Can news sites get their slice of the advertising pie?

Recent findings by Pew and Gallup indicate that, generally speaking, U.S. consumers now prefer news delivered via the internet over news printed in newspapers. This redoubles the need for a viable business model in which online news content is supported by adequate advertising revenue.

Unfortunately, as pointed out by John Thornton at Insomniactive, only a fraction of the ad revenue formerly aimed at those print-oriented eyeballs has followed their attention over to the web. By Thornton's educated guestimations, online news via newspaper sites is garnering only about 4 percent as much revenue as newspapers still manage to sell into their printed products.

Can this problem be overcome? Can newspapers crank up the sales pressure and find more revenue for their electronic offerings?

One way of looking at this says no: Historically, printed newspapers were monopolistic enterprises, their positions protected by very high barriers to entry which gave their owners the market power to set prices high enough to cover the cost of a liberally staffed newsroom and still reap princely profits (such as those that built and furnished Hearst's San Simeon). This monopolistic privilege has only gradually eroded over the last 50 years as television, and then the web, claimed their slices of the pie, as illustrated by this graph showing the share of various media of total U. S. ad spending since 1948 (click for clearer enlarged view, see November 30 post for more info).



But clearly, no newspaper, or other news content provider, has much pricing power in the online world. Does that mean there's simply no chance that online advertising on newspaper sites can grow enough to make them viable?

One observer at Seeking Alpha, Alex Rampell, seems to think not, in a piece entitled "The End of Brand Advertising." Basically, Rampell's thesis is that brands are waking up and realizing they've historically been getting bilked, that " there is at best a tenuous link between consumption of their goods and consumption of the free content they are sponsoring." And that, having figured this out, they'll shut the spigot. This explains, according to Rampell, why CPMs on MySpace run 25 cents per 1,000 while Time Magazine, in good times, got $25 per 1,000.

The problem with this view is that while advertisers will, of course, always drive the best bargain they can, brand and image advertising has always been about achieving a degree of monopolistic market power. There may be a tenuous link between the advertised goods and the content sponsored by ads, but there has always been a clear relationship between the volume of advertising behind a product, and its consumption or popularity (as convincingly demonstrated in recent months by the Obama campaign's unprecedented promotional spending). Leading brands have almost always maintained their positions by brand and image advertising, not by informational advertising providing objective product specifications.

Historically, for at least 80 years, total U. S. advertising expenditures have been nearly constant at about 2 percent of GDP. Economic slowdowns push that ratio a little lower, expansions push it up, but with very few exceptions the range has been between 1.8 and 2.3 percent, despite all the changes over time in media technology and the consumer's preferred media mix. If there were, overall, no more than a "tenuous link" between advertising and sales, marketers would have discovered that, and adjusted their spending, a long time ago. But the fact is that the link is robust, not tenuous, and 2 percent is still the norm—it was 2.025% in 2007; 2008 will probably come in a tad lower.

[a.m. addendum:] The point is, the advertising pie, relative to GDP, won't shrink significantly, or permanently, because marketers seeking market share continue to have very strong incentives to advertise, but the media to which ad dollars are allocated do shift over time, as the graph shows.

The problem for web sites, including news sites, is that the web is not yet a great place for brand and image ads, relative to the attractive environments of ads on big-screen TVs, billboards and slick magazine pages. Like newsprint, the computer screen is still fairly low res, as amply demonstrated in any YouTube video, so the web has been more suited (as newspapers always have been) for informational advertising rather than brand and image promotion. It is part of the genius of Google that their model has never featured any brand or image advertising at all.

So the challenge, to newspaper web sites and news site startups, is to move beyond Thornton's 4 percent level by ramping up online versions of the informational advertising that sustained printed newspapers, as well as finding ways to host brand and image ads that were never native to newsprint. And to do this in the context of the new wisdom that is writing off the utility of traditional website banner and button advertising and trumpeting video ads as well as the new world of social network advertising.