Can The Inquirer and Philadelphia Daily News build a future on the back of their Web site, Philly.com?
That is a critical question for the investors pondering bids for the two newspapers and Web site.
Will there come a day when readers, advertisers and revenue fleeing the newspapers will be captured by the Web site - in numbers sufficient to sustain the expensive business of covering news, sports, arts and culture in the nation's sixth-largest metropolitan area?
"I think it's safe to say that the consensus in the industry right now is that nobody has figured it out. That's the holy grail," said Ken Doctor, lead analyst with Outsell, a media research company, and a former vice president for the digital arm of Knight Ridder Inc., parent of The Inquirer and the Daily News.
The Wall Street Journal has attracted 771,000 paying customers to its Web site, but virtually every other newspaper publisher has concluded that charging for online access is not worth the revenue it would generate. And revenue from online ads, while growing rapidly, remains a fraction of overall newspaper revenue.
It was in that environment that Knight Ridder agreed in March to be purchased by the McClatchy Co., which plans to sell 12 of Knight Ridder's 32 papers, including the two in Philadelphia.
A partnership of the MediaNews Group Inc., of Denver, and others have agreed to buy four of those papers. The rest are still in play, pursued by MediaNews and other bidders.
Worries about shrinking profit and a cloudy future for newspapers, especially those in large urban markets, precipitated the sale. Some industry analysts wonder whether the worries are justified, especially if the audience and revenue growth of newspapers' online sites are factored in.
About 61 percent of Americans still look primarily to their local daily newspaper for local news, according to Outsell, which polled 2,800 consumers. Only 6 percent turn to such sites as Google, Yahoo and MSN.
John Morton, an independent media analyst, pointed out that ad revenue on many newspaper Web sites had grown 30 percent to 40 percent despite competition from the likes of Craigslist and Monster.com.
"A lot of people don't realize that in almost every market, the second-largest audience is the local newspaper's Web site, and the largest is the newspaper," Morton said.
Just last week, the Audit Bureau of Circulations reported that daily newspaper circulation nationwide fell 1.2 million, to 45.4 million, in the year that ended March 31. Meanwhile, the bureau said, online readership of newspapers grew more than five million, to 56 million.
Philly.com's revenue is growing but remains a small portion of the business. Last year, Philly.com accounted for about $20 million, or 5 percent of total ad revenue for the combined publications. This year, online ad revenue is up more than 30 percent.
Philly.com looks for new ways to attract users, including interactive features, said its general manager, Dennis Wichterman Jr.
"We're constantly growing on this front," he said. The site offers blogs, discussion boards and polls, he said. "We're currently looking at the possibility of photo community publishing as well."
The Daily News in the next several weeks plans to add a crime blog and an online afternoon edition with news on traffic, entertainment and other information, said Frank Burgos, the newspaper's editorial page editor and new media editor.
But he said Philly.com and many other newspaper sites needed to improve in several ways by:
Becoming 24-hour news operations, posting news on Web sites immediately.
Adding blogs and other ways for readers to debate and interact.
Figuring out how to deal with the increasing use of keyword searches, which take people using a search engine to a newspaper Web site only if it ranks high in their search.
Spending money to promote the newspaper and the Web site as the best source for local news, shopping and other information.
"One of the weaknesses we have at the building is not having much of a promotional budget," Burgos said.
Even though many newspaper Web sites have added shopping and other interactive features, competitors have already nabbed many of those opportunities.
"The 'Craigslist Revolution' is also dramatically affecting the purchase of classified ads," according to the Outsell report. Forty-eight percent of the Internet users it surveyed had used Craigslist, eBay, or other online auctions to buy or sell something in the previous 12 months, compared with 10 percent who bought print classified ads to sell.
And while Internet ad sales remain small, they are growing quickly.
Newspaper ad revenue is growing at just 3 percent yearly, according to media-and-communications investment firm Veronis Suhler Stevenson. Internet advertising, however, is expected to grow 25 percent this year.
Trends like that have hit newspaper profits hard.
In the first quarter this year, profit fell 53 percent at Knight Ridder; 20 percent at the New York Times, excluding a onetime gain of $68 million last year on the sale of its headquarters; 11.5 percent at Gannett (owner of USA Today); and 14 percent at McClatchy.
Ken Marlin, managing partner of Marlin & Associates, an investment-banking and consulting firm that focuses on technology and the Internet, said too many newspaper managers were still focused on simply transferring the traditional newspaper to the Web. Instead, he said, they should use the value of their brands to give readers new services.
One possibility: Readers could read a restaurant review, then click on a link that lets them make a reservation. Similar models could be developed for movies, cars and other items, allowing newspapers to charge businesses for the service, he said.
"Most newspapers understand cities very, very well," Marlin said. "They ought to be the best vehicle for people to get access to the city. Most newspapers just don't get it."
Philly.com and other sites do let readers buy movie tickets and other products, but the industry as a whole, critics say, has failed to make consumers think of them first in the same way that coffee drinkers think Starbucks.
Some news organizations, Marlin said, are starting to get it. They are adding audio, more photos and video to their Web sites, as well as information available only on the Web. They also are expanding their brands to non-news sites.
Marlin cited the acquisition of MySpace, a social networking site popular with young people, by Rupert Murdoch's News Corp. Similarly, the New York Times Co. acquired About.com, a collection of Web sites on a wide variety of topics, and the Wall Street Journal acquired MarketWatch, a business news site.
Leonard M. Apcar, editor of NYTimes.com, said newspapers would survive both in print and on the Web.
"I think print is a very durable, very viable product, but I think the Web is extremely strong and that readers read the two very differently," he said.
NYTimes.com, for example, had to turn away ads because its pages were full. That sounds like good news, but it also points out a challenge: getting more people to look at more pages on an individual site, which would create more ad space. Internet ads are sold based on the number of page views.
About half the people who visit NYTimes.com are sent to an article from another site and never see the home page, Apcar said. NYTimes.com has redesigned its site to encourage surfing."The goal of the redesign," he said, "was to get people into the article page and hold them longer."
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