Local online advertising:

The paradox of

the growth imperative

By Lincoln Millstein, Hearst Newspapers

The basics: Total online ad revenue

6

7.3

9.4

11.5

0

2

4

6

8

10

12

2002 2003 2004 2005 (p)

Will hit $11.5 billion this year

Have surpassed billboards

Are neck-and-neck with magazines

Will pass yellow pages by 2006

May rival radio by 2009

May hit $20 billion by 2010

– Accounts for more than 2/3 of all online time

Local online advertising is the fastest growing segment

How $2.7 billion in local online spend is divided Source:Borrell Assoc

YP6%

Paid Search5%

Newspapers44%

TV4%

Pure Plays40%

Radio1%

‘New Media’ is no longer new …

This medium is maturing faster than is reflected in many surveys because of its usage in the workplace

2/3 of all online time– Quickly becoming

more multimedia• Smaller markets

now growing faster

Internet usage is actually close to critical mass

2000 2001 2002

Total Americans who use the Internet 66.9% 72.3% 71.1% Internet use at home 46.9% 58.4% 59.3% Students who use the Internet at school 59.9% 72.9%

73.7% % who use the Internet at work 42.3% 51.2% 51.2%

HOURS ONLINE

Average numbers of hours online per week 9.4 9.8 11.1

UCLA Internet Study

Consumer time spent online has stopped growing in U.S.

• In some communities, it’s a long way from Tipperary … Fayetteville, NC is not Greenwich, CT

• Market is Top 20 DMAs• Virtually no demand in our YP markets for online

products

Looming paradox: The internet cannot produce enough quality inventory to meet demand:

Major search engines defer a significant percentage of the available budgets of booked advertising from winning bidders because they lack sufficient inventory to display those ads.

Yahoo executives voice concern over ad inventory a year ago.

ESPN Motion is sold out, limiting its upside for multimedia spend

Quality publishers – CNET, About.com - experience severe inventory shortages in key verticals – finance, tech, travel

Click fraud aggravates problem as advertisers lose confidence in cpc model

Pharmaceutical spend online is limited by inventory constraints - Weightwatchers has already saturated its web buy and is looking for reach on TV

Consequences of shortage of quality online inventory …

• Site-based media businesses will not scale to the same degree as their analog counterparts; will have marginal impact in the marketplace as a result

• Three or four portals will continue to dominate• Pricing elasticity is stretched to the limit, putting

the medium at risk of being non-competitive• Big-Iron publishing model is dead; Network

publishing model is king• Online remains viable for DR (cpc, cpa); but

suffers as a branding medium – already happening to hotels industry

Case study of Company X - the ‘Big-Iron’ model (or why the internet will never produce a WSJ, NBC or NYT - or even a Houston Chronicle – in scale)

• Company X is publisher in key vertical• Has ad rev of $35m • Has ebitda of $8m• Has 6 million uniques and 130 million PVs a month• Company X is already at an 80 % sell-through rate • Company X is trading at 90 times trailing earnings (ttm)• Company X’s upside is severely limited by its size and

ability to grow as the medium reaches maturity

Conclusion: Company X does not scale

The tail of the internet becomes the growth sector – this is where the medium reaches scale

Tail as applied to content and publishing

Two examples of the tail:seatguru.com and mobiletracker.com

The tail also features

high quality personal brands

Portals must meet huge growth imperative; they are the first to leverage the tail

• That’s why Google launched AdSense and is launching a new product – or buying a new company – every minute: Blogger, Keyhole, Desktop Search, Gmail, science search, Picasa, Urchin, etc. Same reason why Yahoo! Acquired Flickr …

• That’s why Google is looking to leverage the sales force at BellSouth and others …

• Google and Yahoo eyeing every small and large business in America and plan to be there when that business wants to connect to customers – instantly, seamlessly and without regard to geographic boundaries

• IAC (Ask Jeeves), AOL, MSFT not far behind …

Biggest prize in the tail? Local markets dominated by yellow pages and newspapers

So how are we doing? Here is one assessment:

“ … despite some exceptions, online newspapers are mostly cluttered sites that do a mediocre job of displaying the wealth of local content that they possess. They typically also don’t showcase their advertisers very well or offer a very satisfying user experience.” – Greg Sterling, Kelsey

“Any momentum that newspapers are starting to build online is challenged by the “commoditization” of news (Yahoo! News is the No. 1 news site), also the emergence of local search and a growing number of other sites that offer local information and classified listings. Craigslist and eBay are the most obvious and prominent examples.”

Incumbents (yellow pages and newspapers) attempted to force the big-iron model onto the internet

• Most of the content not readily seen• Expect user to gravitate to web site• Fails to serve the intent of the user• Publishing is the wrong model online –

pulls users with content; online, model must be built around user’s intent; lean-back medium vs lean-forward medium

Online Revenue as % of Total Gross Revenues

Copyright 2005, Borrell Associates Inc.

2001

2002

2003

2004

Washington Post Co. 3.6% 4.2% 5.4% 6.6%

Belo Corp. 1.8% 2.7% 3.3% 4.1%

Knight Ridder 1.4% 1.9% 2.7% 3.8%

New York Times Co. 2.1% 2.4% 2.9% 3.8%

McClatchy 1.5% 2.1% 2.5% 3.5%

Gannett 1.2% 1.5% 2.1% 3.0%

Tribune Co. 1.5% 1.9% 2.3% 3.0%

Media General 0.6% 1.2% 1.8% 2.5%

Lee Enterprises 0.9% 1.5% 1.4% 1.7%

Journal Register 0.9% 1.0% 1.2% 1.3% Sources: SEC documents, company statements.

Recent M&A pointing to a desire to play in this new sandbox …

• Dow Jones acquires MarketWatch for $460 million

• BellSouth, SBC acquires YellowPages.com for $100 m

• NYT acquires About.com for $410 m• Three Bears – KRI, TRB, GCI – acquires

Topix.net for ?• Yahoo! buys Flickr• IAC acquires Ask for $1.9 b• Google acquires Urchin

How to win: shedding the big-iron publishing model and embracing the open architectural of participation

• Big-Iron: Proprietary content, controlled distribution, competitor lock-out, pull audience to content

• Open architecture: Free content, organic distribution, leverage competition (Google’s top search term is ‘Yahoo’), meet and serve audience intent – not publisher’s

Winning with local search – newspapers and YP publishers joining forces

• One search box serving a single intent • Harnessing the best knowledge of the

community to serve that intent, arrayed against services and commerce targeted to that intent

• Riding the distribution of the internet• Feet on the street selling to those services and

SMEs• Leveraging our traditional media assets

Our core strengths• Most trusted local brand – in a world of

unlimited and “unfettered” content, users will trust the guiding hand of newspapers; opportunity to enable and assure a network of high quality blogs (March 25 headline in WSJ - ‘Many Advertisers Find Blogging frontier is still too wild’)

• Create a local network where advertisers trust where their ads appear

• Feet on the street sales force

Publishers embrace blogging

New economic imperatives of ‘unlimited’ choice in content RSS and blogging are early enablers of this

model – adopt them Google is a massive distribution point – learn to

exploit it, instead of having Google exploit you Leverage the distributed assets of the internet Use a light-weight oversight model to ensure

quality control Serve your customers; they will reward you

with their loyalty Aggregate, aggregate, aggregate Network, network, network