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A friend works for the local newspaper, the Berkshire Eagle, editing a weekly arts and calendar section. I visited her at her office the other day and surprised - staggered, actually - at the size of the office. While the paper relies on dozens of unpaid correspondents and pay-per-piece freelance contributors, it also has eight editors, several reporters, professional compositors/paginators, and departments for administration, circulation and ad sales. My friend guessed that, with everyone in the office, day and night shift, there were at least sixty full-time employees responsible for producing, distributing and monetizing the paper.
I don’t mean to suggest that this is excessive, or that the newspaper’s (legendarily tightfisted) management is running anything other than a lean, efficient operation. While the office is responsible primarily for the 26,000 circulation daily newspaper (not bad for a paper that serves a county of 135,000 people), it also publishes a 6,000 circulation paper focused on the northern Berkshires and southern Vermont. And the mighty four-color presses in the basement produce an additional Vermont paper, helping defray the costs of production. (Given the parent company’s financial difficulties, and the downgrade of their bonds deep, deep into junk status, any efficiencies are surely appreciated.)
What I was amazed by was how much advertising and subscription revenue the paper must generate to support dozens of full-time jobs. I haven’t been able to find revenue numbers specifically for the paper, but a back of the hand calculation suggests that it must be generating significantly more than $2 million a year in subscription and ad sales to support salaries and production costs. It’s quite possible that subscription is what keeps the paper alive - at a retail price of $176.88 for daily home delivery, subscriptions could generate a couple million a year. (I assume not everyone is paying retail price, which means that some significant part of the paper’s revenue picture comes from advertising.) I find the advertising side of the business harder to comprehend, however.
I help run a fairly popular online citizen media site, which is visited by roughly 300,000 visitors a month. We’re doing a great deal of strategic planning at the moment, looking for ways to broaden our revenue base from foundation support and corporate parterships to include online advertising revenue. As we run the models, the numbers aren’t especially pretty. Suffice it to say, very few of our models project us making a million dollars a year in online ad sales. Fortunately, we’ve got less than half a dozen full-time employees as well as an army of volunteers and contractors, so we don’t need nearly as much revenue to support our work as our local newspaper does.
The difference in ad pricing between online and print advertising is something I’m finding mind-boggling. Advertising inserts in the Berkshire Eagle are priced at a base rate of $45 per thousand customers for two print pages, targeted by zipcode. Those prices don’t include production costs - the advertiser is responsible producing the inserts and delivering them to the production facility. The cost covers the insertion of the ad into the appropriate papers and their delivery.
This model of advertising pricing - called CPM (cost per thousand) - is what early internet companies tried to use to monetize content. In the early days of Tripod, we called our friends who worked for glossy magazines, found out what they were charging for ads in CPM terms - usually $20-$60 - and asked our advertisers to pay at least as much. Our logic? Since you can’t click on a magazine ad, they simply build brand, while ours build brand and can lead to sales.
We were able to earn $45 CPMs for a little while, until advertisers started to question our logic. In some cases, they saw other sites offering much cheaper rates; in other cases, they questioned whether the ads really were leading directly to sales, as they could track who’d clicked on the ads. CPM rates fell across the industry. Some sites continue to make pretty good money on a CPM basis, especially sites with highly targetted content likely to appeal to a certain type of customers. Federated Media, an advertising network that focuses on technology content, offers CPM ads from $3 to $26. Most content providers don’t see rates that high. According to Technorati’s 2008 state of the blogosphere, US bloggers who accept advertising saw a mean CPM of $4.20, but a median of $1.20 - that implies a small number of bloggers earning high CPMs for highly targeted content, and a lot of folks selling impressions at $1 per thousand.
The real problem for web publishers like Tripod wasn’t the fall in CPM rates, but the switch to “performance-based advertising”. As advertisers started to wonder whether ads were really leading towards sales, they started to pay not on an impression basis, but on a click basis. This makes much better sense for an advertiser - a click is a sales lead, and a marketer can decide she wants 500 new leads a month and will pay for 500 clicks. The problem with pay per click from the content provider’s point of view is that clicks depend a great deal on the creativity of the ad. A truly great ad might get clicked 2-3% of the time, while a lame one could get less than 1% clickthrough, eating valuable ad inventory.
Google and Overture both figured out how to navigate the pay-per-performance world, setting up ad auctions where advertisers could bid to place their ads on search results pages, paying per click. Ads that were rarely clicked were placed lower on the results page, resulting in fewer clicks and incenting the advertisers to improve their copy. While highly targeted ads (an ad for roofing services in Pittsfield, MA) might be worth several dollars a click, most ads sell for a dollar or less a click, often much less. An ad that sells for a buck a click and gets 1% clickthrough is functionally a $10 CPM ad, which suggests that lots of ad inventory (the nickel-a-click stuff) selling at sub-$1 CPM.
Pay per performance seems to be the way of the future. JP Morgan analyst Imran Khan sees performance ad revenue growing more quickly than impression based and representing roughly two-thirds of the online market. CPM-based advertising is apparently less appealing to advertisers and may fall in price.
That’s why $45 CPM seemed pretty high to me. Not that there isn’t ad inventory that might be worth the price. The New York Times has recently started selling ads on its front page for $75,000 on weekdays, a $75 CPM, given the paper’s print circulation of slightly over a million. The front page of the national paper of record is a pretty good way to gain some attention for your product or service. But that’s not what we’re talking about - we’re talking about the sort of inserts supermarkets put into your newspaper to promote a 3 for 1 sale on nectarines. Those tend to catch my attention only when I’m looking for kindling. It’s hard to believe that they are, reader for reader, worth 60% of what a front page ad on the New York Times is worth. Or that they’re worth paying $4.50 a click, which is what would yield a $45 CPM in a pay per click environment, assuming 1% clickthrough.
Perhaps these prices aren’t entirely rational.
Scott Karp wrote a lovely piece for Publishing 2.0 about 18 months ago called “Newspaper Online vs. Print Ad Revenue: The 10% Problem“. The title refers to Karp’s astute observation that “print circulation is about 10% of total audience reach, while online advertising revenue is 10% of total ad revenue — the economics are nearly the perfect inverse of what they should be.” In other words, online readers of the Times were worth roughly 1/100th of what offline readers were in advertising terms. (They’re worth even more inasmuch as most are paying subscription fees.) There’s all sorts of ways to make these numbers make more sense - circulation bureas estimate that issues of the Times are read by multiple people, which means each of those print ads viewed multiple times. But the fact remains - online ads sell for much, much less than offline ones.
The comment thread associated with the piece is helpful, and includes a number of readers trying to help explain the disparity. Online advertising isn’t especially mature yet, one suggests, and therefore significantly cheaper. The ability to target specific geographic markets makes newspapers more useful for non-virtual retailers. (Hmm. Given that the Times has been losing local audience and becoming a national paper over the past decade, this one is harder to swallow.)
Online ads, on the other hand, are measurable. They work just as well, if not better, than print, television, etc., the difference is that for the first time ad customers know exactly how ineffective they are.
When I worked in Advertising the ineffectiveness of advertising was hardly a secret. But customers couldn’t measure the effectiveness of ads. So they paid and continue to pay ridiculous prices for them.
Online ads, on the other hand, are measurable. They work just as well, if not better, than print, television, etc., the difference is that for the first time ad customers know exactly how ineffective they are.
Basically, there are two ways to explain the disparity in online and offline ad cost. One is to argue that paper ads are, for some combination of reasons, ten to a hundred times more effective than online ads. The other is to argue that advertisers are better at pricing online ads than offline ads.
In the days before the internet, advertisers made choices between billboards, radio and TV ads, the phone book and newspapers. All these ads work on an impression basis - it’s very difficult to measure the effectiveness except via anecdote (I put up lots of ads and my sales increased) or by asking customers to bring the ad to you as a coupon. In comparison to the sort of detailed information on performance you can get from Google Ads, measuring the performance of newspaper advertising seems impossibly inexact.
Let’s posit for a moment that the price of newspaper ads may have more to do with how much money a newspaper needs to earn to keep the presses running, rather than how effective they are at producing new business for advertisers. It certainly may make sense that the Eagle has to sell inserts for a CPM of $45 to continue producing the paper without suffering large losses. Why are advertisers willing to pay these prices without strong evidence that they give an effective yield? They may not have much choice - other options in a community where many customers are offline are also pay per impression and may be similarly expensive. The worry the local Price Chopper has is that if they don’t produce an insert and the Big Y does, perhaps they lose their share of the local customerbase. Without good methods to track the effectiveness of the print ads, the Eagle’s ability to sell ads may have more to do with comparable ad rates in other local newspapers or radio stations.
So what happens if the market rationalizes, if pay per performance advertising becomes a viable way to reach the majority of consumers who consume a particular publication? This may be what’s happening to papers like the New York Times. As print circulation decreases and online readership increases, it seems like the newspaper could still afford to produce high quality journalism. But if online ads sell primarily on the basis of their effectiveness, and print ads sell for other historical, competitive and less rational factors, revenue could fall sharply as readership increases. There’s certainly no shortage of speculation that the Times, like almost all newspapers, may be in trouble (though the Times’s response to a particularly gloomy Atlantic article is a masterpiece.)
Whatever objections I have to the Berkshire Eagle’s charming habit of making yesterday’s weather the lead story in the day’s paper, I don’t want it to go out of business. And I really don’t want the New York Times to go under. But I’m starting to worry about the irrationality of the model that’s supported journalism for the past several decades.
I remember a conversation before an academic conference in 2006 with a New York Times reporter. In typical conference fashion, we’d been paired up, blogger and “real journalist” to discuss the future of journalism. Talking informally the night before, the reporter said, “I don’t really understand how it is that Bloomingdales underwrites our Africa coverage, but as long as they’re doing it, I’m not complaining.”
I’m not either. But I am worried. What happens when Bloomingdales wises up and concludes that they’d save a small fortune by advertising online, targetting only to readers who actually live near their stores?
Here’s my concern. If I’m right and print advertising costs are fundamentally irrational, then it’s possible that the way we’ve built media in the United States can’t survive a transition to a more rational market. That would be bad. Newspapers aren’t just businesses - they serve a critical function in a democratic society, informing citizens so they can make intelligent voting decisions, lobby their elected representatives on issues of their concern and hold political and business powers accountable.
What if the idea that commercial enterprises should carry out the public interest function of journalism is built on a fundamentally broken model? What if advertising worked pretty well as a way of subsidizing public interest journalism only so long as advertisers didn’t understand the effectiveness of their ads? Putting aside all the other reasons why commercial journalism may be flawed - the tendency of newspapers and television channels to seek readers by publishing “edutainment” rather than investigation, the worry that papers will hesitate to publish stories that might embarrass advertisers - what if ad supported journalism is only viable in a world where we radically overvalue the worth of ads?
That would be a bad thing. Seth Godin argues that there may be lots we’re willing to either throw away from the local newspaper or have covered by new online providers, but we need to ensure that there’s still a way to engage in serious investigative journalism: “I worry about the quality of a democracy when the the state government or the local government can do what it wants without intelligent coverage. I worry about the abuse of power when the only thing a corrupt official needs to worry about is the TV news. I worry about the quality of legislation when there isn’t a passionate, unbiased reporter there to explain it to us.”
Godin believes that we’ll find another way to provide for this coverage. “Maybe it’s a public good, a non profit function. Maybe a philanthropist puts up money for prizes. Maybe the Woodward and Bernstein of 2017 make so much money from breaking a story that it leads to a whole new generation of journalists.”
Maybe. I wouldn’t count on it. My friends who are engaged in online projects to conduct “difficult journalism” - the sort of investigative reporting Godin is talking about, as well as international coverage, are worried about revenue models. We get support from the foundation community, but foundations can’t provide support forever, and all would like to know when we’re going to be able to work without their support.
We’re all looking at models that include some advertising support. What if the model that brough us Upton Sinclair and Woodward and Bernstein - impression advertising - can’t bring us into the future because it’s based on uneven distribution of information and bad math?
Friend and colleague Doc Searls has an important post that I wish I’d read before writing this. He sees a similar set of problems with the rise of pay for performance advertising, and argues that systems where buyers find sellers - which he calls VRM (vendor relationship management) systems - will be an important force for supporting journalism in the future. Worth reading.
This piece originally appeared on Ethan Zuckerman's blog, My Heart's In Accra.
Very good, very well written article which covers all the points well.
It's difficult to draw a line between editorial direction and advertisers' direction. I've had spats with editors of both magazines and blogs; however the difference has been that the former are worried about their readers while the latter are concerned about their advertisers.
The sad thing is that it's the print sector which started this by pursuing sensational stories in order to drive up circulation figures.
For now .. imagining electronic publishing as it is now would have seemed fantasy eight years ago. So deep breath in, and let's see where the next eight years go. A free press in a requirement of a functioning democracy: let's hope it stays that way.
I have a slightly different perspective.
Maybe advertising on the internet is irrationally low priced rather than print advertising irrationally overpriced. How could that be?
I think that the internet is vastly underpriced - just like for example oil is vastly underpriced.
Our whole economy and complexity is built on non renewable energy resources. And the day will come when we hit peak oil and oil price rise quickly. At this point all the organisations and processes that have been subsidised by cheap energy will come to a grinding halt.
Another way of saying this is that we are consuming our futures in the present when ever we use non renewable resources, when we destroy renewable resources and when we borrow money for consumption.
One way to think about resilience and sustainability in a world where the price of exogenous energy is set to rise is to look at the ratio of exogenous energy costs to human energy costs in a business.
The internet is heavily dependent on exogenous energy relative to human capital. A recent study by a Harvard academic estimated that two google searches generated as much CO2 as boiling enough water to make a cup of tea. Clearly they use a similar amount of energy to do this
But this cost is not reflected in the cost of advertising because of the underpricing of energy and the fact that the user or person search is paying for their broadband, computer etc. In other words the consumer is paying rather than the advertiser. The point though is that this hidden cost is being incurred by the environment even if it is hidden from the "cost of advertising" view of the world.
The next level of hidden cost is the cost of future system failures. As the world becomes more connected by computers it becomes more interdependent and less resilient. A small glitch in the system can effect many users because of this. The drive for efficiency at the cost of resilience is the result of a free market capitalist system that cannot account for the future, for hidden and unpriced variables, and for possible "black swan" events. As a result of the model, short term efficiency wins out over long term resilience.
The issue for all technology is this twin problem of creating unrecognised, underfunded future costs and reduced resilience.
A few days ago I saw a calculation for the estimated full life cost of a $100 computer ago - $2,600. Is this sort of computer a gift or a liability to a poor starving African? It looks like a gift but it is a poisoned challis.
When we look at computers we say - look how well Moore's law is working. Technology is getting cheaper at the same time that it is betting more powerful. But this is a delusion that is created by focusing on the cost of a single computer that excludes unfunded future liabilities.
Behind the scenes the reality that while price of a single computer has been falling, the total cost of this technology has been rising exponentially. Individual computer prices have been falling because the number of people buying them has been rising exponentially too.
It took till 2007 for the first billion computers to be sold. The next 2 billion were scheduled to be sold before the end of 2008. It doesn't take much maths to realise that Moore's law has just about done its run. When the market hits saturation point new development costs will have to flow into price rises.
Are computers privitising profits and socialising the costs? I might spend a few hours searching online for a cheap air ticket and think I have saved money relative to buying the ticket from a travel agent. But how much was the few hours of my time worth? How has the lonesome activity reduced social capital and community resilience?
I think we need to look a little more deeply at our hidden assumptions and the real costs of living off the future.
I read this article with much interest and I can totally relate to everything mentioned. Having started my own online magazine about architecture (www.fivefootway.com) , I face these strategic challenges especially in making it a sustainable long-term business. The struggle to find a revenue model especially for highly specialized content is something that seems to elude me and the article seems to articulate my thoughts on the matter.
Thank You for the wonderful piece.
I wonder, as Mr. McCrindle has commented, if online ad pricing is currently under-valued? For example, with current pay-per-click models, the ad is only considered successful if I click on it. But, isn't one of the functions of advertising to help me make future decisions? For instance, I see Red Bull adds all over, they sponsor sporting events that I watch, they pay for print adds in magazines I read, there are billboards near where I live, etc. So, from all this, if I was in a store trying to decide what energy drink I was to purchase, I'm more likely to choose Red Bull--because it has been through my consciousness enough that my sub-conscious mind is likely to lean toward that product. As with on-line advertising, I'm highly unlikely to click on adds, but I'm sure if I wanted to join some on-line social-networking site where I could create an avatar, I would choose Zwicky--because it's what I know from the adds (it's all that's ever on Scott Adam's (the creator of Dilbert) blog site).
Sometimes things have unmeasurable, or not obvious effects. Perhaps online advertising is an area where further study would be worth investigating, to determine if the pay-per-click model is short-changing the sites hosting the adds.
There was an interesting interview on CBC radio this morning in Ottawa, about this, in regards to print media. Here's the link if anyone is interested (it's Real Audio format): http://cbc.ca/ottawa/media/audio/ottawamorning/20090122media22.ram