McClatchy & Yahoo! Ad Deal

In April 2007, Yahoo! entered in an alliance with McClatchy for online advertising. Yahoo! already has an agreement with a consortium of 12 newspapers and the current deal represents more than 264 newspapers across 44 states. McClatchy has discarded its plans of setting up a similar online ad partnership with Gannett and Tribune and decided to tag along with other newspaper groups like Belo, Scripps, Journal Register and Media General. In this piece, we look at the implications of the deal.

Newspapers, ofcourse, are an industry in turmoil. The deal will provide McClatchy and the other newspaper companies an opportunity to increase their online advertisement revenues by leveraging Yahoo!’s display advertising technology, targeting and inventory management capabilities. The deal also gives Yahoo! access to a huge inventory of quality content and will presumably enable the company to monetize its search engine better and compete with Google.

McClatchy could have gone ahead with its newspaper partners Gannett and Tribune but then I don’t think it would have helped the company leverage the full potential of online advertising. McClatchy had to go with something more robust technically, and the options were Google or Yahoo!. Yahoo with its existing alliance with other newspapers and upgraded ad-system Project Panama, was chosen for its new ad-serving technology. I am sure, Yahoo’s overall superior relationships with the content industry is also a factor in play here.

McClatchy has been witnessing a sharp decline in their print advertisement revenues. Total advertising revenue dropped 5.3% in 1Q 2007. However, online advertising increased by 5.4% in 1Q 2007 compared to 1Q 2006. Online advertising revenues constitute a small portion (8.6% in 1Q 2007) of the total advertising revenues of the company. McClatchy is working on a strategy to increase its online advertising revenues and the recent tie-up with Yahoo! will hopefully boost monetization of its content.

Online retail advertising for McClatchy was up 85.1% in 1Q 2007. Display ads, though a small portion of the total ads, are growing fast and the alliance with Yahoo! will enable the Company to increase targeted advertising and optimize the CPM rates. The deal will also help McClatchy attract large advertisers like phone and car makers.

Yahoo! on the other hand is facing fierce competition from Google and is seeking to establish a stronger foothold in the local online ad / search market and alliances with the newspaper industry and other media companies like Viacom will enable the Company to increase its inventory of high quality content and improve its advertising revenues. Yahoo! will also tap into the high quality local content of the newspapers, a market (local news) that is still dominated by the newspaper industry, despite strong competition from online players on the classifieds side.

The deal is going to enable the consortium of newspapers and Yahoo! to cross sell ads to local and national advertisers. The newspaper companies will be able to leverage Yahoo!’s local and national sales force to sell their inventory and they in turn will sell Yahoo!’s online inventory to local advertisers. Could be a powerful exchange.

Yahoo! is going to use this opportunity to integrate its paid search engine in the hundreds of newspaper websites and consumers can use the Yahoo! toolbar on the local newspaper sites to search the Internet. The deal will also enable Yahoo! to serve-up local content from the various newspapers through its site and mobile phones. The deal will give Yahoo! access to over 50 million unique monthly visitors.

The common online platform will allow advertisers to buy ad space across the newspaper sites that are part of the consortium. The profits from selling ads on the sites will be split between Yahoo and the consortium members.

A win-win situation for both the parties.

But is it enough to save McClatchy and Yahoo?

Yes and No. Local advertisers spent $3.4 billion on the Internet in 2006 and it is projected to rise to $12.4 billion in 2010. The alliance is betting on capturing a large portion of this spend. Google is miles ahead of Yahoo! in search advertising. Above all, there are huge issues related to the execution of the deal. The revenues from the deal will start flowing in 2008.

But, if Yahoo! is able to get the advertising technology and the execution right, it would definitely pose a threat to Google’s dominance in the online advertising business. More so, the deal provides Yahoo! the opportunity to expand its graphic ads business and improve the CPM rates. The acquisition of Right Media could also aid in increase pricing and expand the size of its ad network. It also is a good brand building exercise for its much-hyped Panama Project.

Given all the acquisitions happening in the Ad network business (Doubleclick by Google, 24/7 by WPP), it is quite critical that Yahoo defends, as well as strengthen its position in the Ad Network business. The Newspaper consortium in general, and this McClatchy deal in particular, are excellent steps in this direction.