An absolute tour-de-force post, from a guy who’s been hitting them out of the park all season long…Alan D. Mutter at Reflections of a Newsosaur.

Alan takes a look at the Google News licensing of wire service content, and extrapolates that it’s a death knell for the already terminally ill banner ad. You see, newspapers, after they had gotten over their original reticence about Google News, have now come to rely on the added traffic and page views they get from being linked by Google. That traffic hits the bottom line as page views, which in turn becomes banner ad revenue, even if it is at an absurdly low rate.

As Alan notes, many of the newspapers have cut original content over the past few years in an attempt to shore up their absurdly high profit margins (very few industries expect the profit margins that newspapers expect – somewhere in the 25% range annually, well, maybe loan sharking).

Now Google won’t be showing the duplicate results, hence they won’t be sending in traffic to AP or Reuters stories that are running on newspapers sites. That means the newspapers are back to eating what they kill, they’ll only get linked for their original content. That is exactly the stuff they’ve been cutting back on producing.

Meanwhile, Mutter shows that the rates for banner ads have dropped to next to nothing. Marketers know that banner ads are a lousy medium, for many reasons I’ve expressed over the past year here.

His suggestion for the future:

The solution for publishers is to get beyond selling passive advertising by the bellybutton in an ancient, brute-force numbers game they can no longer hope to win. Instead, publishers need to start developing individualized, transaction-oriented products that will deliver targeted, qualified leads to advertisers who will pay handsomely to reach live prospects poised to make a purchase.

And guess who will be poised to ride in on their digital white stallion to save the day? The same folks who are now cutting them out of the wire service loop, Google. This is where Google’s quiet move into Cost Per Action ads vs. Cost Per Click or Cost Per Mille is going to put them ahead. They’ve already got the mechanism the newspapers will need. The question is, will the newspapers, already burned once, hop back into bed? I am betting the will, and the inevitable second burn will be worse.

You see, as Alan writes:

Publishers have to get busy to get this right. Online traffic already is showing signs of flat-lining, as discussed previously here. Ignoring the gathering threat to the banner-ad business will lead at some point to a gut-wrenching decline in online revenues similar to the one now afflicting the print side of the business.

That’s right. Newspapers have been looking to Online as the one great point of light in an otherwise dim world. However the signs are there that all isn’t bright there. Readership numbers appear to be leveling out as Mutter notes here.

So why is that? My seat of the pants answer is that the newspaper sites have failed to inspire us. While they’re perfectly poised to take advantage of the Web 2.0 social networking stuff, the problem is that they’ve been unable to create anything other than passively engaged readers. My suspicion is that the newspaper sites are too broad in scope to create a real sense of community. Hence they don’t create the passion needed in their readers that makes niche communities work.

Whatever it is, there is a lot to consider here.

(update: 9/6/07 – Tim McGuire, former Editor and Senior VP at the Minneapolis Star Tribune posts on this subject here.)