Turn ‘Digital Dimes’ Into Conventional Dollars

It seems like we keep bouncing between two visions when it comes to digital media’s role as a revenue generator for TV stations. On one hand, when we look at the actual dollars spent on digital media advertising and compare that to spending on television advertising, it still represents dimes on the dollar. On the other, we hear about the higher percentage of growth in digital advertising when compared to a fairly stagnant outlook for traditional media and then wonder if the soothsayers are correct in predicting the demise of television as another outdated analog medium.

Truth is, those two visions are part of a continuum that has existed since the mid-1990s. Rather than being undone by competitors that have emerged from the World Wide Web, many television stations are already on their way to becoming digital media powerhouses in their local communities.

That’s the conclusion of Gordon Borrell, CEO of the research firm Borrell & Associates. Borrell has been collecting digital sales data from thousands of local media companies in the United States and Canada for the past 11 years.

“We’ve reached a significant turning point in the history of digital media,” Borrell told MFM members in an article appearing in the July-August edition of The Financial Manager (TFM) magazine. He went on to explain that the doomsayers have focused on the parallel between the growth in locally spent Internet advertising, which now stands at about $20 billion, and the amount of revenue that newspapers and yellow pages have lost over the same period. “But something more interesting has begun to unfold — something that could ironically make digital media the savior of analog media companies.”

Here’s the reason for Borrell’s optimism: traditional media companies sold more than half of the $18.7 billion spent on local digital advertising in the U.S. last year. “In fact,” he reported, “When companies are ranked according to local online revenue results, two of the largest were a newspaper and TV company (Gannett Corp.) and a yellow pages company (YP). Each generated roughly $1 billion in digital sales.”

Much of that revenue came from offerings that include banner ads, online classifieds, video ads and audio ads. Sales range from the low single digits for cable and radio to as much as one-third of gross ad revenues for some yellow pages and newspapers, according to Borrell’s research.

“It’s not just squeezing a few digital dimes out of established clients. Some [companies] are using digital products to leverage themselves into new customer bases altogether,” Borrell notes. One example of this trend is McClatchy Corp., a newspaper company that generated half of the roughly $200 million in digital revenue it earned last year from advertisers that weren’t print customers.

In addition to the ability to both grow revenues and expand the number of companies buying advertising from traditional media companies, there are two aspects of digital media sales that Borrell says are noteworthy for media CFOs and investors.

The first characteristic is the operating margin for a digital sales business. “The average EBITDA margin (earnings before income, taxes, depreciation and amortization) for local digital operations that are leveraged out of traditional media companies is 49%.” In fact, one broadcast CEO told Borrell his Internet ventures contributed 6% in company revenues but 8% of company profits (EBITDA) last year.

One of the reasons so much of digital revenues can fall directly to the bottom line is the relatively low cost for a station to operate a digital media business. Borrell explained: “The vast majority of these local media operations aren’t charging their digital units for rent, advertising and content — things that are already paid for by the host company. Yet even for pure-play companies that are taking the hit for those charges, reported margins are a respectable 20% to 30%.”

Not surprisingly, these profits are quickly drawing the attention of CFOs. As Borrell pointed out, “While a $100 million media company might have gotten 10% of its gross revenue from digital sales last year, a 49% operating margin would mean that its digital operations probably contributed 20% to profits.”

The second characteristic is, ironically, the reason given by doomsayers concerning the likely demise of television: the sheer growth of the digital media business.

Borrell’s research indicates that the typical “broadcast site” (a TV station or radio cluster) is already making $500,000 to $850,000 per year. He believes that “if current trends persist, digital ventures could be contributing half of company profits to these media companies in five years.”

To back up his projections, Borrell shared the firm’s analysis of local online ventures operated by traditional media businesses that on average generated $943,000 in revenue last year. “But that’s average,” he noted. “Many are making more than $10 million with operating profits above $5 million.”

He also gave the example of one major media company where digital ventures already represent as much as 30% of its profits. “By 2017, that figure might rise to 60%, even though digital revenue in that year may represent less than one-third of total gross revenue.”

Summing up, Borrell pointed out that there’s new confidence in online strategies today that didn’t exist in the early days of the World Wide Web. “Three fourths of the managers we surveyed this year — many of them owners or top-level executives — expressed confidence in not only the profitability of their operations, but also in the overall direction.”

Moreover, 40% of those surveyed rated their strategy was “pretty good” or “brilliant.” However, as Borrell concluded, “That sounds great, until you consider that 60% of media managers didn’t think their companies had quite arrived in the digital future.”

If you would like to learn more about these findings, check out Borrell’s article, “The New Cruising Altitude” in the July-August issue of TFM, which will be available on MFM’s website for another week or two. It contain a number of additional insights based upon his company’s analysis of “pure play” digital media businesses such as Autotrader.com and ReachLocal, as well as digital ventures at traditional media companies.

We will also be discussing the ways television stations and other media businesses are monetizing their digital operations at next week’s Media Outlook 2014 seminar. This signature MFM event will be held in New York next Thursday, Sept. 12, from 9 a.m. to 5 p.m. at Hearst Tower (300 West 57th Street, near Columbus Circle) in Manhattan.

If you’d like to join us, today is the final day for online registration; an online registration form and more information may be found on MFM’s website.

I am particularly excited about our closing panel focused on “Emerging Media Trends for 2014.” Moderated by Forrester Research’s Melissa Parrish, it will include the latest thoughts from Tumblr’s David Hayes and Grant Whitmore, VP-GM, Hearst Digital Media.

Borrell’s research indicates that media companies are looking at becoming the “go-to digital marketing company” that makes sense of interactive media for their clients. Tumblr and Hearst will be able to provide two different paths to achieve that goal. Helping clients make sense of the vast array of available digital advertising opportunities seems to me to be a big part of the way media businesses are going to mark the transition from digital dimes to conventional dollars.

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary. She can be reached at [email protected]. Her column appears in TVNewsCheck every other week. You can read her earlier columns here.