« Should We Believe The Hype on Borat? | Main | Cablevision Reports Inline: Implications Limited »

November 08, 2006

Google Throws A Lifeline to the Newspaper Industry

The launch of a newspaper industry ad buying marketplace by Google (GOOG) is an interesting development. Studies have shown that newspapers only reach a fraction of the potential advertisers within their geography. I read one study that said it was as low of 20% of potential advertisers. Most of the advertisers that aren’t using newspapers are small businesses. The idea behind the GOOG-newspaper industry trial is that by making it easier to buy newspaper advertising, the base of advertisers will grow. I am not that well versed in all things GOOG but I am under the impression that it is smaller businesses that are the primary users of Google search. So in theory, this is a good match.

Another potential benefit to the newspaper industry could be a lower cost structure to reach advertisers. An efficient, easy-to-sue, online ordering system could lead to lower cost of sales as advertising sales forces are slimmed down and administrative expenses are reduced.

One potential problem I see.....

.....is that GOOG's auction bidding model is quite efficient. Certainly it is a lot more efficient than calling the newspaper and buying an ad. Market theory says improved efficiency should drive down prices. Consequently, a risk I see in this initiative is that smaller advertisers will be buying excess inventory at a discount to what the newspaper industry's major advertisers are paying. This could serve to drive down pricing across the industry such that lost pricing more than offsets the increased volume from a simplified ad sales process.

Overall, this is a worthwhile idea. It is easy to create a scenario where newspapers are doomed, slowly losing readers and advertising revenue, and effectively becoming liquidating trusts with a very long tail. The industry should be willing to try to new ideas, even if they come with risks. Status quo is unacceptable.

Diversification toward digital media is underway and revenue contribution across the industry is in the upper single digits and rising. Other uses of digital technology, such as the GOOG initiative, also have to part of the solution. If there is one.

Posted by Steve Birenberg at November 8, 2006 10:45 AM in Newspapers