Is the online news-stand finally set to make money?

DMGT, the owner of the Daily Mail titles, saw online advertising surge in its third quarter. Has the media at last found ways to make the internet pay?

The public's desire for the online coverage of stories from David Beckham's wardrobe to Catherine Zeta-Jones's dress disasters has seen advertisers flock to its site. The growth in online revenues is a welcome development for news services looking to make the internet pay, but some are questioning whether free sites can yet be self-sufficient.

The Daily Mail & General Trust (DMGT), the parent of The Daily Mail and The Mail on Sunday, yesterday posted a slight fall in third-quarter revenues to £508m compared with a year ago, but highlighted the growth of its digital operations. Advertising at its consumer titles rose 13 per cent. Online, the growth was 46 per cent.

Peter Williams, the financial director of DMGT, said: "The Mail Online is growing fast. We think the free model is the right place – not necessarily for every title in DMGT – but the volume model is working." He added the advertising was more than enough to support the site. One industry expert said the Mail Online had "succeeded in growing its online audience by moving into celebrity gossip stories, and delivering revenues through scale. The Mail is really advanced, it uses information to target stories at particular markets".

Most newspaper sites rely on display advertising, with banners running along the top of the site or alongside. Nigel Gwilliam, digital consultant at the IPA, the advertising trade body, said: "All things being equal, the more eyeballs you reach, the more money you will make".

He added: "Display advertising on the internet is becoming more targeted and data driven. The industry is developing and the pace of change is accelerating." Sir Martin Sorrell, founder of advertising giant WPP, has said he expects the digital operations at his group to more than double in the next four years.

Yet, the ad recession hit publishers hard, and online ad revenues were not immune, despite the headline numbers. While the data shows online ads grew in 2009, it was driven by growth of ads on Google. Display advertising fell 6 per cent. Tim Smith, general manager, digital for the Evening Standard, said advertising on its site was up 28 per cent this year partly because of a return of the advertisers. "Last year was disastrous. Advertisers got the tin hats out and ducked below the parapet."

Other problems were more structural. "The problem for newspapers is they can't charge the same rates for online advertising as print. At a market level, an oversupply of online inventory has driven prices down," Mr Gwilliam said.

Vincent Letang, head of advertising research at Screen Digest, said: "Things are changing this year. The display advertising market is bouncing back, and companies are using targeting technology to monetise the audience and the data they gather on their users." Screen Digest predicts that online display adverts will grow 5 per cent in the UK this year and a further 7 per cent in 2011. Other publishers are seeing positive momentum in their digital operations including Independent Print Limited, the owner of The Independent, which has seen similar levels of online advertising growth to DMGT, according to senior figures at the group.

DMGT published its update one day after Financial Times owner, Pearson, had results of its own. The FT Group revealed in its half-year results that it had doubled operating profit over the same period in 2009. The group has targeted subscription revenues heavily. Digital subscription had risen 27 per cent to 149,000 – almost double its paid-for print sales – and more than 1,000 corporate licences. In 2009, digital services marked 36 per cent of FT Group revenues, up from 13 per cent in 2000.

Rob Grimshaw, managing director of FT.com, said advertising was still a crucial revenue stream. "The stronger the relationship with readers, the more valuable they are to the advertisers," he said. "Online advertising is now much more sophisticated. But not all publishers are equal." Yet, the FT benefits from a specific audience who see the content as unique and vital for their work; many can also expense it.

The move is harder for a general newspaper. The Times is the first of the nationals to attempt to diversify its revenue stream beyond just online advertising, introducing a paywall last month. Parent News International is remaining tight-lipped, with sources close to the company saying it was "early days of a long-term project". Yet recent numbers have been estimated. Dan Sabbagh, reported on the Beehive City site that 15,000 had agreed to pay for the online subscription, adding the figure was considered disappointing. He said 12,500 had agreed to pay for the separate iPad application. Rivals across the industry are watching the experiment carefully as they look for alternate online revenue streams, although some, such as The Guardian, are evangelical about keeping their content free. The move has been useful to help improve revenues from advertising, as sources close to News International said the new data on its users allowed the group to more closely target adverts.

The game has changed in the competition for online ad spending, Mr Grimshaw warned. "The newspapers are used to competing with each other. If it's a volume play you're after then you're competing for advertising with Facebook and Google, as well as all the portals and blogs. The competition for advertising money is incredibly intense," he said. "If a newspaper's going to be successful with its online operations it has to be highly differentiated and have a good way to make money elsewhere."

Regional publishers were hit especially hard by the downturn. Stuart Paterson, the financial director of Johnston Press, said: "The industry has recognised that it needs to monetise online adverts better." While nationals have to compete with the BBC website among others, regional sites tend to produce unique local content. "The regional publishers are well placed," Mr Paterson said. "We've been watching and testing. Nobody has found the absolute answer yet."

Beyond paywalls, groups are investing in IT to improve their targeting tools, as well as better use of social networks as few believe their online operations can survive on advertising alone. Many are heavily investing in their mobile sites. Mr Gwilliam added: "I would expect many familiar newspaper names to survive. They will probably just be smaller and more nimble businesses."