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The following is an excerpt from our report, “What Local Web Sites Earn, 2003-04,” a survey of 711 local media properties’ Web operations. To purchase a copy of the report or to download a copy of local Internet ad spending estimates for 210 U.S. markets, go to www.borrellassociates.com/research.html.
What Local Web Sites Earn
Who’s Carving Out the Local Online Space?
(July 2004) – While Internet advertising grows at an overall rate of 12-15%, local advertising has begun its upward spiral. In 2003 local advertising grew 27%, from $1.65 billion to $2.1 billion. At mid-year 2004, we see the local growth continuing, with WebAudit™ data projecting a 28% increase, hitting $2.7 billion. Further supporting this is the growth we’re seeing from the online operations run by newspapers and local broadcast TV stations, which drive nearly half of all local online revenues. As of June 30th, Web revenues for 419 newspapers and TV stations that we surveyed were growing at an annualized rate of 36%. Despite their reputation among the pure-play companies as being unsuccessful on the Internet, daily newspaper Web sites are earning strong profits and the largest share of local spending. Newspapers have strong-armed their way into this new medium by leveraging their brand, their advertising relationships, their deep local content (both advertising and news), and their ability to promote their Web sites via relentless print advertising. They will achieve $1.1 billion in Internet revenues this year, commanding nearly 40% of all local Internet ad revenues. At least one-fourth of their revenues are being driven by “up-selling” print advertisers to online applications, according to our most recent survey of local online media, “What Local Web Sites Earn, 2003-04.” The battle for local Internet ad revenue is far from over. Google, Overture and other paid-search products are absolutely tapping local ad budgets. In July 2004 we conducted more than 1,500 searches and found that 5.7% of the paid advertisements were “local” – that is, placed by a local advertiser with specific local interests. Realtors led the pack with local advertisements popping up an average of 17.5% of the paid listings. Local TV stations have also become more aggressive. For TV, 2003 was the year that local stations stopped viewing the Internet merely as an opportunity to promote their news anchors and weathermen and started viewing it as a way generate new revenue. Many stations have begun using the Internet to tap revenue from the classified verticals of employment, real estate and automotive advertising, taking square aim at their newspaper competitors. TV station Web revenues grew nearly 40% in 2003, and stations project revenue increases averaging 70% this year. To summarize, the principal recipients of this local online advertising bonanza are:
Daily Newspaper Online Operations. Daily newspapers have seized the local Internet as their own, building Web sites that capture 39% of all local online advertising expenditures. While the business model relies heavily on up-selling print advertisers to online programs, the newspaper industry lessened its dependence on up-selling in 2003 by focusing more on “new” (non-print) advertisers. As a result, the percentage of total Internet revenues from up-selling decreased in 2003 from 36% to 25%. For 2003, we estimate that daily newspapers captured $811 million in Internet ad revenues.
Online Yellow Pages. Print Yellow Pages companies have been building their Internet revenues much the way newspapers have – via up-selling. Directory companies such as Switchboard are also driving significant new revenues. The Kelsey Group estimates that interactive yellow pages generated $325 million in revenue in 2003, an amount that is largely unchanged from Kelsey’s 2002 estimate. This equates to about 16% of all local Internet advertising.
The Big Four. AOL, MSN, Google and Yahoo! are tapping local revenues totaling – by our estimate -- $320 million by offering advertiser local placement opportunities, principally through search-engine listings based on key words and ZIP Codes or city names. This comprises 15% of all local Internet ad spending. The exact size of these revenues is difficult to estimate because the companies do not break down local and national advertising. However, we expect this group’s share to increase dramatically with the growth of Google’s AdSense and Yahoo’s Overture efforts and their ability to offer local targets. Google and Yahoo claim to have 350,000 advertisers between them, and at least 10% of them are “local.”
Vertical Pure-Plays. We categorize the pure-play Internet companies principally as Monster.com, Realtor.com/Homestore, eBay, Autotrader.com and other niche sites not considered a division of a traditional media company. These sites in aggregate brought in roughly $550 million, holding a 26% share of local ad dollars. It is unlikely that this group – which we view as the chief competitors for online newspaper companies because of their focus on the classified categories – is losing share. eBay alone grew its 2003 revenues by 78%, nearly three times the rate of local online spending. AutoTrader.com’s revenue increased 58% in 2003, to $134 million.
TV and Radio Web sites. Local broadcast TV and radio stations captured about $85 million in local Internet advertising in 2003. We estimate their combined share at 4%, with TV stations bringing three-fourths of the revenue. Radio stations have been generally oblivious to the Internet as an advertising opportunity, with two notable exceptions: Clear Channel Communications radio stations generated $25 million from Internet applications in 2003, and a pure-play Internet vertical called RegionalHelpWanted.com generated $4.9 million in online employment advertising for radio station affiliates in 2003.
Still, it is important to keep these impressive gains in perspective: Online revenue remains only a blip on the corporate radar screen. Internet revenues tend to be less than 2% of total company revenues (see Figure 2). Because all but a few newspaper and TV companies have organized their Internet operations beneath their traditional publishers or station general managers, the main focus of these operations may continue to heavily reflect the business model and customer list of the product that fuels the other 98% of their business.
Traditional media companies have maintained their growth despite the aggressiveness of the pure-plays. On average, nine public companies that we reviewed showed their Internet revenues growing at a Compound Annual Growth Rate (CAGR) of 29.4% since 2001, compared with a 30.0% CAGR for seven pure-play Internet companies (see Figure 3). Even if we factored out Google’s phenomenal CAGR of 209% during this period, the growth rates between the two groups would still be comparable.
What happens in the ensuing years will be most interesting. There is no guarantee that the local competitors will even remain the same. Just four years ago it was inconceivable to think that an upstart could bump Yahoo! from the No. 1 spot for search engines. Yet Google did just that. The battle for local Internet advertising isn’t just a money-grab for a few billion dollars with an attractive growth rate. What’s at stake – at least in the minds of traditional media companies – is a delicate (and sometimes tenuous) relationship with their current customers, many of whom are being told that Internet advertising is a cheaper and more effective way of reaching consumers.
1 See Appendix B for full WebAudit™ spending estimates.
2 Universal McCann, 1958 estimate of local spot TV revenue
4 Online revenue for Hearst Argyle represents only profits generated by Hearst-Argyle’s minority investment in Internet Broadcasting Systems (24%) and an IBS-HA company (49.9%) that operates its TV Web sites.
5 27% of NYTD revenues is from digital archive sales. Factoring these revenues out, the percentage of total company revenues from online would be approximately 2.0%.
6 Internet-only revenues
7 U.S. only revenues, not including PayPal
8 U.S. only revenues
9 U.S. only revenues
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To obtain a copy of the full report go to: http://www.borrellassociates.com/research.html