Group Case Study
USA TODAY Online
prepared by
Brian Bright, Ximena Canjura, Priya Mathur
Gerwin Schalk, Fredrik Vitzthum
Marketing on the WWW
Dr. Shikhar Sarin
Rensselaer Polytechnic Institute
Albany/Troy, NY
March 2001
Contents
1 Introduction
1.1 The Market . . . .
1.2 The Product . . . .
1.3 The Revenue Model
1.4 Competitors . . . .
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2 Analysis
2.1 Strengths . . . . . . . . . . . . . . . . . . . . . .
2.1.1 Strong Brand Name . . . . . . . . . . . .
2.1.2 Own Content . . . . . . . . . . . . . . . .
2.1.3 Experienced Staff . . . . . . . . . . . . . .
2.1.4 Information Product . . . . . . . . . . . .
2.2 Weaknesses . . . . . . . . . . . . . . . . . . . . .
2.2.1 Non-Tech Savvy Staff . . . . . . . . . . . .
2.2.2 Brand-Name Dilution . . . . . . . . . . . .
2.2.3 Revenue Model Depends on Advertisement
2.2.4 Channel Cannibalization . . . . . . . . . .
2.2.5 Customer Loyalty . . . . . . . . . . . . . .
2.3 Opportunities . . . . . . . . . . . . . . . . . . . .
2.3.1 Content Syndication . . . . . . . . . . . .
2.3.2 Classified Advertising . . . . . . . . . . . .
2.3.3 Limited Customization . . . . . . . . . . .
2.4 Threats . . . . . . . . . . . . . . . . . . . . . . .
2.5 Finances . . . . . . . . . . . . . . . . . . . . . . .
3 Strategic Recommendations
3.1 General Recommendations
3.2 Content Syndication . . .
3.3 Classified Advertising . . .
3.4 Lock-In Strategies . . . . .
3.5 Pricing Model . . . . . . .
3.6 Financial Summary . . . .
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4 Executive Summary
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1
1
Introduction
In this report, we summarize the situation of USA Today Online, as it is presented in
the provided case (Section 1). We then use SWOT analysis to analyze (in Section 2)
the company’s strengths, weaknesses, opportunities, threats, and financial situation.
Based on these analyses, we then present strategic recommendations (Section 3) for
USA Today Online in order to remain a healthy and competitive operation.
1.1
The Market
Advances in electronic communication and, specifically, the Internet have over the
last ten years radically changed the way information is distributed. Scarcity of
information and the traditional trade-off between richness and reach changed into
abundance of information with the trade-off removed. Traditional content creators
and distributors, e.g., newspaper publishers, early on started to explore the Web as
a new medium that could deliver an almost unlimited amount of information and
that could still reach a huge target population.
USA Today Online was started in 1995 at a time, when the popularity of the
Internet started to reach critical mass. In an attempt to investigate how to take
the USA Today Online brand into new markets, executives drove the experiment
(similarly to other early adopters) by a vision of technical feasibility and potentially
unlimited possibilities of information distribution rather than by a clear business
model.
1.2
The Product
Early on, USA Today Online was positioned as an online newspaper with sports
statistics - targeted mainly at fantasy baseball fans. It was originally distributed
through a subscription-based proprietary dial-up service. With the WWW literally
exploding, management decided to expand the concept to a more complete source
for a large variety of information grouped into categories, with a focus on sports,
weather, and breaking news. Quickly, they realized that with the increasing abundance of information on the Web, they had to change the revenue model from the
original subscription-based model to an advertising revenue base.
By 1997, USA Today Online covered 227 college football teams, 601 basketball
teams, women’s volleyball and NCAA hockey. Statistical analysis of browsing behavior gave important feedback on which sections were popular and thus were a
potential target for expanded coverage.
2
1.3
The Revenue Model
As mentioned in Section 1.2, management had changed the revenue model to an
advertisement based model early on. The strong brand name and the quality of
information resulted in a large number of page visits (e.g., 20.08 million in October
1997). USA Today Online charged customers for the number of times an advertisement appeared on a user’s screen ($30 per thousand page visits, a figure comparable
to other media).
USA Today Online had a significant market penetration - significant enough
that (even in local markets) that management explored the possibility for classified
advertising. However, even though preliminary data seemed promising, there was
not enough data to judge the efficacy of this revenue source.
1.4
Competitors
USA Today Online faces competition from two main sources: established news agencies and the increasing ease of information distribution that results in new and aggressive ”pure play” information distributors and syndicators. USA Today Online
closely watched the following established established companies:
• CNN Interactive (CNNI)
• ESPNet SportsZone
• MSNBC.com
• Yahoo.com
Figure 1 graphically illustrates USA Today Online’s competitors, roughly categorized in entertainment, news, sports, and online print publications.
3
entertainment
sports
news
online print publications
Figure 1: USA Today Online and its competitors.
Estimated Monthly Advertising Revenue
$5,000
$4,500
$4,000
Thousand US$
$3,500
USA Today
$3,000
Yahoo!
$2,500
CNN Interactive
$2,000
ESPN
$1,500
$1,000
$500
Ju
ly
Au
gu
st
Ju
ne
ay
M
Ap
ril
O
ct
ob
er
No
ve
m
De ber
ce
m
be
Ja r
nu
a
Fe ry
br
ua
ry
M
ar
ch
$0
Month (in 1996/1997)
Figure 2: Estimated monthly advertising revenue for USA Today Online and some
of its competitors for October 1996-August 1997.
4
2
Analysis
In this section, we analyze USA Today Online’s strengths (section 2.1), weaknesses
(Section 2.2), opportunities (Section 2.3), threats (Section 2.4), and finances (Section
2.5). Based on this analysis, we will present our recommendations for USA Today
Online’s strategy in Section 3.
2.1
Strengths
USA Today Online’s strengths fall in different categories:
• Strong brand name
• Content coming from own research (e.g., extensive sports coverage)
• Experienced staff in a stable environment
• Information Product
2.1.1
Strong Brand Name
One of USA Today Online’s most valuable resources is certainly the USA Today
brand name. Most of the content, except from sports news and columnists’ opinions,
is generated from the same Associated Press feed that every other news source
receives. For this reason is the brand name certainly an asset that drives the audience
to the site.
2.1.2
Own Content
Aside from the mentioned Associated Press wire feed that other agencies receive as
well, USA Today Online produces its own content, especially its extensive sports
coverage. This coverage, both on the local and national level, gives the company an
edge over its competitors and has, as mentioned before, the potential to become a
seperate revenue stream.
2.1.3
Experienced Staff
One of the major problems in today’s fast society is the high turnover rate, which
hurts every company that is dependent on experienced staff. USA Today Online has
an experienced base of journalists and, since the company is well established, creates
the kind of stable environment that is necessary to attract and retain employees.
5
2.1.4
Information Product
USA Today Online’s product is an information product. Therefore, the company
does not own any inventory, which is one of the biggest risks for any company. In
addition, information products have the potential to be copied, re-packaged, and
sold.
2.2
Weaknesses
USA Today Online’s weaknesses fall in different categories:
• Non-tech savvy staff
• Brand-name dilution
• Strong dependence of revenue model on advertisement
• Channel Cannibalization
• Customer Loyalty
2.2.1
Non-Tech Savvy Staff
Of of USA Today Online’s strengths at the same is one of its weaknesses. While the
employees that comprise the editorial staff have a strong background in journalism,
computer skills have not been their most important skill in the past. This is a
situation that would inhibit USA Today Online’s growth, if it would go in directions
that require computer savvy staff.
In addition, it seems that (maybe because of the company’s roots) the whole
operation is not centered around a strong competence in IT (even though USA
Today Online operates the web site in-house).
2.2.2
Brand-Name Dilution
Another inhibiting internal factor in USA Today Online’s growth stems from the
fact that its brand is one of the company’s major assets. Uncontrolled growth in new
directions could easily dilute the brand and take away one of their major advantages.
2.2.3
Revenue Model Depends on Advertisement
USA Today Online’s revenue model almost exclusively centers on online advertisement. This fact can potentially be very dangerous, in case competition became
fiercer, or if online advertisement lost in importance (exactly which seems to be
happening in 2001).
6
2.2.4
Channel Cannibalization
Even though preliminary studies showed that its online operation only had a minor
effect on the printed medium, it is likely to anticipate increased channel cannibalization, since market penetration is already very high.
2.2.5
Customer Loyalty
It is very likely that customer loyalty on the web is lower compared to the printed
medium, because the switching costs are lower (e.g., no subscription has to be
cancelled) and competition (i.e., other sites) is only a mouse click away.
2.3
Opportunities
USA Today Online’s opportunities fall in the following categories:
• Content syndication
• Classified advertising
• Limited customization
2.3.1
Content Syndication
One of the dangers of the Information Age, content that is easily replicable, at
the same time opens up a lot of opportunities. Content syndication is a largely
untapped (not even 0.1% of the revenues come from content sold to 3rd parties)
revenue source.
2.3.2
Classified Advertising
Classified advertising could supplement banner-based advertisements, since the large
online audience provides much deeper market penetration compared to the printed
newspaper. However, in early 1997, USA Today Online explored ways to generate
classified advertising revenue (i.e., with the ’Marketplace’), but time was too early
to tell the impact.
2.3.3
Limited Customization
While unrestrained customization might be against the traditional role of a newspaper, i.e., to inform about a large variety of news instead of providing very customized
pieces of information, subtle and limited customization and community building
might lead to increased switching costs and thus effectively locking in customers.
7
2.4
Threats
One of the direct consequences of an information society is that it becomes more
and more difficult to protect content. This represents the major threat to USA
Today Online’s long-term operation. While in ’real’ print publications the resources
required to replicate content are substantial, in the online world they are negligible.
This opens up the door for increased competition and new competitors.
Therefore, USA Today Online has to anticipate increased competition from portals (e.g., Yahoo, Netscape’s Netcenter) that extend their services to news and content, from other traditional news agencies (e.g., CNN) to new ’pure-play’ infomediaries.
2.5
Finances
In the 12 months to April 1997, USA Today Online generated $6.5 million in advertising revenue and $500,000 and $50,000 in transaction income and sale of content,
respectively. After taking all expenses into account, the company balanced approximately even.
In USA Today Online’s pricing model, the company relies on accurate predictions
of the future number of exposures. USA Today Online charges a fee for the predicted
number of exposures and provides refunds, if the number of exposures was lower than
predicted. On the other hand, if the number of exposures exceeded the predicted
number, that resulted in a bonus for the advertising company.
In order to estimate the costs of a potential underestimation, we analyzed the
estimated and actual number of page views for April 1997. Table 1 shows the actual
number of page visits for the months April, May, June, and July of 1997 (linearly
interpolated for May and June) and Table 2 illustrates the estimation error for both
over- and underestimation. The results show that the estimation error might be
substantial (given the limited amount of data) and that USA Today Online should
consider changing its pricing model to charge for the actual number of exposures
rather than charging for estimated number of page views.
An interesting observation is that, although General Administration (which we
assume includes the costs to generate the in-house content) accounts for $3.5 million
(with 50% the major component of the expenses), in-house content only generates
a fraction of direct revenue and in addition, access statistics show that the Sports
Section (thought to be one of the most valuable assets) generated only a fraction
of the total advertising revenues (e.g., about half of the revenues generated by the
Money Section in June 1997).
Figures 3 and 4 illustrate the annual national and local expenditures by medium.
They indicate that advertising volume is on a steady rise (especially for media
capable of direct marketing), both nationally and locally, thus suggesting that at
8
Visits per month
Per page avg.
Home
Money
Sports
News
Weather
Life
Sports
Stocks
College
% Views
55%
65%
14%
7%
4%
6%
23%
22%
2%
April
May (est.)
12,830,000 13,230,000
June (est.)
13,630,000
July
14,030,000
7,056,500
8,339,500
1,796,200
898,100
449,050
705,650
2,886,750
2,822,600
192,450
7,496,500
8,859,500
1,908,200
954,100
477,050
749,650
3,066,750
2,998,600
204,450
7,716,500
9,119,500
1,964,200
982,100
491,050
771,650
3,156,750
3,086,600
210,450
7,276,500
8,599,500
1,852,200
926,100
463,050
727,650
2,976,750
2,910,600
198,450
Table 1: This table illustrates the number of actual and estimated page views for
the months April, May, June, and July 1997.
least in the short term (see comments in section 2.2.3) USA Today Online can expect
a steady rise in advertising revenue.
In order to calculate a growth estimate for advertising revenue, we modeled the
category DirectMail in national advertising with a first and second order model.
Since the first order model was able to describe almost as much of the variance as
the second order model (r2 > 0.99), we calculated a linear regression in order to be
able to extrapolate USA Today Online ’s potential growth in advertising revenue
(the provided estimated monthly advertising revenues shown in Figure 2 only cover
a period of 11 months, which might be too short to generate accurate predictions).
The growth of DirectMail was described by the equation y = 1628.8x + 5621.3
(with 1980 being the first year). We then calculated the predicted advertising expentitures for the years 1997, 1998, and 1999 (years 18, 19, and 20, respectively),
which yielded (in million US $) 34,939.7, 36,568.5, and 38,197.3, respectively. This
translates into an approximate annual growth rate of 5%. We then used USA Today
Online’s advertising revenue for the 12 months to April 1997 ($6.5 million) as a basis
for our predictions (we used this value as an estimate for USA Today Online’s 1996
advertising revenue). Based on a predicted 5% annual growth rate and our estimate
for USA Today Online’s 1996 revenue, we calculated the expected advertising revenue for USA Today Online for the years 1997, 1998, and 1999: $6.8, $7.2, and $7.5
million, respectively.
This expected additional revenue can be used to finance our strategic recommendations.
9
Est. Exp. Est. Cost
Home
6,701,378
$201,041
Life
873,407
$26,202
Money
4,014,528
$120,436
News
2,346,406
$70,392
Sports
2,407,434
$72,223
Weather
657,402
$19,722
Average
2,833,425
$85,002
Act. Exp.
7,056,500
705,650
8,339,500
898,100
1,796,200
449,050
3,207,500
Error Underest. Overest.
-355,122
$10,654
167,757
$5,033
-4,324,972
$129,749
1,448,306
$43,449
611,234
$18,337
208,352
$6,251
-374,074
$70,201
$18,267
Table 2: This table illustrates the estimation error between estimated and actual
number of page exposures for different sections. Underestimation directly results in
decreased revenue for USA Today Online.
Annual National Advertising Expenditures by Medium
Expenditures (million $)
$80,000
DirectMail
$70,000
Magazines
Newspaper
$60,000
Outdoor
$50,000
Radio
TV
Sum
Linear (DirectMail)
$40,000
$30,000
$20,000
$10,000
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
$0
Year
Figure 3: Annual national advertising expenditures by medium. The dotted black
line illustrates a linear regression for the DirectMail category that provides the basis
of growth estimates (see text).
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Annual Local Advertising Expenditures by Medium
$60,000
$40,000
Cable
SpotRadio
$30,000
Outdoor
Newspaper
Sum
$20,000
$10,000
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
$0
1980
Expenditures (million $)
$50,000
Year
Figure 4: Annual local advertising expenditures by medium
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3
3.1
Strategic Recommendations
General Recommendations
As analyzed in Section 2, USA Today Online’s operation depends on few and static
sources of information (i.e., its input), only produces one product (i.e., the online
publication), and generates only one major source of revenue (i.e., its output =
advertising revenue). Our general belief is that that such a rigid structure will prove
disadvantageous in today’s rapidly changing environment.
Therefore, we propose a general shift from this rigid model to a more flexible
and diversified model. Both the ’traditional’ model and our suggested model are
illustrated in Figure 5. The initial costs to finance this paradigm shift can be offset
by the expected increase in advertising income.
Traditional Model
Advertising Revenues
few and static
sources of information
one source of revenues
Associated Press
Wire Feed
Online
Print Publication
Self-Generated
Content
one product
Suggested Model
many and dynamic
sources of information
Advertising Revenues, Content Syndication, Classifieds
more sources of revenue
Associated Press
Wire Feed
Online
Print Publication
Self-Generated
Content
Packaged
Content
Acquired Content
From Different
Sources
more products
Figure 5: The current model of USA Today Online’s operation (i.e., traditional
model, upper figure) and our suggested new model (lower figure).
We do not recommend immediate horizontal expansion (i.e., diversifying content), because of the potential unfavourable effect on one of the company’s key
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assets - the brand name. After an initial phase that implemented our general suggestions, we do not object against vertical expansion (i.e., deeper content in USA
Today Online’s key segments).
3.2
Content Syndication
One of the key features of our proposed strategy is content syndication. We believe
that USA Today Online should leverage its in-house generated content in order to
create new sources of revenue. As summarized in Table 3, we reserve a major part of
the expected revenue growth for the technical and operational (i.e., internal training)
costs for this transition.
3.3
Classified Advertising
One of the key sources for additional revenue will be classified advertising; a strategy that (at the end of the time covered by the case) seemed promising. Since
there are no brand name problems and no problem with channel cannibalization,
we recommend this strategy to be continued.
3.4
Lock-In Strategies
During the transition period, USA Today Online will still heavily depend on advertising revenue. Since advertising revenue is directly related to ’eyeballs,’ we propose
a strategy that produces a subtle lock-in effect for visitors: limited customization
and community building in key areas will effectively raise the switching costs for
existing customers. Specifically, we propose an expansion of this strategy (limited
customization is in place) in the sections Money and Sports. Since customization
of ’News’ would go against the company’s roots as a medium of news dissemination
(rather than entertainment), we do not recommend this strategy for the section
’News.’
3.5
Pricing Model
The accuracy of the predictions on future page exposures is not mentioned in the
case. In case it was significantly below 100%, USA Today Online should revise this
model such that they, at the end of each month, charge for the actual number of
exposures.
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3.6
Financial Summary
Table 3 effectively summarizes the estimated effect of our strategic recommendations1 . For advertising income, we assumed a 5% growth as calculated in Section
2.5. We assumed a 2% (inflation-based) increase in income or expenses for transaction income, sales and marketing, and general administration. We assumed an
annual growth rate for 1997-1999 of 100% for the income coming from the sale of
content. We believe that this assumption is valid given the tiny income in 1996 and
the strategic focus.
In addition, we assumed an 8% increase in and product development and technical and development support due to product development and R&D costs resulting
from our strategic recommendations. We found it difficult to estimate the potential
additional revenue from classified advertising; we have therefore not included this
position in our summary.
We also want to note that this projected income has been calculated fairly conservatively. The case does not provide advertising income for the complete year of
1997, but extrapolating the provided eight months to 12 months would represent a
growth by far higher than our assumed 5%.
Revenues
Advertising income
Transaction income
Sale of content
Expenses
Sales and marketing
Product development
Technical/devel. support
General administration
Net profit before taxes
1996
1997 (est)
1998 (est)
1999 (est)
$6,500,000
$500,000
$50,000
$6,800,000
$510,000
$100,000
$7,200,000
$520,200
$200,000
$7,500,000
$530,604
$400,000
$1,000,000
$500,000
$2,100,000
$3,500,000
-$50,000
$1,080,000
$540,000
$2,268,000
$3,570,000
-$48,000
$1,166,400
$583,200
$2,449,440
$3,641,400
$79,760
$1,259,712
$629,856
$2,645,395
$3,714,228
$182,413
Table 3: This table illustrates a sample income statement for 1996-1999. The numbers for 1997-1999 are estimated based on parameters described in the text.
1
We used the provided disguised sample income statement for the 12 months to April 1997 as
a measure for the income in 1996
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4
Executive Summary
To conclude our analyses and recommendations:
• USA Today Online is a healthy operation with a solid brand name
• Changes in the business environment will demand a change in operation and
revenue model
• General paradigm shift resulting in a more flexible operation
• Implementation of strategies that will result in additional revenue streams,
without causing channel conflict or cannibalization
• Restricted community building and customization to lock-in customers
• Hold off on horizontal diversification in order not to dilute brand name
15