More for Free

March 18, 2005 • Media Economics • by

Neue Zürcher Zeitung, Mar. 18, 2005

Boom in online advertising favours free content
In the US, free-access websites seem to be regaining popularity. In the last few weeks, Dow Jones and the New York Times Company have spent around one billion dollars on acquisitions in the sector.

There is a sense of gloom within the American internet sector and it should come as no surprise that the worries concern advertising. What is surprising, however, is that it is not too little, but too much advertising that is causing executives sleepless nights. Ad banners and buttons to the value of around ten billion dollars were sold on American Websites in 2004, according to estimates by the Internet Advertising Bureau – up 30 percent from the year before. As the New York Times has reported, the strong demand for advertising has led to a lack of much-visited and hence attractive advertising space. As a consequence, free-access websites, until recently considered doomed, are blossoming again. In contrast, in the US at least, the “paid-content” business model could be coming under increasing pressure.

The Google effect

The trend is fuelled – among other factors – by the search giant Google, which has embarked on a spending spree, acquiring a whole host of companies and then offering their services cheaper, or often completely free. This so-called Google effect is increasingly evident in the strategies of the big media companies. To get a larger slice of the online-advertising pie, Time Warner, for instance, has decided to offer content and services which were previously accessible only to AOL customers, free of charge. Several months ago, the Hollywood trade magazine, Variety , started to offer parts of its online edition for free as well, after years of strictly subscription services. And only last December, the Washington Post Company dramatically extended its reach by purchasing the free-access online magazine Slate .

The business model of the Wall Street Journal Online , a prime example of a paid-content site, seems to be ripe for change as well. During a week-long trial last November, the business paper’s online edition could be accessed free of charge. The objective was to attract more paying customers, but also to get an opportunity to study the impact on the traffic to the site of offering free content. What is more, a few months ago, the Journal started to allow a number of influential bloggers to link to a selection of WSJ articles for free.

Buying reach

The Wall Street Journal‘s successful subscription service represents an obstacle to the paper’s efforts to extend reach, and thus increase the amount of lucrative advertising space. While the New York Times receives a total of 9.2 million visits to its free-registration site monthly, the Journal‘s 700,000 subscribers produce less than half that number. New York Times Digital generates up to 80 percent of its revenue from selling online advertising; the Wall Street Journal Online a mere 40 percent.

This is likely to have been the driving force behind the acquisition of business-news provider CBSMarketWatch by Dow Jones, the Journal’s parent company. Peter Kann, the CEO of Dow Jones, recently pointed out that the deal, worth more than half a billion US dollars, tripled the reach of the company’s Internet services in one go, allowing them to take full advantage of the boom in online advertising.

Opening the gates

This trend probably contributed to the New York Times Company’s purchase of the website about.com announced in February; Martin Nisenholtz, the CEO of New York Times Digital, had shortly before identified the lack of advertising space as the greatest challenge his company faced for the future. For the not inconsiderable price of 410 million US dollars, the Times acquired an additional audience of 22 million unique visitors as well as around 500 microsites maintained by both experts and amateurs, covering topics ranging from fly fishing to synchronized swimming.

As early as last year, the New York Times responded to the thriving online-advertising business by easing access restrictions to content that is particularly appealing to advertising clients and that might create additional revenue streams through transaction fees. Visitors to the site now enjoy free access to over 10,000 movie reviews, some of them dating back to the 1980s. The quality paper’s travel section opened up its archives in the wake of a major overhaul in May, making a series of previously fee-based articles freely available. In October of last year, the technology supplement Circuits made its entire collection of articles going back as far as 1998 accessible at no charge. In a press release, the New York Times Company attributed the strong increase in traffic at NYTimes.com explicitly to the technology and travel sections. In January 2005, traffic at the latter was a whopping 140 percent higher than the previous year.

Still, rumours about an imminent introduction of a subscription service at the New York Times Website persist. In January, NYTimes.com conducted a poll on the issue among its readers. The acquisition of about.com could indeed create opportunities to experiment with new paid-content models. NYTimes.com‘s CEO Martin Nisenholtz said in an interview with the Weblog, PaidContent.org , that the idea of expanding fee-based services had never been dropped entirely from the company’s agenda and that discussions to that effect would continue in the future. Answering a corresponding question by the Online Journalism Review , Nisenholtz explicitly pointed out the volatile nature of online advertising – paid content to balance business cycles, so to speak.

Wanted: new business models

Steve Outing, a veteran observer of the online-news sector and columnist at the trade journal Editor & Publisher , told the Neue Zürcher Zeitung in an interview that he was convinced the trend towards more free content on the Internet was set to continue. In his view, although there would always be opportunities to make money with niche content, the newspaper industry in particular would have to develop radically different business models, if it was to make up for losses in the print business. Outing believes that even in the brave new “Google world”, pressure on paid-content providers will not ease in the foreseeable future (see below).

In Europe, some of these developments are, for the moment, still being greeted with disbelief. The increase in online advertising spending is still modest, and the fact that European markets are small compared to the US could further slow down the trend towards more free content. Nonetheless, the Swiss business paper, Cash , recently announced a major repositioning of its business, scrapping its subscription-based Secret Service, while at the same time expanding its free-content offers. If anything, however, there seems to be a tendency in Europe to shift to paid services on the Internet, or at least to state the intention to do so. For whatever reason, publishers appear to prefer to launch more free sheets in print.

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Websites with free classified advertising

Traditional media companies may soon have to face fierce competition on what they consider to be their own turf. According to US expert Steve Outing, digital blackboards such as Craigslist will eventually force the newspaper industry to expand free classified-ad services. The very successful Craigslist, which is reminiscent of websites from the last century and in which eBay – the world’s largest classifieds market – has for the last few months held a 25 percent stake, lets users post regionally-organized classified ads, mostly for free. At a recent conference, Mike Kment, director of classified advertising at Gannett, America’s largest newspaper company, warned that “what we can charge [for classifieds] is going to go rapidly down and it’s going to go greatly down”. Bob Cauthorn, former vice president for Digital Media at the San Francisco Chronicle, estimates that classified job postings at Craigslist have cost newspapers in the Bay Area alone from 50 to 60 million dollars in turnover. In California, Craigslist‘s heartland, the local newspaper Bakersfield Californian has already launched a free-classifieds Website.

[Translation: Florian Faes]

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