Yahoo!'s Earnings Drop: New Media Suffering like Old

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A jogger runs by the Yahoo! campus in Sunnyvale, Calif.

Both Yahoo! (YHOO) and the New York Times Co. (NYT) reported earnings for the first quarter, and there was noticeable synchronicity between them. Yahoo!'s revenue dropped 13%, to $1.58 billion, and net fell nearly 80%, to $118 million. Based on the portal firm's forecasts, a slip below projections in the second quarter could take net income down to break even.

At the New York Times Co., management put on mourning clothes for their earnings call. Revenue fell a little over 18%, which was closer to Yahoo!'s drop than champions of Internet advertising would like. Advertising revenue killed the newspaper company's sales by dropping 27%, to $335 million. Fans of paying for content will note that subscriber revenue was up 1%, to $229 million, but that money came from people buying physical papers and not online content. (See 25 people to blame for the financial crisis.)

The irony of the circulation-revenue success in the battered newspaper industry is that subscription sales are the Holy Grail for paid content. But the industry has not found a way to make it work online.

The results of both companies put side by side are a true indication of what the recession has done to the media, old and new. With the exception of Google (GOOG), the life has gone out of the business of making big profits in the content business. Since Google is only a content aggregator, it does not qualify for the sake of comparison.

It is too bad that the boards of the New York Times Co. and Yahoo! will not craft a merger. It would give the newspaper a larger audience and potentially better advertising income. It would allow Yahoo! to step away from using the Associated Press, the wire service whose news stories go out to thousands of media outlets around the world, making its product dumbed down for readers who did not get a GED.

The merger won't happen. The Times Co. will have to cut off more fingers and toes. It will have to find a benefactor at some point soon. Perhaps the shadowy past of Mexican financier Carlos Slim, a Times Co. shareholder, can be swept under the rug long enough for him to step into the role. The company could create a document separating "church" from "state," which might keep Slim out of the newsroom like the provisions to hold Rupert Murdoch in check at Dow Jones did.

The market has been worried about newspapers for two or three years. Large Web properties, including Yahoo!, MSN, AOL and, were not a big concern to Wall Street. They were supposed to grow at a rate of 20% a year, unabated, forever. That has not worked out as planned, and it is not the economy. The recession may have hastened the decaying of online growth, but it did not cause it.

Internet advertising advocates make the case that the Web is a better way to reach consumers. They keep repeating that it is somehow more targeted. Ads can be served directly to discrete parts of the online population based on people's interests. The first proof against that is the fact that online newspaper content is not attracting advertising. Online revenue for the New York Times Co. dropped in the first quarter. The combination of the content's quality and that ability to focus on valuable groups of readers did not bring cash flooding in the door.

Advertisers have to go somewhere. They always do. They moved from radio to TV starting in the late 1950s. That didn't kill radio, but it didn't help it. TV advertisers moved to cable. Most advertisers began to consider the Internet a viable medium in the early part of the decade. Last year, online ad revenue topped $23 billion, but it was wounded, up barely 10% from 2007. This year the total will probably be down.

Advertisers love a winner, even if that winner has no real financial value as a business. That is why marketers are fooling around with MySpace and Facebook, so far with very little success. They will turn to Twitter because its annual user growth rate will probably hit 1,000%. But how does a marketer reach people who do nothing but send tiny 140-character messages into cyberspace? Trying to put a square peg into Twitter won't work, but a lot of capital will be wasted in proving that Twitter is a bad fit for advertising.

The advertising industry is up against the largest problem it has faced since perhaps when it found a way to reach a national audience in magazines in the early 20th century. TV, cable, magazines and online properties are all attractive ways to reach consumers, but none of them is exhibiting the kind of growth that TV did in the 1960s and the Internet did from 1997 to 2006. People are spending their time on YouTube and Twitter now. Neither has any reason to recommend it as a way to reach people to sell products or services. The roadside billboard is about to make a comeback.

Douglas A. McIntyre

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