The era of diminished circumstances

There’s plenty of standard issue stuff in Paul Farhi’s discussion of newspapers’ digital ad revenues at the American Journalism Review.

Two points stand out, however. Both of them raise the spectre of slowing online revenue growth, and, beyond it, the prospect of a newspaper industry ekeing out a living in much-diminished circumstances.

The “diminished circumstances” meme has become prominent in recent weeks. At the Guardian, Roy Greenslade mentioned it in his discussion of his reasons for leaving the NUJ. It might be my imagination, but at Buzz Machine, Jeff Jarvis seems to be mentioning it more frequently, too.

At the New York Times, there was more of the same — quite recently — from Silicon Valley type Jarod Lanier. In its way, Lanier’s short opinion piece was a response to the plaintive concerns of those who feel that digital deliverance is a long way off.

I’ll come back to those “diminished circumstances” in a minute. For now, let’s take a look at Farhi’s main points about the *current state* of newspapers’ online ad revenues in the US.

  • After years of robust increases, the online newspaper audience seems to have all but stopped growing. The number of unique visitors to newspaper Web sites was almost flat – up just 2.3 percent – between August 2006 and August 2007, according to Nielsen/NetRatings. The total number of pages viewed by this audience has plateaued, growing just 1.8 percent last year.
  • Remember those confidence-building double-digit increases in online advertising revenue? They’re fading, fast. . . In the first quarter of this year, the newspaper industry saw a 22 percent gain in online revenue. Not exactly shabby, but still the smallest uptick (in percentage terms) since the NAA started keeping records in 2003. In the second quarter, the industry rate slipped again, to 19 percent. The third quarter promises even less, considering what various companies have been reporting lately.
  • (At this point, a couple of things need saying. Online audiences aren’t flat in the UK. And online revenue growth doesn’t yet seem to be declining. But for the sake of argument, let’s put these points to one side, and follow Farhi into his worst case scenario. . .)

    Farhi asks two good questions: “Can online ad revenue grow fast enough to replace the dollars that are now being lost by the ‘old’ media? And what happens if they don’t?”

    This isn’t a new concern. At several points during the past decade, the online industry has asked itself how long the apparently unstoppable rise of digital advertising can continue. Every minor growth hiccup has risked being mistaken for a permanent plateau: the point at which digital advertising starts to mature as a medium.

    Of course, it’s going to happen at some point.

    But the newspaper industry, in particular, needs the party to continue for as long as possible. Here’s why (Farhi again):

    Even if the newspaper industry continued to lose about 8 percent of its print ad revenue a year and online revenue continued to grow at 20 percent a year – the pace of the first half of 2007 – it would take more than a decade for online revenue to catch up to print.

    Now that sounds almost tolerable if you visualize it as a graphic. But the reality is likely to be deeply unpleasant.

    As Farhi writes: “Even a 5 percent decline in print revenue year after year might look something like Armageddon. . . The cuts could take on their own vicious momentum, with each one prompting a few more readers to drop their subscriptions, which would prompt still more cuts.”

    Quite. But is there any light at the end of the tunnel? Can digital ad revenues actually grow at 20% per annum for another decade? Once the medium-term agony is over, might digital ad revenues be able to sustain our industry?

    Digital ad revenues that flow to newspapers typically grow in lockstep with the overall digital advertising market. For newspapers to grow, the overall market must grow too.

    So how long can the party continue? In 2006, digital ad revenues in the UK amounted to £2.02bn according to IAB/PwC. Assuming continued growth at 20% per annum, UK digital ad revenues in 2017 — ten years hence — would amount to £12.5bn.

    That’s a vast chunk of the entire UK advertising market. (For the record, the entire UK ad market, including online, was worth £17.68bn in 2006. It grew by 1.1%. Assuming similar rates of growth for the next decade, the market would be worth £19.72bn in 2017.)

    Can you envisage a world in which digital advertising accounts for 63% of all advertising? I can. What’s more, I suspect that Microsoft, Google and Yahoo can, too.

    Bear in mind, also, that we might not need a decade for the transition to take place.

    Farhi’s 10-year horizon assumes that print-based newspaper revenues will continue to fall by 8% a year. That might be the case in the US. But in the UK, where digital ads take a larger share of the ad market than almost anywhere else in the world, newspaper ad revenues aren’t falling by as much. Last year, they dipped by a modest 0.2%.

    The upshot? Somewhere in the early part of the next decade, we might be able to look forward to something a renaissance.

    How bad will things get in the meantime? That, as Donald Rumsfeld might have put it, is a known unknown. . .

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