• by Erik Sass  @eriksass1, September 1, 2006

Newspapers facing print ad declines may find solace online. Newspapers' online ad revenue topped $667 million in the second quarter--a 33 percent rise over the same quarter last year, according to the Newspaper Association of America. Newspapers' online ad business has been growing at an impressive clip for nine straight quarters. One catch: its contribution to the bottom line is dwarfed by contractions in the print ad market. Print revenues dropped .2 percent to $11.7 billion, and combined revenues were almost flat, growing just 1.1 percent to $12.4 billion.

According to Ken Doctor, a newspaper industry analyst with Outsell, Inc., a sizeable part of newspapers' $667 million online take comes from classified ads. He says they've "been doing well in recruitment, and they've been doing well in real estate." Doctor emphasizes the importance of online newspaper classified networks like Careerbuilder that pool the databases, lead generation and promotional muscle of many newspapers.

But he warned a reliance on recruitment and real estate makes newspapers' online business especially vulnerable to an economic downturn. "The greatest concern going forward is that the economy appears to be slowing. Publishers should be thinking about what will happen cyclically to those two areas," says Doctor. "It looks like hiring is softening, and that could have a serious impact on recruitment revenues."

Real-estate classifieds are a little more complicated, but the long-term implications are the same. Until last year, it was a sellers' market with the housing bubble, and the sector performed well. Somewhat surprisingly, he adds that the initial cooling of the housing market is good for newspapers. "What newspapers have really benefited from over the last 12-18 months is this 'even' market. Houses were on the market longer, which meant more advertising." But the concern now is if an economic slowdown occurs, buyers will pull their homes off the market.

What will make newspapers' online truly profitable? According to Doctor, a more sophisticated approach to behavioral targeting, a field news companies need to improve. He points to behavioral-targeting companies like Revenue Science and Tacoda and the trailblazing work of Dow Jones. "Now that you have tracking mechanisms in place, advertisers, merchants and national brands will pay more money to sites that deliver more paying customers."

Another concern: newspapers are losing out in contextual advertising. Doctors says they've been too reliant on Google and Yahoo, which own the ad matching systems and the relationships with hundreds of thousands of advertisers of all sizes, large and small. He counsels that newspapers would do well to strengthen existing relationships and make inroads into the two online companies' client bases, though they are formidable competitors.