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In search of the elusive online profit
This column originally ran in ComputorEdge on May 11, 2007
(Issue 2519, Grade School Guru)
As Google announces another record-setting quarter of profitability, just about everyone else in the online advertising world is trying to figure out how to make ends meet. From Yahoo's shrinking bottom line to nearly every newspaper's Web site, the reality is becoming more and more clear that traditional advertising models from broadcast and print media aren't going to work online.
While online commerce is doing fine – this past holiday shopping season saw yet another exponential increase in online sales from the year before – news and information sites are struggling to find a revenue model that actually delivers enough revenue to pay the bills.
The traditional model has been that you sell your papers or magazines to readers for a nominal fee, then sell access to your readers' eyeballs to advertisers. A typical revenue breakdown for a newspaper would be in the 20:80 to 30:70 range, with the first number the total revenue percentage derived from subscription sales and the second number the percent earned through advertising.
In the broadcast world – TV and radio – there is no subscription, with all a station's revenue derived from selling advertisers access to the station's viewers or listeners.
All of that ad revenue, of course, is dependant on the newspaper or magazine having a lot of readers, and the TV or radio station a lot of viewers or listeners.
But the fact is that more than a decade after most newspapers began migrating at least some of their news report to the World Wide Web (and a good 20 years since CompuServe and the San Jose Mercury News both began offering breaking news on dial-up subscription services), nobody's really figured out how to make the money to hire reporters, editors and designers to present the news in an online environment.
Well, except for the Wall Street Journal, which is a subscription-only site ($79 for the year, although subscribers to the print edition also apparently get online access as well).
An online subscription plan
But the Wall Street Journal offers a unique product that folks are willing to pay to get – most general circulation newspapers don't have that privilege.
And the start-up costs are so low for an online news outlet that if a major daily newspaper tried to put its content behind a subscription firewall (so only subscribers could read the news report) odds are someone else would simply start up a news site of their own offering local news coverage.
Or the local TV stations would beef up their news report.
But with its in-depth coverage of business issues, the Journal is in the unique position of being able to put its news coverage behind a log-in prompt without too much worry about competitors cutting it off at the knees.
(We've seen an example in San Diego of the potential for a start-up operation to put the heat the existing newspapers – former San Diego Evening Tribune editor and former Union-Tribune columnist Neil Morgan was part of a handful of folks who began the Voice of San Diego. Without the costs of printing a copy each day or week – as, say, local alternative publications City Beat and The Reader must – the costs for running the online-only Voice is presumably much lower than for the two weekly alternative papers.)
The New York Times has a subscription package that lets you access some "bonus" features – opinion columns and commentary. But its main news report remains free. ESPN.com has its "INsider" plan in which some of its features are only available to subscribers – but, again, the bulk of its news report is free
Selling in volume
Which brings us back to Google, which makes money by selling access to its hundreds of millions of visitors to advertisers – who typically only pay when someone actually clicks on one of their ads.
Google can afford to be that generous because of the sheer volume of visitors to its site – and to the millions of Web pages run by folks who sign up for Google AdSense, hosting ads on their sites that are sold by Google. If someone clicks on a Google AdSense ad on your page, you get paid.
It's only a few cents per click that Google charges, but when you're generating millions of clicks per day, it adds up quickly.
That same volume mentality is what's made MySpace a cash cow for Rupert Murdoch's News Corp.
With more than 100 million users on MySpace – most of them in the highly desirable 16-32 demographic – MySpace has no shortage of businesses wanting to advertise. From the latest Hollywood teen fright flick to the major music labels, everyone and anyone wanting to reach American teens and young adults is getting their ads up on MySpace.
Not universally true
But what works in the ultra-rarified worlds of Google and MySpace doesn't work for everyone. While even small newspapers can exist in small towns because they offer area merchanst affordable access to the town's residents, Web sites don't have that geographic immediacy in their favor. Why should a pizza joint advertise on the newspaper's Web site when maybe 20 percent or more of the folks visiting that site each day live outside the region the newspaper serves?
This is the dilemma most newspapers find themselves facing: Their online readership is less geographically focused than their print readership, making the selling of online advertising a tougher sell to would-be advertisers.
Google's getting rich; few others are.
Stay tuned.