Over the long labor day weekend Google announced a serious change in the way Google News will relate to the various wire services and the newspaper industry. The change could have a dramatic impact on the traffic Google News sends to newspaper web sites. There have been several commentaries on the developments and Techmeme has been a great source tracking them.

The New York Times, ironically carrying a Reuters syndicated article, said

                “Google is playing host to articles from four news agencies, including The Associated Press, the company said Friday, setting the stage for it to generate advertising revenue from Google News.

            The news agencies — the Press Association of Britain, Canadian Press, Agence France-Presse and The A.P. — now have their articles featured with the organizations’ own brands on Google News. The companies have agreed to license news feeds to Google.
            The five-year-old Google News service previously searched the Web to uncover links to news articles from thousands of sources, and clustered links on similar subjects together.”

The impact of the decision was also well understood by the Reuters writer:

            “Because of Google’s campaign to simultaneously reduce duplicate articles, the original wire service article is likely to be featured in Google News instead of versions of the same article from newspaper customers, sapping ad revenue to those newspapers.”

It is worth viewing this incredible serious news in context. Newspapers are reeling from a very recent and sudden drop in classified advertising revenues. Many of the top publications saw falls of more than 20% in Q2 alone. Last week the Washington Post’s Sam Diaz published a story covering the most recent trends. Techmeme’s gathering together of the conversation is here. The Washington Post piece is here. The conclusion, which Don Dodge articulates well is that:

    “The Next Big Thing – Online classified ads, local search, and mobile search are huge markets, with no dominant leader, and lots of opportunity for innovation. New business models will emerge and a new set of leaders will reap billions in profits…pennies at a time.”

Or, to put the same thing another way, newspaper classified revenues are likely to continue to decline as online classifieds revenue grows. If true this will represent a blow to the newspapers to compound the impact of the Google News decision.

My own research – and as ceo of edgeio I have a strong stake in the game so I have done a lot – suggests that these trends are both strong and relatively irreversible. But it also suggests that online classified revenues are not yet growing sufficiently to stem the decline in print classified revenues.

Here is the entire US advertising spend since 2001. It has grown every year.

The newspapers share of this spend has declined.

More graphically:

Now, within that decline there has been a growth of online revenues for the newspapers as the following chart shows:

But, this growth has been too small to make a big difference. If the newspapers are to survive they need to attract more traffic and more advertisers than they have so far been capable of. Dodge suggests that this will be achieved by becoming more “local”, even “hyper-local”. I have to say that I believe he may prove to be right, but not for many years. There is no current evidence that individuals are adopting a strong local mindset when using the Internet. Rather the contrary. The growth of blogs like Techcrunch (disclosure: i am a shareholder) GigaOm, ReadWriteWeb, PaidContent.org and many others suggest that online behavior is shaped more by ones work/interests/hobbies/passions than where one lives. Vertical editorial content is growing in traffic. Local editorial is not growing so fast.

Google has benefitted most from the growth of vertically focused traffic, as the following chart shows. Search advertising – including that embedded in hundreds of thousands of publishers sites, has grown whilst classified advertising has stayed flat as a share of Internet Advertising over the 2001-2006 period.

Classifieds are of course not only local. Magazines have perfected the ability to target ads at vertical interests for many years. Boat ads in boating magazine, job ads in almost every vertically focused publication, car ads in classic car magazines, furniture ads in House and Home publications and so on.

Beyond all of this there is still a big opportunity for newspapers to grow revenue.

As the chart alongside shows, the newspapers still command a giant number of absolute dollars. There is time to figure out how to do classifieds online. The stand-alone classified sites (eBay, Craigslist, Monster, Careerbuilder) have built awesome businesses that mirror offline publications like Autotrader in the US and Exchange and Mart in the UK. They are stand-alone, classified-only environments.  Together they accounted for only $3.1 billion in revenues in 2006.

There is a much larger pie to be figured in discovering how to embed classified advertising in editorialized environments in a manner that is targeted at the readers of those publications.  In other words, to do online what the magazine industry has done so well offline. This may well be an opportunity greater than $15 billion a year in new revenues.

So… it is still all to be played for, and it will be fun being involved. The online classified players, the newspapers and the magazines are all likely to be involved as this plays out. And all stand to grow revenues.