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Google and Yahoo Are Capitalized At Several Times the Value of Major Newspaper Groups. How Come They Are Raking in The Money and Newspaper Growth Remains in Single Digits?

By Philip Stone 

Dow Jones has completed its purchase of the MarketWatch web site for more than $500 million. Tribune has joined with Knight-Ridder and Gannett to add web properties, including their recent purchased of Topix. But  neither Google nor Yahoo have bought a traditional newspaper. Hmmm. Can’t imagine why!

Possibly it might have something to do with the fact that in Q1 Google experienced a six-fold increase in revenues marked by a 109% increase in advertising revenue. Yahoo doubled its revenues with ad revenues growing by 47%.

And how did newspapers do? They scratched out a 3% increase in Q1, but that was mostly from new products such as publications aimed at the youth market. And the advertising analysts have nothing but more bad news for newspapers.

According to John Janedis of Bank of America Securities, newspaper circulation will continue its downward spiral, April has not shown any sign of real advertising growth, and that means advertising money will “accelerate its shift away from traditional media.”

Much has been written about newspaper readers deserting the printed page for free news on the Internet and this was the number one problem newspapers needed to fix. But there is now a new number one and this one hurts where it really hurts – newspapers are beginning to lose significant advertising revenues to the Internet.

Previously publishers could content themselves that even though Internet advertising was growing by some 25% a year it was mostly new money – advertisers were mostly maintaining a sizable portion of their spend with newspapers, even if that revenue grew only by 2-3% a year.

But now the Yahoo and the Googles of this world, along with classified web sites such as Craigslist, are making serious holes in a newspaper’s financial pocket. McKinsey & Co., the same consultants that Rupert Murdoch has called in to tell News International how it can make the best use of the Internet, has just warned newspapers that by 2007 the web will steal away about 9% of its current annual advertising revenue -- -- that’s a $9 billion hit – just via losses in classified advertising such as help wanted.

And announcements such as that by General Motors that it will allocate 25% of its advertising budget to the Internet only serves to fuel that fire. Most companies spend usually just 2 – 4% of their advertising online.

Making matters worse is that large newspapers groups in the US are reporting a real softness in national newspaper ads. Dow Jones, for instance, reported a 10.8% decline in Q1 ad revenues, primarily from its Wall Street Journal. Advertisers say they are no longer convinced a national newspaper campaign is as effective as running campaigns in local newspapers and there is every indication, too, that some of that national advertising money is being diverted to the web.

Merrill Lynch’s outlook for newspapers was especially bleak. It said that while newspaper ad revenue grew by some 3%, that was only because of new publications, while in the same quarter web advertising jumped 40%. Merrill Lynch lowered its 2005 newspaper ad revenue growth forecast to 3.5%% from 4 per cent.

Another problem for newspapers is that neither Google nor Yahoo are sitting on their laurels-- they are looking to aggressively increase their ad revenues by introducing new features to entice more advertisers, especially the big corporates that traditionally spend on print.

In a major policy change this week, for instance, Google has started to accept on a test basis branded advertising such as banner ads which previously it had prohibited. While Google dominates the $5 billion annual search word advertising market, it is not a player in the $100 billion of brand advertising spent offline. Big companies want their banners, and not very many mess with search-word related ad programs. Google has now accepted that if it wants to get into bed with the likes of General Motors then it needs to provide what General Motors wants.

Other changes is has introduced include adding animation to its ads, that advertisers can now select where across the Google network their ads will (and will not) appear, and that pricing can be on a cpm basis rather than a pay-per-click system.

And none of that is good news for newspapers. As the strong get stronger, the weak -- well they may not fully understand it yet but they are already in the fight of their lives to survive.

© Philip M. Stone of  Stone & Associates, a partner in followthemedia.com


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