• by Wendy Davis , Staff Writer @wendyndavis, October 26, 2006

The current round of quarterly earnings reports shows that online revenue at newspapers continues to grow quickly. That's the good news.

The bad news is that online revenue doesn't seem to be keeping pace with online readership. On average, online contributes between 6% and 7% of total newspaper revenue, according to Merrill Lynch estimates. "Even if the rapid growth continues for the next few years, we don't see online representing over 50% of newspaper ad revenues for at least a couple of decades, suggesting that industry profit could stay flat for the foreseeable future," Merrill Lynch stated in a report issued this week. "Many newspaper stocks are pricing in flat to negative perpetual growth in free cash flow."

Another report issued this week by research company Outsell made similar points. Outsell estimated that the Web contributes about 5% of total revenue at the top 10 news companies. "Growth is heavily dependent on narrowing that gap between the percentage of audience online and how much company revenue is derived from online."

How can newspapers grow online revenue so it keeps pace with Web readership? While there are a host of possibilities--everything from selling archives and other premium content online to beefing up free ad-supported content--they all depend on newspapers' willingness to experiment.

"Publishers in their testing will see how much new pay-per-view and how much subscriber-archive revenue they can drive with the new Google exposure," Outsell wrote, referring to Google's new News Archives, which offers historical articles. "With the new ad models proliferating, there will be many temptations to stop charging for archival content and monetize it with contextual and other ad models."

But any experiments likely will have to occur at Internet speed--much faster than newspapers are accustomed to. Consider, the $1.65 billion deal between Google and YouTube reportedly came together in just one week. "Traditional companies," said Outsell, "must figure out how to begin moving at the speed of the upstarts."