Business - Newspapers' web revenue is stalling

Newspapers, already facing a grim economic forecast, are digesting another piece of bad news: The growth in online advertising they saw as their salvation has slowed to a crawl.

In the last few years, newspaper companies have been rapidly expanding their web presence— adding blogs, photo slide shows and podcasts—in the belief that more features would bring more advertisers. But now, after 17 quarters of ballooning growth, online revenue at newspaper sites is falling. In the second quarter, it was down 2.4% compared with last year, to $777 million, according to the Newspaper Association of America. It was the only year-over-year drop since the group began measuring online revenue in 2003. Overall online advertising, however, is strong. Display advertising, the graphics-rich ads that newspaper sites carry, grew 7.6% in the second quarter, TNS Media Intelligence reported.

Newspaper executives say the new features have drawn bigger, more engaged audiences, which they hope will translate to more advertisers. Unique readers in August were 17% higher than a year earlier, at 69.3 million, according to a Nielsen Online analysis of newspaper sites for the newspaper association. They also point to other factors for the decline, including the economic downturn and the continued flight of classified advertisers away from papers and their sites.

But the advertising glut, particularly in display advertising, on which companies had based their optimistic projections, has shrunk. As newspapers keep adding pages, they are forced to sell ads at cut-rate prices. Large papers such as The Washington Post or The New York Times can sell premium ad space on, for example, a newspaper’s home page, for $15 to $50 for every thousand impressions. But these and other papers of all sizes have increasingly relied on middlemen —known as ad networks—to sell less desirable space, typically for around $1 for every thousand impressions. The networks usually charge advertisers double that or higher, industry insiders said. While some publishers rely on ad networks, others are devising strategies to avoid them. With networks, “unwittingly, I think, the publishers commoditise their own inventory,” said Paul Iaffaldano, the general manager of the TWC Media Solutions Group, which sells ads for the Weather Channel and Weather.com.

A recent study from Bain & Co and the Interactive Advertising Bureau examining seven high-end publishers (their names were not disclosed) found that about 53% of the ad space on newspaper sites went unsold without networks last year, up from 50% in 2006.

Given the choice of showing an ad-free page and making no money, or using an ad network and making a few cents, many publishers choose networks. In 2007, 30% of the ad spaces sold on their sites came from networks, up from 5% in 2006, according to the Bain study. “If we sold every scrap of inventory, we wouldn’t use ad networks, but right now it makes some sense for us,” said Jeff Webber, the publisher of USAToday.com.

—NY Times / Stephanie Clifford