't stop talking about page views and unique visitors?

We all lose if newspapers bet on the wrong horse. So we better pay attention.

Last week NYT Chief Executive Janet Robinson told analysts that digital revenue would continue to grow as a percentage of total revenue, predicting a 30 percent increase in 2007.

Score a round for the challenger. But let's look closely at that projection. Robinson isn't claiming that online's portion of total revenue would increase 30 percent – her projection was merely comparing this year's online revenue to last year's. Compared to total revenue, Robinson said online will remain in single digits – the same as every other newspaper.

Ouch. That punch did some damage. But wait, there's more:

Online revenue, no matter how meager, doesn't consider the cost of gathering the news that generates online traffic. That cost is still borne by the print product. If you subtract that cost from online revenue, the online profit picture looks even bleaker.



Even worse, a significant portion of online revenue – 30-70 percent at most newspapers – comes from "upsells" of print advertising to online, according to a 2005 study of revenue by Borrell & Associates. (See chart, above.) Without the print product and its classifieds, most online "revenue" would be cut in half. And as print classifieds continue to decline, so do the opportunities to upsell print advertising.

The challenger would seem to be down for the count, but he's not out yet. Not according to Chris Kouba, director of content & strategic development for HamptonRoads.com and Pilotonline.com, online entities of The Virginian-Pilot. According to NAA's blog about Chris' presentation at NAA's marketing conference last month, The Virginian-Pilot company expects profits from sites outside the core to produce 45-50 percent of the company's profits in 10 years.

Unfortunately, the blogger made one of the common mistakes about online revenue. The Pilot's 45-50 percent projection included all products outside the core newspaper – print and online. Chris says online is only projected to produce 12.5 percent of profits ten years from now.

It appears as if the bout is over. While the referee is counting, … eight, nine… let's consider the future:

Most people believe online is the future of publishing. These same people see the newspaper (the core product) as the lifeboat to that future. Our lifeboat is a leaky one: as print circulation drops it approaches a tipping point where advertisers lose confidence in our ability to reach their customers. If newspaper companies want to remain as profitable as they have been historically, they must find a way to make much more money with their online products.

Warren Buffett says it isn't gonna happen. And he's probably right, if newspaper companies continue to operate their online operations as they do now.

To prove Buffett wrong, we gotta make changes to get online revenue out of single digits where it's been languishing since online newspapers began. Here's how:

Adopt a new way to sell advertising
We've heard from the world's second richest man. Now it's time to study the methods of the only man to do him one better, Bill Gates, to learn how newspapers can generate more online advertising revenue.

Microsoft's Bill Gates uses a very simple method to dominate every market he enters:

• When Apple had the best operating system,
  Microsoft created a similar product and called it Microsoft Windows
• When Quicken had the best personal finance software,
  Microsoft created a similar product and called in Microsoft Money
• When Netscape had the best web browser,
  Microsoft created a similar product and called it Microsoft Internet Explorer
• When Novell had the best networking software,
  Microsoft created a similar product and called in Microsoft Windows NT
• When Google had the best online search,
  Microsoft created a similar product and called it live

(If you haven't seen it, visit www.live.com and marvel at the remarkable similarity between Google and Microsoft's new entry in the online search space.)

Newspapers should take a lesson from Microsoft: if you want to gain market share, follow the leader. More specifically, if you want to sell more advertising, follow the practices of the world's largest advertising company – Google – beginning with the way it sells advertising.

Google charges based on click-throughs. Newspaper sites, for the most part, charge based on impressions. What's the root of the word "impressions?" That's right, "press" – how 18th century! If newspaper sites want to compete in the 21st century, they need to start by changing the way they charge for advertising.

Here's another progressive practice from Google: self-service advertising. API's Newspaper Next encourages newspapers to adopt this practice which is a key to Google's success, yet virtually non-existent at newspaper sites.

Newspaper Next also encourages newspaper companies to develop a portfolio of print and online products, rather than depending upon the core newspaper print product for most revenue. That was also the thrust of Chris Kouba's message to NAA's Marketing Conference: Media companies should create more choices for consumers and advertisers, looking at the demographics, interests and occasion of need. The Virginian-Pilot media companies meet the needs of more people with multiple brands, products and platforms. That's why these companies expect 45-50 percent of their revenue to come from non-core online and print products in ten years.

Adopt a new kind of ad to sell
To hear the newspaper webmasters tell it, newspaper sites are among the most popular and highly trafficed, with a desirable demographic of frequent visitors. So where are all the ads? Why aren't advertisers flocking to newspaper sites?

Because advertisers aren't satisfied with the kind of ads we're offering them.

Advertisers are seeking the same experience online that we've traditionally provided in print – the impact of a full-page ad. Skinny banners squeezed onto webpages that seem like an afterthought or tiny tiles that compete with each other won't cut it with those who pay the freight.

It's time to wipe the slate clean and redesign newspaper Web sites to provide a compelling environment for advertising.

Enough with the contests already
The newspaper industry has been falling all over itself with congratulations and awards for sites that don't even pay their own way. EPpys, Digital Edge, SNDies, WebAwards, OJAs, etc. – the total number of awards has probably reached a thousand while true profitability is little more than a projection for most sites.

From a bottom-line standpoint, newspaper sites are abyssmal failures. Rather than promoting yet another "neat and cool" content initiative, the industry should encourage newspaper Web sites to make the cash register ring. Let's abolish all awards except for one – first newspaper site to meet its own costs for content, while contributing more than 10 percent to total newspaper revenue without depending upon print upsells.

So where does this leave us? Are newspapers doomed?

To the neo-realists who say that newspapers deserve to die, let me say this:

There's a lot more at stake than profits for newspaper owners and their stockholders. The very future of our free society hangs in the balance. Each day, Chris Kouba walks past these words from Thomas Jefferson, carved into the walls of The Virginian-Pilot:

"Were it left to me to decide whether we should have a government without newspapers, or newspapers without a government, I should not hesitate a moment to prefer the latter."

Our society can do without newspaper companies, but it can't do without the journalism these companies – and their profitable products – provide. For the sake of all that is good and decent, newspapers must find a way to be financially viable in the digital age.