* Online advertising revenue rose 1 pct in 1st quarter
* Fifth straight quarter of declining online ad growth
June 7 (Reuters) - As more U.S. newspapers cut back on print to reduce costs and focus on their websites, a troubling trend has emerged: online advertising sales are stalling.
In the first quarter, digital advertising revenue at U.S. newspapers rose just 1 percent from a year ago, the fifth consecutive quarter that growth has declined, according to the Newspaper Association of America, a trade organization.
A flood of excess advertising space, the rise of electronic advertising exchanges that sell ads at cut-rate prices, and the weak U.S. economy are all contributing to the slowdown, publishing executives and observers say.
For an industry savaged by the erosion of print advertising dollars, significantly boosting digital revenue is necessary for survival. But the double-digit online growth rates that many newspapers used to enjoy -- and on which their hopes for a prosperous future rest -- could be a thing of the past.
At the New York Times Co (NYT.N) digital ad revenue at its news sites, including nytimes.com and bostonglobe.com, fell 2.3 percent to $48.5 million in the first quarter from a year earlier. At the Washington Post Co WPO.N, the decline was even worse, with revenue dropping 7 percent to $24.2 million, mainly at the website of its namesake newspaper and online magazine Slate.
"The online share that newspapers are getting is smaller even though it's the greatest goldmine of advertising growth we’ve seen in a generation," said Ken Doctor, an analyst with Outsell Research.
Last week, ratings agency Moody's issued a report calling the U.S. newspaper industry's outlook "negative" because of the "relentless" declines in overall revenue. [ID:nL1E8H1ADK]
"At this point, there is no evidence digital strategies are returning most daily newspapers to positive growth," wrote Moody's senior credit officer John Puchalla. "It is merely a way to moderate revenue declines."
Newspaper executives have long touted digital advertising as a bright spot in an industry plagued by declining print readership. For instance, New Orleans will become the largest U.S. city without a daily newspaper this fall, as the New Orleans Times-Picayune prepares to print just three days a week to cut distribution costs and to focus online. [ID:nL1E8GOI5M]
Some publishing executives are still optimistic about the long-term outlook for digital, blaming the slowdown on the economy.
Scott Heekin-Canedy, president and general manager of the New York Times Co, said digital advertising is becoming just as sensitive to economic swings as print. "We actually saw a dip associated with uncertainties," he said. "We heard it from advertisers and saw it in the spending patterns."
The New York Times Co gets 10 percent of its revenue from digital ad sales and 35 percent from print ads. Print and digital subscriptions generate 48 percent of revenue, while miscellaneous sources account for the rest.
Steve Hills, president and general manager of Washington Post Media, labeled the falloff a "temporary slowdown" in a weak economy and a technology issue related to how content on its websites is published.
But there's another problem that is less temporary: the rise of ad exchanges that put downward pressure on ad prices.
BEHIND THE SLIDE
Advertising exchanges are electronic platforms that allow buyers to bid on and purchase advertising space at drastically reduced prices. Many websites -- not just newspaper sites -- rely on these exchanges to sell unclaimed advertising spots, known in industry parlance as excess inventory. The thinking is it's better to get something than nothing at all.
But it also trains ad buyers to expect lower advertising prices. "It's like a publisher trying to sell me an Armani suit for $3,000 but I can walk around the corner and buy it from Google for 90 percent less," said Shawn Riegsecker, chief executive of Centro, an agency that specializes in buying and selling digital ads, and counts many newspapers as its clients.
Advertisers "are buying audience instead of context and they don't care what sites they are on," said Gordon McLeod, president of Krux, a company that helps websites interpret data.
News Corp's (NWSA.O) Wall Street Journal, which does not use advertising exchanges, enjoyed double-digit growth in digital ad sales for the quarter ending March, according to Michael Rooney, chief revenue officer at Dow Jones' Consumer Media Group. He declined to say how that compares with historical trends.
Robert Dickey, president of U.S. Community Publishing at Gannett Co Inc, the largest U.S. newspaper publisher, acknowledged there is pressure on ad prices. But he argued that advertisers want to be associated with strong news brands.
"What we show our advertisers is that our audience and our performance for them is higher than what they are going to find at other types of sites," he said.
HAVE AND HAVE NOTS
At Gannett, its national paper, USA Today, faired better in the first quarter than did its local properties. USA Today's digital revenue rose 25 percent in the first quarter, with video becoming a big drawer of ad money, said newly appointed publisher Larry Kramer. That compared with 11 percent growth in Gannett's U.S. Community Publishing division.
Overall, however, the newspaper industry's share of online advertising dollars is shrinking. U.S. online advertising revenue is forecast by research firm eMarketer to rise 23.3 percent to $39.5 billion this year, on growth in video advertising and Web search ads.
Auto dealers, retail clothing stores and other local advertisers still use newspaper websites to reach people online, but that segment is also facing insurgent competitors such as daily deals site Groupon Inc (GRPN.O), search giant Google Inc (GOOG.O), and e-commerce leader Amazon.com Inc (AMZN.O).
"If you look at the top 20 companies that made all the money in local Internet advertising, more than two-thirds ... have nothing but advertising ... It’s not about the news." said Gordon Borrell, CEO of Borrell Associates, citing websites like Autotrader, Yellowpages.com and Groupon.
Some newspapers are trying out new formats and experimenting with different types of ads on their websites to try to goose advertising spend.
"Newspaper companies have acknowledged those trends and there is a lot more innovation on the online side that's not immediately reflected in the numbers," said Caroline Little, CEO of the Newspaper Association of America.
(Reporting By Jennifer Saba; Editing by Peter Lauria and Steve Orlofsky)
((firstname.lastname@example.org; 1 646 223-6173; Reuters Messaging: email@example.com)) Keywords: NEWSPAPER DIGITAL/ADS
(C) Reuters 2012. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing, or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.