The question du jour for the UK newspaper industry is whether the (London) Times’ paywall will work. Will it be profit-neutral, -negative or positive?
At a high level, very roughly, the paywall’s impact on profits is
(a) The revenues that the paywall generates directly,
(b) The advertising revenues lost from people that the paywall will turn away
For the two main papers that have managed to charge online (the WSJ and the FT), the chart below shows the yearly online subscription price as a factor of the (print) cover price, and the (rumoured) online subscription takeup as a percentage of the paper’s (print) circulation.
If you extrapolate linearly between the WSJ and the FT, you have that the Times should be getting some 280,000 online yearly subscribers. At £2 per week or £104 per year this would mean around £30m per year.
Of course this is only half the story. If the revenue lost due to fewer advertising impressions is greater than £30m pa, the paywall might be unprofitable. Now, the figures above suggest that only around 1.5% of the Times’ monthly visitors will agree to pay. Even if you concede that these people read a lot more articles than your average audience – and hence generate more ad impressions – you still need to write off most of current ad revenues.
Say that you are killing 2/3 of all ad revenues. For this to be less than £30m pa (and the wall to be immediately profitable), current online ad revenues would have to be below £45m pa. Is that the case? I don’t know, but another back-of-the-envelope estimate tells me that’s roughly on the ballpark of what the Times should be making today. If this is right, it would mean that the Times’ paywall will be more or less profit-neutral.
Of course all of this may be completely wrong. Among many other things, this analysis ignores the paywall's (presumably positive) impact on print circulation, its own cost, and the subtleties around bundle pricing. Take it for what it is – a very rough-and-ready back-of-the-envelope look. As such, this analysis suggests one thing: Murdoch's paywall may not be a cash-cow, but it's not suicide either.
In an article published today, the Guardian wonders if Rupert Murdoch's announcement (a few months back) that News Corp will introduce pay-walls across its online portfolio amounts to collusion. The key bit:
When Murdoch announced that he intended to introduce charges for access to all his news websites, he said that he believed other publishers would follow suit. [Alan Davis of legal firm Pinsent Masons] said that a pattern of such statements, in effect a signal to rivals to do the same, can be interpreted as a "tacit cartel", even if no meeting or explicit deal has taken place.
I am not a lawyer, so I won't comment on the legality of this. But I'll make two related comments.
First, Murdoch's move can be seen as a textbook case of strategic commitment. Suppose that you and your competitors would all like to do something that nobody wants to do on his own. So you announce that you intend to make the risky move even if nobody follows you, and you do it in such a way that your announcement is public, credible and irreversible (you are 'committed'). If you succeed in being credible, now a competitor – without ever talking to you – would feel reassured that if it also makes its move, it won't stand to lose as much as it might if it had moved on its own. If you are big enough, the change in your competitor's strategic calculation may be big enough to compel it to move as well. And since you know this from the beginning, your initial move was not as rash as it seemed. Granted, Murdoch's move was hardly irreversible – all he did was make an announcement in an earnings call. But he would lose a lot of credibility if he were to back down, and in this sense he is committed. Presumably this is what the Guardian has in mind. But note that – as I've hypothesised it – this move doesn't involve any talking behind closed doors.
Second, all of this may be a moot point. Talk of anti-competitive coordination presupposes that erecting a pay-wall is a profitable move only if your competitors do the same. But that is far from clear. To be sure, if you just slam a big all-or-nothing wall that refuses to serve any free content to anyone then you might lose most of your readers to your competitors and end up worse-off – unless your competitors erect walls too, and hence the coordination point.
But such 'hard' walls are out of fashion. What is in fashion is 'smart' pay-walls that only affect a small percentage of your readers (see my previous post on this). The thinking is that – if done right – this should result in a net increase in profits regardless of what your competitors do, essentially because you are only charging those readers who are loyal enough not to go to the competition.
This is not to say that with 'smart' pay-walls competitors' actions are irrelevant, or that there would be no point in price-fixing. If your 'smart' wall can make you some money even if your competitors don't follow suit, it can make you even more if they do (because you could then cast your net wider and charge more people, or charge a higher price). But that's another discussion – it's about refinements to the walls and not about whether to erect them in the first place.
Much of what you read about charging for online content is ill informed. All too often the question is put as if the only choices were to charge everybody or nobody at all, for all content or for none of it. And although some coverage is more nuanced, it rarely sheds any light on how the people who are working on this problem are going about it. If you are trying to get to grips with the real issues, this post might help.
A recent survey claimed that somewhere between 5% and 10% of an average paper's online audience may be willing to pay for the right to access the newspaper's site. This is not an insignificant amount of people – for many papers, 10% of monthly online reach is comparable to the entire print circulation. So clearly there is some money to be made. The question is how.
Dumb models need not apply. If you just drop a big pay wall and force everybody to pay you will lose up to 95% of your audience, and a similar (although somewhat smaller) percentage of your ad revenues. For most papers the new subscription revenue would not be enough to make up for this. So, clearly, a big pay-wall that charges everybody for everything is not a good idea. Everybody knows this, and almost nobody is considering this approach.
A better idea is to come up with a clever pay-wall that only charges those readers who are willing to pay and leaves the rest undisturbed. If you can pull this off, you have a win-win: you keep all your readers, page-views and ad revenues, and on top of that you get 5%-10% of your readers to pay.
The trick is how to do this, and in this there are two difficult challenges: targeting the right people, and deciding what to charge for (and how much).
About targeting: Try to charge too many people and you lose readers and ad revenue. And if the people you lose are among your frequent readers, you could lose quite a bit of revenue: each of them may account for ten times the number of page-views that other readers do (or more). So, play it safe: err on the side of caution and show the pay-wall only to a very small group that you are confident will pay. You may not get it quite right, but that's OK. You may end up not charging some people who might have paid, but at least you keep their ad revenues. And if you end up charging some people who are not willing to pay, at least you were not charging that many people to begin with so the loss of ad revenue is small.
About what to charge for: the typical way of dealing with this is to identify (or develop) some content within your site that is particularly valued by your targeted segment, call it "premium" and put it behind a pay-wall – while keeping the rest of your site free. The problem with this is that your targeted readers will only pay according to how much they value the premium bits, not according to how much they value your entire site – and this may not amount to much. A different approach is the one used by the Financial Times, which charges anyone who reads more than ten articles per month. The idea there is that people who value the FT enough are also frequent readers of it; the downside is that not all (potential) frequent readers are willing to pay, and you lose the ad revenues you could get from them. There are many other ways to target people who value your site. For example, you could charge people who visit before 9am, or who access it via their iPhones.
And then there's the PR. You don't want your pricing policy to come across as too arbitrary. You can't just say "we think you fall in a segment that values our content and therefore you should pay us $50 per annum". You need to be upfront about which ways of using your site (e.g. frequency, device, etc) are free and which ones are not, so nobody feels singled out.
All of this calls for a lot of research, analytics and technology. The devil is in the details and there are many of them. But it can be done. And as you can see, the idea is simple.