Three reasons why media should invest in classifieds
Davide Ruggiero returns as guest columnist to explain why media companies should be investing in classified advertising
News Corp’s recent acquisition of Move Inc is yet another example of how legacy media companies are willing to make big bets to diversify their revenue streams and leverage their existing content. Of course, Murdoch’s media company has the huge advantage of a more solid balance sheet compared with many of its rivals.
Even though it owns REA Group, one of the most profitable online real estate advertising companies worldwide, News Corp has decided to carry the acquisition directly in order to have tighter control of Move’s platform for its media assets. The media giant clearly believes in its synergy with Move, having paid $21 per share at a 37% premium to the stock last close, while only few months beforehand, Trulia, which appeared to have a more obvious synergy with the online real estate operator, was rumoured to have offered $18. Move Inc could well be the wrong target because of its ageing technology, underperforming digital marketing and general lack of innovation (Trulia, recently acquired by Zillow, would have made much more sense) but there is no question that media companies should pursue a growth strategy.
With print revenues inevitably going down, media outlets not only have to convert their user base to digital but also need to increase ARPU (how much money they make from each reader) to keep a sizeable business and stay profitable. Classified businesses seem to be among the obvious targets, being the natural evolution of what was already offered in print. However, so far very few media companies have been successful with classifieds. In fact, having analysed 45 acquisitions from 2008, I have found that legacy media have more often been among the underachieving sellers (see graph below). In the UK, for instance, the Daily Mail, Trinity Mirror and the Guardian all lost control of their classified operations between 2009 and 2013, and no other traditional media now holds a majority stake in a large classified company.
There are various reasons for that. First, the technology. Classifieds have a strong technical component that old-school media do not easily grasp. Second, classifieds tend to be a long-term play – in order to build the marketplace an extensive free period is required before monetisation can occur (when already profitable, these firms trade at high multiples and are rarely affordable by cash-strapped media). Third, the lack of strategy; legacy media have never been able to build a significant degree of synergy between their publishing and classified content.
Who is making money with classifieds then? In Europe, Axel Springer and Schibsted have converted into large diversified media and information services with a significant classified presence that now serves as a growth engine for other parts of their business. At Axel Springer, classified revenues grew by 22% in 2013, accounting for more than 14% of revenues… and growing. Last year, online classifieds generated 28% of Schibsted’s revenues and 44% of its EBITDA, with a 15% revenue growth per each of the last two years (see Schibsted’s key financial figures here), likely to continue in 2014. Schibsted’s relationship with classifieds is particularly interesting because it started early and with a bruising defeat against specialist site blocket.se, which Schibsted later acquired in 2003 (to know more about the story of the Norwegian media, read Frédéric Filloux’s blog here).
But what was the strategy of these companies based on? Essentially, three things:
- Prioritisation: Allocate considerable resources to digital products at the expense of declining print products
- Organisation: Create an ad-hoc unit to build best practices and exploit synergies between different classified operations
- Replication: Roll out the winning model in other markets, expanding well beyond the original audience
Starting early was critical because each market does not support more than a couple of profitable digital players. Once early movers achieve scale it becomes difficult for later entrants to overcome switching costs and buyer choice under uncertainty. This is why it may now be too late for other publishers to catch up on this diversification strategy without taking excessive risks.
Is it still possible to invest in classifieds then? The answer is yes, provided that media companies adopt a product development strategy and start by focusing on their existing customer base. Here are three reasons why they can benefit:
- Cross-selling: Sell content-based products and advertising services to clients in the chosen classified sector
- Visibility: Get more eyeballs for related content (classified websites tend to generate very high traffic)
- Choice and Personalisation: Offer a new service and learn more about users’ preferences to achieve better targeting as well as create more customised content
While execution is key to deliver a seamless user experience, I believe that for traditional media companies the challenge is primarily organisational; it requires that corporations find new ways of internal collaboration. In the words of Jim Bankoff, VOX Media CEO, “What you put forward is a product… and that product requires people to break down walls, to integrate and to talk to one another”. This is a crucial point in explaining how different parts of a media group need to work together to unlock synergies and create a better product.
Davide Ruggiero is a former entrepreneur with a management consulting background. When he is not deeply engaged in the digital media industry he can often be found playing with his two kids or skiing off-piste.