Where are all the ad dollars going?

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Car search started on the Web
Barry Marston of Carver, Minnesota began his search for a new car on the Web.
MPR Photo/Martin Moylan

Jobs, cars and homes account for most newspaper classified ad listings. But to the chagrin of the newspaper industry, online classified ads offer dramatic advantages to both consumers and ad buyers.

Barry Marston of Carver, Minnesota was at Walser Toyota in Bloomington last week, looking for a new car. And where did he begin his search? Not with the newspaper classified section.

"I went to the Toyota Web site, checked out the specs and features on the vehicle," Marston says. "And we used the Web site to identify where the closest dealerships were. So, we came here to test drive it."

The Web speeds deals
Walser Toyota/Scion sales manger Ellie Swenson says the Internet helps get deals done by educating buyers before they enter a showroom.
MPR Photo/Martin Moylan

Marston says the Internet is much more useful than a newspaper for car shopping.

"It is a matter of being able to see the information I want to find out about the vehicle," says Marston. "If I'm interested in the fuel economy, some of the specifications on the engine or something, I can find that on the web site."

Marston is a typical car buyer. Walser sales manager Ellie Swenson says 85 to 90 percent of consumers research cars online before they head to a dealership. She says that makes the sale more efficient.

Ad dollars are shifting fast to the 'net
Ad dollars are shifting fast to the 'net
MPR Graphic/Martin Moylan

"[Buyers are] prepared," she says. "It makes the process faster. It makes the transaction easier."

The Walser dealerships sell about 24,000 cars a year. And CEO Paul Walser says newspapers are increasingly irrelevant when it comes to selling those cars.

Walser says he once spent more than $5 million a year advertising in the Star Tribune.

"It wouldn't even be a half million," he says.

Walser says the Web is especially valuable for advertising a used car. He says it's a lot cheaper than a few lines in a newspaper ad.

Found her condo on the Web
Jessica Guernsey found her condo on the Web.
MPR Photo/Martin Moylan

"A used car liner ad might cost you $50 a day or something like that to have it in the newspaper," says Walser. "But basically once you're set up with a Web site, it doesn't cost you anything to put it online."

Walser is part of a troubling trend for the newspaper industry. Back in 1993, newspapers grabbed 23 percent of all spending on advertising. As of 2005, newspapers had lost more than a fifth of that market share.

Newspapers played no role in Jessica Guernsey's search for the Minneapolis condominium she bought this week. She found her new home on the Web.

"I didn't even look at newspapers,'' she says.

The Internet allows realtors to provide more information about a home at less cost than a newspaper ad.

Guernsey says the Web is the fastest and smartest way to look for a home.

Sunday circulation
Sunday circulation for the Twin Cities dailies. (Source: Audit Bureau of Circulations)
MPR Graphic/Martin Moylan

"Each home would usually have like 10 pictures," she says. "You get a different idea of each home. It would tell you the square feet, all the appliances it had. It was just extremely informative."

On the Web, shoppers can even take virtual tours of a home, getting 360-degree views of each room. They can also learn about everything from property taxes to nearby schools.

Lynn Clare, vice president of marketing for Edina Realty, says the company is taking about half the money it spent on newspapers and shifting it to the Internet. Clare says much of the money will go to enhance the Edina Realty Web site and to buy ads that bring homebuyers to the Edina site.

"Especially as the market is changing and getting younger, the Internet is the way to go," says Clare.

Daily circulation
Daily circulation for the Twin Cities dailies.(Source: Audit Bureau of Circulations)
MPR Graphic/Martin Moylan

Some, mostly older, home sellers still want to see ads in the paper, though. And Clare still sees a role for newspapers in the real estate business.

"Quite honestly promoting our Web site," says Clare. "Letting consumers know they can get more information and more complete information by going to our site."

But it's a role that promises to erode newspapers' classified ad revenue. Real estate and employment ads are the two biggest contributors to newspaper classified revenue. And employment pages are also losing out to the Web.

Steve Lewis is director of recruiting for U.S. Bank. Lewis says U.S. Bank generally gets a greater return on its money when it puts employment ads on the Web instead of in newspapers.

Newspapers. I didn't even look at newspapers.

But Lewis says newspapers are responding to the challenge of online competitors.

"It has forced newspapers to really focus more on developing capabilities electronically and offering alternate sources for employers who know electronic is more efficient, more effective," says Lewis.

Newspapers are tweaking their print offerings, trying to develop targeted publications that better serve employers, car dealers and realtors. And newspapers are major players in the online advertising world. They've created individual and collective Web sites for employment, cars and real estate. Newspapers have even joined the enemy, developing partnerships with Yahoo, Google, and Monster.com to sell ads.

On the Web, newspapers are not wimps.

"The number one employment Web site (CareerBuilder.com) is owned by newspapers," says Charles Diederich, director of marketing & advertising for the Newspaper Association of America. "The number one local real estate web site in most cities and automotive web site and employment Web site in a given city is often that newspaper's Web site."

Diederich says the demise of print classified ads has been forecast for more than a decade. Even though classified ad revenue fell 2 percent last year, it was up 4 to 5 percent in each of the two prior years. And real estate ad revenues have increased for 12 straight years.

Star Tribune revenue
Star Tribune revenue has been hurt by a tough ad market.
MPR Graphic/Martin Moylan

But Diederich says there's no question the Internet has been taking money from newspapers, including the Pioneer Press and Star Tribune in the Twin Cities.

Star Tribune publisher Par Ridder declined to be interviewed for this story. But according to a Wall Street analyst, the Star Tribune's revenue was down 6 percent through most of last year.

The news isn't any better across the river. A few months ago, the head of the firm that manages the Pioneer Press, said the paper's ad revenue "fell off a cliff" in the second half of 2006.

Diederich says the Internet hits newspapers with a powerful one-two punch.

"The Internet poses both [market] share loss and price destruction for them," he says. "It is driving prices down through the competition."

Eventually those trends could be fatal for at least some newspapers.

Peter Zollman of Classified Intelligence advises newspapers about the classified advertising business. He says the virtual monopoly that newspapers once had in classified advertising is over.

Zollman say some newspapers will die if they don't figure out how to grab a big chunk of ad spending as it moves online.

"The question is: Will they be selling better services, perhaps at a lower rate but higher margin or will the migration leave newspapers behind?" says Zollman

Zollman says newspapers must morph into information companies adept at serving audiences and advertisers through many channels. And, says Zollman, newspapers must accept more intense competition for ad dollars. But Zollman says the future of newspapers doesn't have to be as gloomy as the industry sometimes portrays it. He notes it's the often the nature of newspapers, after all, to push gloom and doom.

"Partly, the panic is because newspapers did not do enough fast enough and were denying the inevitability of all these problems," Zollman says. "And there's no industry more than newspapers that likes to beat itself up and talk about how terribly it is doing. Even when, in fact, the newspaper industry is still the most profitable industry by percentage in the United States."

According to the Project for Excellence in Journalism, publicly-held newspaper companies had an average pre-tax profit margin of 17 percent last year. The question is how long those fat margins will remain.