Israeli Websites Losing Out to Google and Facebook

Local Internet ad market growing by NIS 100 million a year, but ‘all of it going to foreigners,’ says consultant.

How much is a media outlet reaching 1.3 million people a month – with nearly 400,000 video viewers and 530,000 surfers via mobile – worth? The statistics for Tapuz, Israel's fourth most popular website in July, according to an Internet rating committee, are indeed impressive but the website was sold last week at a value of just NIS 4.3 million.

This is in stark contrast to the situation seven years ago, when Tapuz People was floated at a NIS 80 million value and was also trying to expand into electronic commerce. But activities such as blog TV fizzled and the company's main Internet activity, including the Flix video site and 51% of the My First Homepage site aimed at children, has now shed 95% of its former value.

Tapuz isn't alone. Israel's top 10 websites have lost much of their value in recent years, mainly from losing their main source of revenue: advertising. Google and Facebook turned the tables and walked away with most of the money.

Tapuz's Internet activity, which is based on ad revenues, lost more than NIS 1 million in 2012 following NIS 564,000 in earnings in 2011 and NIS 4.3 million in 2010. In the first half of 2013 its revenues plunged to NIS 4.8 million, a 27% drop from the year before, and the loss jumped to NIS 1.2 million.

The same happened to Nana 10, Israel's fifth most popular website with traffic registering 12 million clicks a month and nearly 300,000 video viewers. Channel 10 bought 50% of the site from Netvision in 2007 at a $22.5 million enterprise value. In 2012 Ron Lauder bought the outstanding shares of the website at a NIS 10 million value, reflecting an almost 90% reduction in its worth.

Walla lost NIS 17 million in 2012, nearly tripling its 2011 NIS 6 million loss.

The Maariv media group's NRG website has also been left with barely any economic value. How did content sites with enormous exposure and high advertising potential see such a sharp decline in revenues? Here are several explanations.

The big guys

1. Google and Facebook

The two global Internet giants have been increasingly grabbing advertising budgets, in Israel too, away from local content sites. In 2012 NIS 570 million was spent on digital ads in Israel, 16% of the overall advertising pie, according to Ifat Advertising Monitoring. Together with Google and Facebook, the Internet advertising market in Israel reaches around NIS 1 billion, says Ilan Schory, who is in charge of telecom and media industries at TASC Strategic Consulting.

"The moment alternative sites like Google and Facebook also offer advertising banners it takes away from existing players," says Schory. "Israel's Internet advertising market has grown by about NIS 100 million a year, but the entire growth is going to foreigners. The pie is larger, but the share held by local players is falling and there are more and more of these. In the last three years most websites have increased in the number of visitors but at the same time international sites have experienced outrageous growth."

2. Clicks rather than premium

New advertising methods brought by Google and Facebook led the entire market into relying on the performance-based model in place of exposure through banners. Content sites can no longer demand premium prices for centrally-placed banners on their main pages since measurements are now mainly based on clicks or leads.

Israeli content sites would rather be evaluated based on exposure rather than clicks. This was also the idea behind the Israel's Internet rating committee which is now close to being shut down. But the content sites haven't been able to sway the market and the ad banner, prominent as it may be, retains no value of its own beyond the number of clicks it attracts.

3. 1+1 doesn't equal 2

The sites that have undergone the most drastic declines in market value are those following the top three in exposure. But a site without a critical mass of exposure has almost no market value.

"This is a widespread mistake in the media world: There is no direct relation between amount of exposure for a large or small site," says Schory. "Exposure of two sites with 2 million surfers a month doesn't have the impact of one site with 2 million surfers."

To generate influence and stay relevant, content sites need to constantly create competitive added value. This is why in the past year large websites have expanded in the field of video, particularly in news, or launched complementary services like weekend supplements.

Problem starts at top

4. Blame management

Besides objective reasons for the downfall of Israeli content sites, the finger can also be pointed at their management. "Everything starts from the top," says an Internet market executive. "If management can't find itself a new revenue-generating model it only has itself to blame." One way is to charge for content.

But it doesn't end there: It is also reflected in websites not having a knack for haggling with ad agencies. "Large websites pay high commissions that reach 40%," says the executive. "If only they could reduce the commissions, they'd break even."

5. Solutions: Video and consolidation

Along with the above-stated shortcomings, industry insiders point out that some of the websites are being run irrationally – headed by people mostly interested in accumulating influence and more exposure and not necessarily better business results. Schory says the solution lies mainly in consolidation and reducing expenses. "The game has pretty much been settled in favor of the international players, and the traditional industry can no longer support the market," he says. "We are in something of a death cycle of media players."

Another field being eyed by content sites is video advertising, which is more conducive to pricing ads based on exposure. Local websites are estimated to be churning out NIS 50 million in video advertising, with YouTube taking a similar share. "It's a growing field that keeps improving," says Schory. "We see a growth in the number of Internet video viewers, even during television prime time."

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