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The Story So Far – New Users, New Revenue: Alternative Ways to Make Money

January 7, 2011

News companies are developing new businesses, not just propping up the old ones. And in doing so, they are challenging some of the orthodoxies that had slowed their transition to the digital world. The process of finding new readers and dollars is forcing media companies to redefine who they are and what business they are really in.

The Houston Chronicle, armed with the knowledge that 310,000 local businesses have 10 employees or less, is launching a consulting business—selling a host of Internet services, from website design to improving businesses’ rankings on search engines. Even if it’s as successful as they hope, it’ll only match the revenue from one of the paper’s biggest advertiser. It will be a big help but is not, in itself, a replacement for the old business model.

A decade ago, KSL, a local TV station in Salt Lake City, came up with what was then a novel idea: It would start its own classified-ads section on KSL.com. Aside from the potential revenue, its classifieds service would also be a way to showcase the moral standards of its owner, the Church of Jesus Christ of Latter-day Saints.

KSL.com’s strategy relies partly on its worldwide audience of church members, but it also offers useful lessons for news organisations seeking untraditional ways to build a digital audience.

Clark Gilbert, president and chief executive officer of Deseret Digital Media claims there is another benefit: “Here’s something hard for old-media people to accept. … Our news content gave a level of trust to the classifieds, and classifieds drove relevance back to the news.” Another important aspect to its success is that were no similar legacy products at the TV station, therefore it wasn’t perceived as being competitive by its existing staff. The classifieds give KSL.com an unusually high level of engagement.

The site also demonstrated a keen sense of its audience—which shouldn’t be a surprise, given the church ownership.

KSL.com’s revenue grew 75 percent from 2009 to 2010, executives say, though they don’t spell out numbers. Gilbert says his company will continue to push on both the cost and the revenue sides of the equation: “News is expensive,” he says, and audience loyalty is key.

For decades, there has been a connection between the journalism that news organisations provide and the advertisements that generate most of their revenue.

“Creating content doesn’t ensure a well-sized audience,” says Chris Hendricks, vice president of interactive media at newspaper chain McClatchy Co. “We’re accepting of the fact that the two may be disengaged.” He then adds something one wouldn’t have heard a few years ago from a media executive: “The longstanding premise of content and advertising being inextricably linked has clearly fallen apart.”

McClatchy and other companies are turning toward selling advertising space on other sites, including Facebook and Yahoo. “It’s almost like we are a sales and distribution company that decided we’re going to fund journalism,” says Hendricks.

Because Yahoo has such broad reach, the relationship opens a big market for local news organisations. “The typical paper has 15 percent penetration in the local market,” Hendricks says, speaking of online operations. “When we partner with Yahoo, it takes us up to 80 percent.”

Hendricks says McClatchy sold about $15 million of Yahoo ads in 2010 and expects to increase that to as much as $19 million in 2011. To put that into perspective, as dismal as 2010 was for McClatchy, the company still sold $1 billion of advertising that year.

One of the issues in selling others’ ad space is that a publisher must adjust to a variety of pricing schemes. It’s noteworthy that the Houston Chronicle charges nearly 28 times as much for ads on Yahoo as on Facebook.

Why do Facebook ads get such low rates? And what does that mean for the rest of the market? It could be that the standard ways of valuing advertising — that is, by whether it will impel a consumer to buy a product, visit a store or feel better about a brand — simply don’t work very well in a world where people using social media aren’t looking to be sold something.

Inevitably the discussion becomes one of how marketing is shifting to “earned” media rather than paid. One analyst defines the distinction this way: “‘Earned media’ is an old PR term that essentially meant getting your brand into free media rather than having to pay for it through advertising,” writes Sean Corcoran of Forrester Research. “The term has evolved into the … word-of-mouth that is being created through social media.”

If marketers believe they can reduce their advertising costs by engaging consumers directly, that almost certainly cuts revenue for news organisations.

And there are journalistic problems that go beyond the economic loss represented by the decline of old-fashioned advertising relationships. A Florida company, Izea, explicitly sets up arrangements so people who blog or tweet favourably about a company can get compensated in cash, travel or in other ways.

None of these ventures comes close in potential payoff to the online coupon craze, pioneered most successfully by Groupon. In a little over two years, the company expanded to more than 500 markets in 44 countries and turned down a $6 billion takeover offer from Google. Forbes called it “the fastest-growing company in Web history.”

Media companies have wavered between joining with Groupon or competing with it. The Minneapolis Star Tribune launched a coupon service, called STeals. Cox Media has started DealSwarm.

Groupon has also spawned a host of competitors. It is possible that so many competitors’ coupons will flood the market that consumers and businesses will begin to tune them out, which would diminish the value of the idea.

If the old formula of “adjacency” — selling ads and commercials alongside content — is fading, what will replace it? There are many possibilities, but few are likely, on their own, to provide the stream of dollars that advertising and circulation once did.

The Internet isn’t a friend or an enemy. It’s reality.

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