Later this month, online ad king Google (NASDAQ:GOOG) will begin a three-month test run selling advertisements in the print editions of more than 50 different newspapers, owned by companies including Motley Fool Income Investor pick New York Times (NYSE:NYT), Washington Post (NYSE:WPO), Gannett (NYSE:GCI), Tribune (NYSE:TRB), and Hearst.
This is a big deal for all involved. Despite the newspaper industry's decreasing readership, more than $49 billion is still spent every year in the United States on newspaper advertising, according to the Newspaper Association of America.
The deal represents a double-edged sword for those in the newspaper industry. In striking the bargain, they stand to bolster ad sales but also risk making Google that much more formidable.
As currently envisioned, the system would allow Google's sophisticated computer system to match potential advertisers with available ad space in participating newspapers. With demand for newspaper advertising on the decline, the newspapers see the deal as a way to fill underused ad space and increase revenues.
The benefit for the newspapers is twofold. First, by tapping into Google's large database of advertisers -- especially smaller businesses and online businesses that currently do little to no newspaper advertising -- the newspaper industry can reach out to a new universe of customers and potentially introduce them to the benefits of newspaper advertising.
Second, by creating more demand for ad space, the Google system could actually increase the price newspapers charge for some ads. Traditionally, the newspaper industry has been highly inefficient in filling this space, creating a list of standby advertisers who will buy unused ad space at a substantial discount.
This is especially true for niche sections in the newspaper that might appeal to specific audiences. For instance, companies looking to reach younger men could target the sports section, while those seeking to attract a more affluent demographic could run ads in the business or travel sections of the paper.
Of course, the benefit for Google is straightforward. In brokering the relationship between advertisers and newspapers, it will earn a cut of every transaction.
During this three-month test period, however, Google has said it will not earn any revenue. I think it's fair to assume, however, that if the newspapers like the system and decide to continue the relationship after the testing period, Google can expect to reap something close to the 20% that it generally takes for facilitating online advertising deals.
Now, it is possible that the newspapers will find that the system doesn't bring in new advertisers or, worse, that it undercuts their current business model by softening the demand (and thus the price) for advertising. Google has minimized this risk, however, giving the newspapers a great deal of flexibility in deciding whether they want to accept any particular request for ad space.
In essence, newspapers have to accept only deals that they believe are in their own best interests. In doing so, Google appears to have struck upon a win-win deal that will help traditional newspapers halt their declining ad revenues, while opening up yet another lucrative source of revenue for itself.
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Fool contributor Jack Uldrich is an equal-opportunity consumer and is willing to accept advertising from both online and traditional news sources . He owns stock in Google. The Fool has a strict disclosure policy.
