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Virtual ads pose real threat to traditional media

Traditional media of all stripes are struggling through their most turbulent period in a generation. Behind the upheaval and soul-searching -- the falling profits, staff cutbacks, content and programming changes, and fear for the future -- lies a stark reality: The rapid growth of online advertising is threatening the historic dominance of print and broadcasting.

Perhaps more than any other factor, the targeted advertising model perfected by Google Inc. and embraced by Yahoo Inc. and Microsoft Corp.'s MSN has curbed advertising growth at ''old media" such as newspapers, magazines, television, radio, trade publications, and direct mail.

Those properties are far from dead, and many remain highly profitable. But the new competition from rivals that have been more technology titans than media businesses is reshaping the industry.

The online challenge already has caused sea changes across the news and entertainment fields, from the rise of pay-per-view and reality television to the bidding for the financially underperforming Knight Ridder newspaper chain.

But the challenge may only be intensifying, according to a new ad spending study by Outsell Inc., an information industry research firm in Burlingame, Calif., that recently surveyed 1,200 advertisers with a combined advertising budget of $2.4 billion.

Among the findings: Spending on online advertising is projected to surge 19 percent, and search engine advertising 26 percent, in 2006. By contrast, spending on print ads will grow an estimated 2 percent and spending on radio and television ads an estimated 2.4 percent.

Thus, while print and broadcast companies should take in more ad revenue, they'll lose share to the Googles and Yahoos -- as well as smaller players such as Craigslist and Monster.com that target classified ad niches -- in the $150 billion-a-year advertising market.

Initially skeptical advertisers, who shunned the Internet in the early days of banner and pop-up ads, are moving ever larger chunks of their budgets to the keyword and contextual advertising pioneered by the search engines.

Outsell estimated the Internet is now used by 80 percent of advertisers, a broader adoption rate than is generally acknowledged, and projected a 90 percent adoption rate by 2008. (Some of this online advertising, of course, is flowing to traditional media companies, often through deals with search engines that place ads on their websites.)

''Advertisers could care less about the media as long as it works," said Chuck Richard, vice president and lead analyst for Outsell. ''They have a budget and they want to reach people. But these are seismic changes in terms of traditional media being able to maintain their growth rates. Most of the traditional media are public companies under tremendous pressure to increase growth year after year."

Narrowly focused online ads are proving attractive partly because their pay-per-click model reduces the risk for advertisers, and partly because their results are readily quantifiable, Richard said.

With key word ads, companies buy ads on top or along the side of search results for a word or phrase, such as ''laptop" or ''sports utility vehicle." With contextual ads, the search engines place ads for products or services on third-party sites. For instance, Google might place an ad for baby shoes on a news site page featuring a story on toddlers' first steps.

Much of the advertising success of Google, Yahoo, and MSN stems from the fact that, together, they currently handle more than 80 percent of search queries.

If the search market gets more fragmented, as the magazine and television markets have, the effectiveness of their advertising platforms could diminish.

To prevent that, Google is extending its brand into everything from maps to travel, while Yahoo is distributing more Internet video clips, and MSN is adding more user-generated content.

Jonathan L. Zittrain, co-director of Harvard's Berkman Center for Internet & Society and professor of Internet governance and regulation at Oxford University in England, said the search engines increasingly will be morphing into full-fledged media companies.

''I think they're competing for the whole ball of wax," Zittrain said. ''They have varying degrees of interest in providing content themselves. But in doing search, they're doing great indexing of other people's content. If their networks are good enough that they can send video with the same quality as television, they'll do that. If they can make enough money doing it, they can license other peoples' content."

In the evolving multimedia world, Zittrain said, indexing content and aggregating eyeballs could prove to be as valuable as producing news and entertainment.

''The ultimate question for anyone in this space is: 'What am I doing that's adding value?' " he said. ''If your value added depends on scarcity and scarcity alone -- 'I'm the only one whose publication can reach these people' -- that could be dicey."

But traditional media ultimately will regain their footing and find their multimedia voice, Zittrain said. ''I'm not so confident magazines and newspapers are dead," he said. ''The need for compelling, intelligent voices means there's some place for intelligent journalism."

The new multimedia news and entertainment business, in reality, is an extension of the new multimedia advertising business.

So the real challenge for all media may be more in finding new business models than in reinventing news and content.

In the future, predicted Charlene Li, a Forrester Research analyst in San Francisco, there will be partnerships in which media businesses share content with one another and license it to Internet companies even as they rely on search engines to bring them eyeballs and advertising.

''Traditional media companies have to understand their audience and deliver content to that audience better than their competitors, whether it's their content or not," Li said.

Robert Weisman can be reached at weisman@globe.com.

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