Advertisers size up Web 2.0

Encouraged by the growth in broadband take-up and the tracking and measuring capabilities of the internet, advertisers are rapidly increasing their spending on online media. Last year, it rose more than 30 per cent.

Now that advertisers, and in some cases audiences, are willing to pay, digital content makers are facing the challenge of how to make digital sales compensate for the widespread decline in traditional media earnings, though these will remain dominant for some time.

The US-based Project for Excellence in Journalism and Rick Edmonds from the Poynter Institute estimate that even if online advertising revenue continues to grow at 30 per cent a year and print revenue at only 3 per cent, online will not surpass print until 2018.

And, they add, growth rates are unlikely to continue to be as high as 30 per cent. Emarketer, a New York-based market research firm, projects the growth in online advertising spending will decline to 10.4 per cent by 2009.

“Everyone’s just throwing everything at the wall and seeing what sticks. A lot of it won’t work,” says Rafat Ali, editor and publisher
of paidcontent.org, which monitors the digital media industry.

A quick glance at the site reveals the dizzying speed at which media companies are moving to grab a piece of the digital action: most days there are a dozen or so items about new products and services, acquisitions, and other strategic moves.

In the past year, many of those moves have related to “Web 2.0”, the catchword loosely describing tools that give individuals more power to customise, create, and interact on the internet.

It’s a sign of how, in the race to monetise their content, big media companies are becoming increasingly aligned with technology.

The most striking example of this is News Corp’s acquisition last year of MySpace, the American social networking website with tens of millions of users, mostly teenagers or students.

The community consists of young people, particularly young men, who are spending more time interacting online and less time watching television, let alone reading newspapers. News Corp has also in the past few months bought kSolo and Newroo, two more very small start-ups that make user-generated content tools, and MTV in April bought Xfire, which makes an online game search tool and instant messaging client.

Inhouse R&D on technology is also popular, with organisations such as the New York Times and the BBC developing their own tools to let users personalise content or communicate with each other.

However, in these attempts they are up against the giants of the internet, such as Google and Yahoo. And those companies pose other threats, says Matteo Berlucchi, the chief executive of Skinkers.

Their tools for aggregating and personalising content from other sources, provides a basis for rich advertising revenue sources when combined with vast numbers of users. At the same time, many content producers rely heavily on traffic from the big search engines.

“What I’m hearing is that there’s a very uneasy feeling about Yahoo, Microsoft and Google at the moment,” says Mr Berlucchi. “They are looking at this space very aggressively and their model is based on users.”

Mr Berlucchi is one of the many technology executives who spends a lot of time with media companies, as Skinkers’ desktop alerts software is used by the likes of the BBC, the FT, the Wall Street Journal, and Time Warner Cable.

But Alexandra White, director of the UK’s Association of Online Publishers, disagrees: “It’s too black and white to see search engines as competitors for advertising, because there are actually some very beneficial relationships to be had.”

Mr Berlucchi does believe that brand is still a powerful tool for media companies. In spite of the success of Google news, he says Google will probably never be seen as a news brand.

The question of how audiences, readers and, increasingly, users of content will value those brands remains a vexed issue.

Although several news-paper websites, including the FT, successfully ventured into a subscription model, the overall number of subscription sites is falling in the UK, which Ms White says is partly because the demand for advertising is so strong.

“Most publishers are probably thinking it’s not worth sacrificing valuable advertising inventory [by making content subscriber-only],” she says.

Advertising was the main form of revenue for the Association of Online Publishers’ members last year, accounting for 41 per cent, with subscription revenues second at 18 per cent. Ms White points out, however, that total revenue coming from subscriptions has not fallen, and says there is still potential in the model.

In another test of their brand power, bigger media organisations are now up against a wave of small and very nimble operations.

Rocketboom, a daily three-minute video news podcast (vlog), is produced five days a week in New York at a cost – excluding labour – of about $25 a day.

Less than two years old, the handful of people who run it are now busily auctioning advertisements – winning $40,000 for a week of advertising in February – striking distribution deals and planning a move to subscription revenue.

In fact, subscription and paid-for content has been more easily adopted by digital video content than the music industry’s difficult precedent would suggest.

Since October, when Disney’s ABC network became the first to begin selling some of its programmes to users of the new Apple Video iPod, NBC, Fox and CBS have also jumped on board and some are also selling episodes directly over the internet.

Although millions of episodes are now sold each week in the US, usually for $1.99 each, the scale is, again, small compared with traditional TV advertising.

Mr Ali – himself a small-scale new media success story – believes that big media will have to face up to some harsh truths. “The amount of revenues that they’re used to is going to go down. That’s a fact of life. They won’t have the margins they’re used to.”