Neue Zürcher Zeitung, June 29, 2004

New competition in the local advertising market
Publishers can rejoice: most US newspaper Web sites are in the black, according to a recent survey. The advance of Google, Yahoo and other Internet giants into local markets might, however, provoke less enthusiasm.

It can be heard over and over again: there is no money to be made in newspapers on the Internet. With the exception of the New York Times, not a single news portal “in global cyberspace” is profitable, proclaimed the Swiss news magazine Facts only recently. Far from it, as the study What Local Web Sites Earn* published by Borrell Associates, makes clear.

Impressive margins

According to the survey, more than 80 percent of the Web sites operated by American daily and weekly newspapers have succeeded in surprising their management by earning strong profits in the past year – and sometimes with hefty margins. The online operations of the New York Times Company (NYTCO), for example, reported profit margins of 30 percent in 2003, thus contributing $20 million to the media giant’s surplus. While this amounts to only around 4 percent of the company’s total profits, it is already getting close to what the NYTCO’s eight TV stations contribute to the company’s bottom line. According to the survey, many newspaper Web sites can even boast margins far higher than 50 percent. It has to be noted, however, that most Web sites – contrary to that of the New York Times – do not have to pay fees to access (already existing) content and services from their print divisions.

The study puts a special focus on local online advertising, which is of great importance to most newspaper Web sites. At around two billion dollars, this market represents only about 20 percent of total Internet ad expenditure. It is, however, expected to grow by 28 percent in the current year, roughly double the growth rate of the overall online advertising market.

On the Internet, the newspaper industry still has a firm grip on everything local today. In the past year, online services of newspapers attracted nearly 40 percent ($811 million US dollars) of all local Internet advertising expenditure, while Internet operations of local radio and TV stations managed to capture just 4 percent. 16 percent of all local online ad spending went to business directories (Yellow Pages). Pure-play Internet companies such as monster.com, autotrader.com or eBay were able to attract a 26 percent share of the market. According to the study, the latter have to be considered the main competitors of the online newspaper companies, since about 60 percent of all revenues of newspaper Web sites is generated by traditional classified advertising categories (employment, real estate and automotive).

At 15 percent, the market share of the “Big Four” (Google, Yahoo, AOL and MSN) is still relatively modest. These companies have until recently concentrated their efforts on the national advertising market, which can be “exploited” at much lower cost. The high growth rates of regional and local online advertising markets have not gone unnoticed by the Internet giants, however, especially since 60 percent of all Internet searches currently are local in nature, according to the market research company Kelsey Group.

Advertisements for the village

“Think globally, act locally”, thus seems to be the latest catch-phrase of the Internet business, a development that is treated in-depth in a report, entitled The Geo-Google Threat: Search Engines Target Local Advertising,** published by the Advanced Interactive Media Group and the Neil Budde Group.

For several months now, US customers of Google and Yahoo have been able to narrow search results by entering a ZIP code or the name of a location. Through features like this, the Internet giants are not only directly threatening the livelihood of Yellow Pages companies, they are also intruding into the innermost territory of the newspaper industry, for localized hit lists can turn into directories, search results can be transformed into local marketplaces.

But there is more to it. When placing an online ad, customers of Google’s AdWords programme can now select the geographic area where an ad should appear on the user’s computer screen. In Germany, for example, federal states are offered as the smallest geographical unit. In the US, the area can be broken down to individual ZIP codes, and there is even an option to freely define the radius around a certain location.

With this targeting technology, Google is developing into an attractive advertising platform for small and medium-sized businesses – be it local event organizers, the plumber or the village butcher – as well, and even the non-traditional classifieds business of newspapers and local media could come under threat. “Some daily newspapers may publish just two or three days a week as news and advertising moves online”, the study pointedly predicts. A development that could be hastened by the user-friendliness of Google’s ad programme – ads appear on the Web site within minutes after they are placed – as well as by the auction-based pricing where advertisers only pay when users click on their ads.

What about Switzerland?

Although searches on search.ch, the “senior” among Swiss search engines, can be narrowed down to individual cantons, regions or selected municipalities, Switzerland has so far been largely spared from the trend towards localized online advertising. Yet, recent developments indicate that this might be due for a change, soon. Swissclick, a search engine launched only a few weeks ago, cooperates with the ad-targeting specialist Overture, which, according to company information, is also working on an approach to geographical targeting. Moreover, with the recent takeover of search.ch, Swiss Post might also have some kind of localization in mind.

* www.borrellassociates.com
** www.aimgroup.com

(Translation: Jasmin Bodmer)