Paywalls

If doomsday does come, who will pay for news? Someone has to, right? Who else will pay then but its consumers, yes? Isn’t that the common belief?

There is no more emotion-laden topic, no fiercer battleground in the hunt for new business models for news than the discussion of paywalls. I have personally been taken to task in the once-august Columbia Journalism Review and by no less than The New York Times’ media critic, David Carr, to name only a few, for challenging the wisdom of the wall. The arguments in favor of paywalls are apparent: Readers used to pay for content when they bought newspapers and magazines and so they should still. It was an original sin for content ever to have been given away for free online. The people who use news sites the most value the content there and would be willing to pay for it, and so they should. News organizations should have multiple revenue streams so they are not so dependent on advertising alone (see: doomsday, above). And news — quality news — is expensive. Who should pay to maintain the newsroom and the Baghdad bureau? Besides, it’s working at The New York Times, The Wall Street Journal, and the Financial Times, why shouldn’t it work elsewhere?

My responses: I have never seen a business model built on the verb “should.” Customers pay for products and services based on the value to them in a competitive market. The arguments in favor of maintaining paywalls around content tend to ignore the new reality of a media ecosystem built on abundance, no longer on a scarcity controlled by media proprietors who have long since lost their pricing power. In such a market, someone will always be able to sell a product like yours cheaper than you. Some spoiler might even figure out a way to make that product free, and it’s impossible to compete with free. Nevermind that the competitor’s product may not be as good. In the market, what matters in the end is this: Is it good enough? In such an ecosystem of abundance, I say it was wise, not sinful, for news organizations to open up and build an audience — bigger online than ever in print — before it could be stolen away by more efficient new competitors: from CompuServe to Yahoo, from a million bloggers to Huffington Post, from Business Insider to BuzzFeed. I will argue in a moment that if we’re going to charge anyone, perhaps it should not be our most loyal, engaged, and valuable customers on whom we make money through advertising, but instead the occasional visitor and freeloader. As for the argument that news is expensive: Well, yes, it was, but we know it can be more efficient today. Besides, thanks to advertisers’ support and subsidies, the truth is that readers never truly paid for news, never fully supported the cost of the newsroom. And in a competitive market, one cannot price one’s offerings based on cost plus profit; that works only in a monopoly, which news organizations have now lost.

That is how the argument has gone, round and round, hotter and hotter, demonstrating little. As it has raged, newspapers have instituted paywalls by the hundreds. By this time, I think it’s safe to say that the Financial Times and The Wall Street Journal should be excepted from this argument because, whether expense-accounted or not, they are bought by people who have money and need these publications and their information to make more money. The New York Times did succeed at its second attempt to build a wall — or rather, a meter — gathering more than 800,000 paid online subscribers and changing the dynamics of the business to the point that readers now support the company more than advertisers (though, of course, advertising revenue has been falling steadily all the while). At about $200 each, the company’s 800,000 digital subscribers produce a new revenue stream estimated at $160 million a year. In 2014, digital advertising revenue about equalled that amount. Together, these digital revenue streams exceed the reported $220 million cost of The Times’ newsroom, and that is an impressive milestone on the path to becoming a fully sustainable digital enterprise. Martin Nisenholtz, the business executive who started NYTimes.com, has told my classes that giving away Times content online was not an original sin but a foundational necessity, for The Times needed to compete with other new players and to build market share. In fact, being free allowed The Times to become a truly international brand with a huge audience: almost 60 million monthly readers online vs. fewer than 1 million buyers daily in print. Having that large an audience is what made it possible for The Times to put up its meter, for its conversion rate from online user to digital subscriber is only a bit over 1 percent, but 1 percent of almost 60 million is a lot of subscribers.

When it started to charge, The Times allowed users to see 20 stories a month for free (with various additions, including links from social media) before encountering the meter and getting hit up to pay up. But not enough people hit the wall and got the pitch. The Times lowered the barrier so customers would see only 10 stories a month for free. That means the vast majority of The Times’ audience doesn’t read so much as one story every three days. That is a shockingly low level of engagement for the pinnacle of a profession that considers itself vital to the maintenance of democracy and society. For lesser newspapers, the numbers are worse. According to Jeff Hartley, vice president for consumer revenue at the Morris Publishing Group, experience with Press+, the leading provider of paywall services, shows that on average 3–4 percent of users will come often enough to hit the wall and about half a percent of those stopped will pay.

The Times was also well aware that by losing some audience when it turned on its meter, it faced a risk of losing advertising. By very rough rule of thumb, media companies these days make something like 80 percent of their revenue from 20 percent of their users — that is, their most loyal 20 percent, who come back more often and generate more pageviews and thus more ad sales opportunities. By putting a wall in the face of those loyal users, a news organization — especially one less worthy than The Times — risks losing the most valuable audience for advertisers. Two more points about the economics of The Times’ meter: First, there are other costs. The Times spent millions on research and technology. There are also ongoing marketing costs for subscriber acquisition and costs for customer service. Second, the way The Times prices its offering artificially bolsters print: It’s cheaper for me to subscribe to the paper and get digital “for free” than to cancel the print product we don’t read anymore and pay for digital alone. Now as long as print continues to have greater advertising revenue, that makes sense, right? Yes, except one could argue that this pricing tactic only delays the inevitable, the transition to a truly digital enterprise. Witness the concern in the leaked Times innovation report about print still being central to the operation of the newsroom and the business. I wonder whether the meter could bring a hidden innovation opportunity cost by extending the life of print. Still, I give The Times considerable credit for making its pay meter a success. I value The Times and want it to succeed and continue. I happily pay my subscription every month. But just as Apple can succeed at breaking rules because it is so damned good, so The Times could succeed at not only building a paywall but also at attracting high-value branding advertisers because it is that damned good. But the Pondunk Daily Disgrace? Not so much.

According to analyst Ken Doctor, about 40 percent of America’s 1,400 daily newspapers have erected paywalls. The country’s largest chain, Gannett, did so and said the wall contributed $100 million in digital subscription revenue. That’s the good news. But after a year, its digital subscription growth rate fell to about 1 percent. And its sites lost audience to free competitors. Three years after introducing its pay meter in 2011 and gathering its 800,000 digital subscribers, growth of that core digital subscription base for The New York Times — apart from new premium products — stalled at just over 1 percent. John Paton infamously called paywalls “as dumb as a bag of hammers” but implemented them on his papers at Digital First, acknowledging that it was a short-term tactic to bolster cash flow. (Remember who Paton’s bosses were — hedge funds — and what they expect — improved balance sheets.) I worry that other newspapers will look at themselves in the mirror and think they can do what The Times has done. But they don’t have more than 50 million users every month as The Times does. Will a 1 percent conversion rate — or likely less — against a much smaller audience be worth the expense and risk of also reducing audience and thus advertising? They don’t have the loyalty that The Times has. Will they have the opportunity to make a pitch that’s welcomed? They don’t have the higher value branding advertisers The Times has. They must depend instead on a suffering local retail industry. And let’s be honest: They’re just not as good as The Times, not worth the price. That is why I have taken the slings and arrows of my detractors and continued to question the business efficacy of building walls and limiting growth.

An industry facing woeful numbers in engagement and loyalty is ill-advised to be putting up barriers to audience, especially to those fewer and fewer surviving loyal users and more especially to a younger audience that has never read a newspaper. We should be finding ways to attract more people to us with better service. We should be finding new ways to go serve users where they are rather than making them come to us and then charging them once they arrive. We should be building rich relationships with the people we serve and building our businesses atop that.

Can we earn money from the people we serve? I believe we can — but not necessarily just by charging them for access to content.

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