Markets

How Google's New "Circulars" Could Kill Off News Corp.'s Sunday Paper Business

By Jim Edwards

Updated on: October 27, 2011 / 12:22 AM EDT / MoneyWatch

Google's (GOOG) introduction of Google Circulars, a coupon format that mimics Sunday newspaper inserts, is likely to become yet another nail in the coffin of the traditional newspaper-based coupon business dominated by News Corp.'s (NWS) News America Marketing unit and its arch-rival, Valassis (VCI).

Google Circulars are large-format graphic ads generated when users click on a regular Google ad generated by a search. They look like this:

Coupled with Google Offers, Circulars now give advertisers a second method of running coupons or daily deals with the search giant.

Google, coupled with Groupon and its many, many imitators, appears to be drawing dollars away from the paper-coupon business. Here's a comparison of Q2 results:

Revenues in Q2 2011
Groupon: $341 million, up 892 percent
Insignia: $4.9 million, down 16 percent
Valassis: $565 million, down 2.5 percent.
(News Corp.: Doesn't break out those revenues)

Is it really a coincidence that as Google, Groupon et al. are seeing growth in digital coupons that the old-media coupon giants are seeing declines? Remember, Valassis, NAM and Insignia are a cartel that controls almost 100 percent of the newspaper grocery coupon market. Monopolies only experience declining revenues when there is a fundamental, structural shift away from their businesses. (It's no good having a monopoly on buggy whips if you're living in the age of the motor car, for instance.)

You can see that structural shift in Valassis' revenues:

And the lack of growth in its sales. Despite the fact that the economy is growing and adspend has come bouncing back, Valassis is still shrinking:

Something similar is doubtless going on at NAM, but News no longer breaks out revenue performance for that unit. (Perhaps it's embarrassed by its own numbers.)

Rob Mason, Valassis' new CEO, has a life-or-death strategic battle on his hands. In theory, if Google and Groupon can be persuaded to stay out of the grocery business -- Valassis' core strength -- then competition will be reduced in all the categories each provider competes in. Lack of competition tends to allow the remaining players to raise prices and drive profitability, but only if they can agree not to get into a price war.

However, Google, with its mountain of cash, will be tempted to engage in that price war, partly because it knows that Groupon cannot withstand any decline in its business and partly because it believes it is replacing the newspaper business entirely with online competitors who rely on search for readers.

It's tough to see how Valassis or NAM survive in the long run.

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Disclosure: The author owns two shares of Google stock.