Why online ads won’t support a newsroom

by Jason Preston on March 12, 2009

Google adI know that the LA Times has claimed that they can cover their entire editorial payroll with online advertising.

It won’t last. Revenue from online ads may grow – yes – but long term ads won’t support the production of content. Why? Because of search ads.

Google has almost single-handedly destroyed the business model behind printed content.

Free Content

Google has always had the luxury of free content. They have to pay for the system, and the software, and some of the hardware, yes, but the content has always been free to them. And realistically, the content is the most expensive part of the package.

You can see the problem, can’t you?

Google has co-opted the content-creation business model, but it’s using it to support a business that has much lower expenses, which means they can afford to undercut the content creators on price. So they do. Massively.

And the worst part? Their ads work better than the old ones.

Free Market

Google is the most ubiquitous ad network on the internet. AdSense units show up everywhere, from Engadget to SeattlePI.com to this blog. What that basically means is that when Google lets advertisers bid on a bit of ad space, they’re essentially setting the market price for that ad. And as long as ad inventory on the internet remains unlimited (i.e. as long as the web keeps growing…which it will), there’s practically nothing that can raise that price.

Essentially, the going rate for ads on the internet will always be the lowest possible rate, and the lowest possible rate will be high enough to support aggregators and search engines, but not high enough to support content creation.

I think that eventually, we’re going to end up with a content model that requires people to pay again. And that’s actually fine with me – user revenue will make up the difference in between ad revenue and operating cost. The margins will never be as good, but the business will be there.

Assumptions and exceptions

Of course, this makes a few huge assumptions, such as “all ad space is created equally.” It’s not, of course. Ad space on my blog is worth less than ad space on Engadget (for certain ads), and ad space in the New York Times is generally worth more than ad space next to a Google search results (unless it’s the right search result).

Even more granular, ad space at the bottom of a search results page is worth less than ad space at the top.

So I think that a newsbrand with a particularly strong brand and a particularly identifiable demographic might be able to make it work. But you’ll have to rely on differentiating your ad space, not simply having it.

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{ 3 comments }

1 Tobias Kahn 03.12.09 at 10:41 am

I’m confused as to why CPM rates haven’t been/won’t increase for online publications? At the moment print CPM rates are much higher than online rates, but you’d think that as people consume more and more content on the web, print CPM rates will have to fall and then bump up online rates? Right?

Though I imagine it will never be enough to fully support these publications (assuming they pay their writers more than beer money unlike many online content producers)…

2 Jason Preston 03.12.09 at 11:43 pm

Tobias – There may well be a bump in online CPM rates, but the problem is measurability. CPM in print is artificially high because a) there is limited inventory and b) it’s nearly impossible to measure it’s effectiveness.

Online, in contrast, has a) unlimited inventory and b) excruciatingly exact statistics (how many clicks? what time of day? where did they go next? where did they come from? did they eventually buy? was it two days later? was it online, or in a real store? and so on…)

Those statistics, ironically, allow advertisers to claim they’re getting less value out of those ads, and therefore pay less for them. That, coupled with the fact that they can always take their money someplace else (because Google is *always* willing to take their money, no matter how little), means that publishers are between a rock and a hard place.

Unfortunately.

3 Norman 03.04.10 at 10:59 pm

Jason

a factor not apparent in your thinking is the question of demographics. All people might well be a suitable metric for Nike. But it’s a very wasteful idea for very many others. Especially when the web makes that universal.
AdSense naturally drives prices to zero because despite the “metrics” it’s impossible to know with any certainty who’s looking. Media that rely on open metrics inevitably head towards cheap, nasty ways to drive “traffic” which themselves accentuate the demographic failings.
Pricing content actually helps discriminate and raises relevance and almost certainly justifies higher CPM.
Of course, nothing wilo save those whose content is irrelevant.

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