Content sites are pursuing partnerships and business development to boost sagging ad revenues, but targeted advertising may provide a long-term lift.
This past year was tough for content providers as they struggled to make a profit. Now that the Web is no longer considered an exploratory area of business, companies are being pressured more than ever before to begin showing a profit.
But how? Content sites find themselves in a familiar predicament: The vast majority of ads rotate through the top 50 sites in terms of traffic. In order to get that kind of traffic, you need to spend a lot of money on content development or on gimmicks such as iWon.com’s giveaways. In order to pay for all that development, you need a lot of ads. This chicken-and-egg scenario doesn’t lend itself to profitability.
Owners of content-based sites know all too well how difficult it is to achieve profitability in this market. It’s a fact: Today’s over-saturated online advertising market is extremely soft. The reasons are many, but the most striking reason is the predominant attitude of ad buyers, who only value ads based on raw impressions and click-throughs, not on the demographic profiles of sites’ users.
A December 2000 study of 75 content sites conducted by Boston-based Forrester Research www.forrester.com found that only 23 percent of the sites were profitable. Another 55 percent expected to achieve profitability during 2001. Most of the profitable sites were small content sites.
This last finding is telling. A small site will have drastically lower costs, thus making profitability easier. Also, small sites tend to provide more niche content–content that can help sell more targeted advertising. The challenge for small content sites is finding the few advertisers who value a smaller set of high-quality impressions.
Given the fact that the market has not yet made the transition to a more targeted model (more on this later), content providers have responded to soft online ad sales by aggressively going after other forms of online revenue. Chief among these are co-branded partnerships based on syndication, subscriptions, and e-commerce.
While content sites can expect some revenue from partnerships, content providers should not expect huge revenue gains from any of these approaches. Syndication may work well for the largest providers (such as Dow Jones), but only 10 percent of all content revenue is expected to come from syndication by 2005.
Subscriptions will not net content providers a large gain either. Business-to-business content subscriptions may provide some revenue, but consumers are not likely to subscribe for a fee when there is a large amount of free content on the Web. Only about 5 percent of all content revenue is expected to come from subscriptions by 2005, and much of this will come from music, movie, and game subscriptions.
Further, Forrester estimates that retail e-commerce transactions will reach $269 billion by 2005, whereas content sites will only see $6.7 billion in net revenues during the same period. Why the huge difference? Consumers are more likely to buy directly from a retail site. For example, why purchase a book via a content site when the same book can be purchased at a book retailer, usually for less? Content providers who partner with others to sell things like books, online training, and test drives are expected to experience minimal profit gains.
Content sites are also usually ill-equipped to manage an e-commerce operation. Those who do succeed at selling will likely be firms who partner with an e-commerce provider for processing and fulfillment.
The bottom line for content sites is twofold: They need to lower costs and they need to diversify revenues. While they can expect some additional revenues from strategic partners, it won’t be enough to show a profit. They still need to figure out a way to sell more ads in a declining market.
So where are the profits?
Are content sites screwed when it comes to profit? Hardly. Though you may find it hard to believe, the biggest chunk of content site profit in the next five years will come from advertising revenue. But the online ad market is about to undergo a significant shift, and content providers need to be prepared if they want to capture a sizable chunk of the estimated $27 billion online ad revenue expected by 2005.
What is changing? Well, growth in the number of new consumers going online is slowing. More than half of U.S. households are already online. In addition, the growth in the number of page views is also slowing. As more consumers and businesses take up broadband connectivity, page views have to compete with other types of online activity.
These factors will cause a dramatic increase in the value of the online consumer. Advertisers will want to reach consumers and will be willing to shell out dollars to do so.
But advertisers will no longer be as interested in bulk advertising. Today, 65 percent of online ad revenues are derived by the top nine portals–those that capture the most page views, according to Forrester Research. According to Forrester, the coming trend in online ad revenue will not be based on the number of page views. Advertisers will be willing to pay significant amounts, but only to reach a highly targeted group of people.
What to do?
Content providers can and should prepare for the coming shift in online advertising by taking specific action now. Job one is to turn the most loyal visitors into an online community. Highly targeted user communities will capture the most ad dollars. Offering visitors targeted newsletters, discussion groups, and bulletin boards accomplishes two things: It makes sites stickier, and it allows content sites to better understand their users.
Second, sites that implement user targeting via free registration, cookies, or other user-selectable programs will be highly attractive to advertisers. In addition, advertisers will demand a variety of programs designed to reach specific users–mostly content that can be easily targeted to specific audience segments.
Advertisers will pour the most dollars into content sites that can do all of these things and do them well. This will drive up the cost of highly targeted advertising.
Even if content sites cannot support highly targeted advertising, supporting some ad-to-user targeting will net them respectable profits in the next five years. Even if the market is not quite ready for more targeted campaigns, it is worthwhile for content sites to invest in targeting technologies now.
Content sites that don’t support targeted advertising will still make some profits, but not at the same levels as those that do invest in the technology to support it. When advertisers reach the budgetary limit on highly targeted selling, they will likely still do some bulk advertising to augment their strategies and increase brand awareness.
A new view
Though many content sites have been aggressively pursuing partnerships and business development activities, the expected shift in ad revenues should cause a change in plans.
Some further investments should be made in pursuing alternate revenue streams; but with advertising still accounting for almost three-quarters of content site revenue in 2005, according to Forrester, it is far better to begin to take a “user-centric” approach to content and implementation.
For example, content sites typically examine certain metrics to gauge their success. Some of these metrics include number of unique visitors, number of page views, and click-throughs.
Moving toward a more user-centric view of content requires that we measure success with a new set of metrics. Do you know what your revenues are per unique visitor? Do you know how many visitors have purchased something based upon related content and advertising at your site? How well are you retaining users–especially ones who do the bulk of the purchasing?
Content sites that want to remain viable should prepare now by investing in and implementing technologies that support advertising in specific ways for specific audiences.
Maggie Biggs [email protected] is a writer and Web technologist based in Silicon Valley. She has worked with content site-related issues for more than four years.