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Online medium slices up advertising pie

There's a good reason online giants America Online, Yahoo, and Microsoft are jumping into the local content business. There's a lot of money to be made, especially when it comes to classified ads for cars, jobs, and real estate.

There's a good reason online giants America Online, Yahoo and Microsoft are jumping into the local content business. There's a lot of money to be made, especially when it comes to classified ads for cars, jobs, and real estate, a new study says.

There's an equally good reason why newspapers, broadcasters, and yellow-page directories are worried: They stand to lose a good slice of the $66 billion local-advertising pie they used to split among themselves, according to a new report from Forrester Research.

Not only will online services continue to take money from the pie, but also will they drive down existing prices, said Bill Bass, senior analyst with Forrester. "[Established media outlets] are going to get hammered," Bass said. "Their ad revenues are going to drop a little over 10.5 percent," he said. That's by the year 2001.

"Traditional media face large-scale value destruction," the report states. "Local advertisers will shift $1.5 billion online by 2001; classified and directory advertising dollars will move first." In addition, local media will lose another $3.6 billion annually by 2001 because of price pressures on core businesses.

"Newspapers will take the biggest hit--losing over ten percent of their total ad revenues--while directories will suffer a five percent decline."

The evidence is all over the Net. Some sites operate like newspapers, with customers paying for ads online as they would for print. Others, such as AOL's Digital Cities, allow sellers to completely bypass the middleman by posting advertisements directly onto bulletin boards.

Today, for instance, Yahoo Chicago picked up another site advertising used cars. World Wide Wheels joins five other sites, including three newspapers, selling cars to Chicago residents through classified ads on Yahoo.

"Aggregators like Yahoo and Excite will succeed in meshing these offerings into virtual city-based services to compete against the city networks controlled by Microsoft, America Online, and others," the report says.

Yahoo isn't directly making money with the classified ads, said Elizabeth Collet, producer of Yahoo Communities. "Yahoo is first and foremost an aggregator of URLs," she said. "We're trying to create a sense of community. We felt classified ads were a logical extension. We feel like it's a way to make the Yahoo site more popular."

In turn, that will allow Yahoo rake in cash through banner ads. "We make the money by selling the banners across the top of the page," Collet said.

"Networks of cars dealers like Auto-By-Tel and of job listings like Monster Board are especially likely to take advantage of the market opportunities on the Net," said Forrester's Doyle.

"It's our conclusion that most online money is going to flow to these new niche classified competitors," he said. "These guys are cherry-picking the most lucrative segments in the classified category and developing deep national databases that can be sliced to the local levels."

That spells trouble for those who have virtually owned the market, such as local newspapers. "The punch line is that traditional media like newspapers are going to suffer," Doyle added. "The spending is going to shift online."

Furthermore, the new online market will drive down prices. "This new medium is going to push advertising down and those price cuts are going to eat into the revenue that the newspapers still have."

Newspapers have been trying several defenses, including banning competitive ads. But in the end, simply defending against the online onslaught won't work, Doyle says. Instead, newspapers might try jumping into the local content business while teaming up with their online competitors.

In other words, if you can't beat 'em, join 'em. "They'll be cannibalizing their own products, but it's the prudent action to take," Doyle declared.

Or, added Bass, they just might consider another strategy: "Start slicing costs right now," he said.