A Slowing Economy Takes No Prisoners
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The challenges of online advertising are heightened by a broader slowing in the economy. It would be fair to say then, that the struggles of advertising are not strictly related to the online medium - as Australia's media moguls are finding out.
The most frail of all sectors in a brittle economy is media. Advertising and other discretionary expenses are invariably the first to be cut during tough times. That said, all the major media outlets' profit outlooks have been slashed in the past few days. Equities analysts hacked 10-15% off Fairfax, Seven and Ten's earnings estimates and revised down PBL by 5% - with the conglomerate being somewhat padded by its Crown Casino interests.
The bleak local outlook follows on from earnings warnings from US media bellwethers, Dow Jones and The New York Times. Indeed, media executives and industry pundits have speculated that the current climate is akin to the media recession in 1991.
Half of newspapers' revenue is derived from two sources, advertising and classifieds. Kevin Lavalla, managing director for US-based merchant banker Veronis Suhler, colourfully summed up the recent trend by saying that "National [advertising] has almost fallen off a cliff." The Wall Street Journal, for instance, noted that February 2001 advertising sales were down 32% from the comparable month a year ago. Classifieds, long the crown jewel of publishing, have also experienced a sharp down turn.
Many of the newspapers have reacted by increasing subscription rates and cover prices. There is a risk, however, that consumers will turn away from the titles and advertisers will be further discouraged.
The small shift in revenue from advertising to subscription is an important lesson for online publishers, who, in the majority of cases, derive the bulk of their revenue through advertising.
One of the great myths of the Internet is that there are no incremental costs, that it doesn't cost anything to send an email or provide a free online service. The reality is that the software packages, processing power and the bandwidth required are not insignificant.
Case in point is Renren, the Chinese Language Portal, who is ceasing its free email and homepages services this Saturday. Clearly, a balance of subscription and advertising must be achieved, however online publishers will struggle to combat the expectations of consumers that everything will be free.
Yahoo! is looking to rapidly trial and implement subscription and fee based services, to defend its declining advertising revenue. Its success thus far has been limited, with Auction listings down 80% since it started to charge listing fees early this year.
Getting users to pay for content and services is a momentous task, with an uphill battle to change the culture of the Internet. The only alternative, however, may be no services at all.