Newspapers' Perilous Paywall Moment

Paywalls are now ready for their close-up. Newspapers are no longer just talking — with increasing bravado or increasing scorn — about walling off or metering their digital content. They are actually doing it or scheduling a date on which to start.
 
And not just any newspaper — but The New York Times and the Times of London, to name two majors. Gannett Co. Inc., the biggest newspaper publisher in the United States, is turning three of its dailies into testing grounds for paywalls. MediaNews Group, the nation’s second largest, is making the same small side bets on paywalls.
 
It’s a moment that’s been a long time coming.
 
The question is, then, when we look back at 2010 will we see the year in which the first big industry players took a gamble that paid off? Or a year in which they made their biggest mistake of the Internet age?
 
No end to the debate
 
The intellectual underpinnings of today’s experiments came in 2009, as publishers dealt with a truly horrific period in the industry’s history. Circulation losses and double-digit revenue declines for the print editions ran headlong into the Internet ad slump of the last recession. The old ways weren’t working, and the new ways weren’t providing the answers.
 
From this came a belief, held by a growing number of publishers, that newspapers could convince neither readers nor advertisers there was value to their content when it was being given away free on the Web. The public got its first look at this industry debate with a February Time magazine cover story by Walter Isaacson, headlined “How To Save Your Newspaper,” that advocated an iTunes-style system of micropayments.
 
Now, in the summer of 2010, some of those papers are rolling out their redesigned web sites to test the theory that readers will actually pay for newspaper content online.

They are proceeding among some very discouraging signs — including failed paywall attempts.

Newsday, perhaps unfairly, has become a notorious example of a paywall’s limits. The former Tribune Co. property now owned by the Dolan family-controlled Cablevision began charging readers for content in October 2009.
 
In January, The New York Observer’s Media Mob blog reported on a newsroom meeting at which it said Publisher Terry Jimenez told reporters that the Web site had attracted just 35 paid subscribers at $5 per month. The Observer also quoted Jimenez as saying the Website redesign and relaunch cost Newsday $4 million. The Media Mob blog then helpfully observed, “With those 35 people, they've grossed about $9,000.”
 
That statistic overlooks that fact that all print subscribers to Newsday get access, as do all Cablevision customers. Yet it also underscored that there appeared to be little demand from the supposed multitudes of Long Island natives who would pay to access unique local news of their hometowns.
 
And there are other experiments that should give paywall advocates pause. Freedom Communications, for instance, isn’t looking at 2010 as the Year of the Paywall — it’s already abandoned one of the two pay systems it introduced in the summer of 2009. “I try to forget about paywalls — I’m not a big fan of them,” says Doug Bennett, president of Freedom Interactive.
 
As MediaNews and Gannett are doing now, Freedom erected paywalls not at its flagshiop Orange County Register or Colorado Springs Gazette, but at two small papers, The Valley Morning Star in Harlingen, Texas and the Lima (Ohio) News. Harlingen’s paywall lasted barely six months.
 
Freedom charged $4.99 per month in Harlingen and $5.99 per month in Lima, Bennett says. It put breaking news and other local stories behind the wall, but kept sports, traffic and weather, many features and obituaries free.
 
The paywall is still up in Lima, where, Bennett says, there’s little to no competition for local news. But Freedom had problems in Harlingen, where neighboring papers in Brownsville, McAllen, and other communities produced news about the Rio Grande Valley. “They were covering Harlingen news also, because they were in close proximity, and people went to those newspapers’ sites, which were free.”
 
Freedom had projected a sharp initial drop-off in traffic, but hoped to gradually rebuild it under the pay system, Bennett says. But things didn’t work out that way.
 
“We saw a 40% decline in traffic,” says Bennett. “We saw some new subscribers come in, but we didn’t see traffic come back to the local news like we expected to, and we didn’t see our CPMs increase. We felt we were becoming irrelevant in local news, and advertisers wouldn’t pay for that readership if it weren’t a certain size or growing at a certain clip.”
 
Plenty of observers think the latest wave of experiments will deliver the same results.
 
Fitch Ratings media analysts Mike Simonton and Jamie Rizzo issued a report in December saying 2010 will show “what goes up must come down … Fitch expects pay walls will be erected and dismantled in 2010 as media companies [with print products] experiment with charging users for online content and are ultimately disappointed by the results.”
 
There will be exceptions, the Fitch analysts said, such as The Wall Street Journal, The New York Times, smaller local newspapers and business-to-business magazines. The great majority of newspapers “have too many competitors in their content niche to compel users to pay.” Paywalls, they added, amounted to a “de facto audience minimization strategy” allowing free competitors to gain readers.
 
Fitch’s prediction for this year: “Parent companies will seek to halt the death spiral by re-opening most of their content broadly and dedicating efforts toward enhancing the user experience, content delivery/packaging and establishing partnerships with complementary content providers.”
 
Simonton tells E&P that “the thesis is still intact … Local newspaper companies that have been free and try to reverse course may have some near-term success at increasing their circulation revenue, but over time they will likely reduce their audience base, negatively affect the reach they can provide advertisers, and will likely spark free competition.
 
“If they do not invest in developing, aggregating and delivering unique local content to the next generation of information consumers, the local newspaper is unlikely to compete effectively with more nimble players that have lower cost structures and lighter debt loads,” Simonton continues. During the recent downturn, he adds, “not many made those types of investments. To the contrary, many companies disinvested to preserve cash flow, putting them further behind in the evolution of the newspaper business.”
 
Steve Outing, director of the Digital Media Test Kitchen at the University of Colorado School of Journalism and Mass Communications, says “a lot of the legacy news organizations — and Rupert Murdoch is the classic example — overvalues their content. And that in no way disparages the work of the journalists. It’s just this new ecosystem is pretty fast going to get to the point where non-legacy news organizations will do things of similar quality using the new business models, and it will be harder for the legacy news organizations to charge.”
 
Alan Mutter, the influential “Reflections of a Newsosaur” blogger who writes a column for E&P, recalls what he describes as the “secret meeting” of publishers in May 2009 in Chicago to discuss ways to charge for content. He and his partners had an idea for something he calls “ViewPass,” through which publishers would fund a cooperative to put technology in place to require readers to register to view stories. The cooperative would develop a database on who was reading what in order to develop highly targeted advertising. If publishers chose, the system could charge for content, Mutter says.
 
“Our belief was they’d never get enough people to pay on the Web so that it would be material to the business, and if you just started charging, they’d go somewhere else for news,” he says.
 
Mutter says he thought he was well-received at the time, “but they all proceeded not to come together to do this … nobody in the industry had any conviction about doing anything about it.” Instead, he says, the newspaper industry will be beholden to Yahoo and Google, which are developing ad-targeting, news-based systems.
 
“I thought 2009 was going to be the year of the paywall,” says Mutter. “Now, I haven’t seen any progress on any idea that will allow newspapers to protect their content and charge for it.”
 
However, a pay system has emerged, though whether it will become a newspaper industry standard remains to be seen. Launched formally last April by media bold-face names Steve Brill and Gordon Crovitz (see a Q&A with Crovitz, p.XX), Journalism Onlline’s Press+ service allows publishers to determine how and how much content they want to wall off. Its selling point is that it readers can use the same login to purchase content across all Press+ affiliate sites.
 
MediaNews Group is using Journalism Online in its paywall experiments.
 
What about the ‘Democrat-Gazette’?
 
While many like to point to the Arkansas Democrat-Gazette’s history of charging for online content, Mutter says it’s a defensible property as the clear leader in Arkansas news; had relatively less internet penetration than most major papers’ markets; and has been charging nearly from the get-go. Many newspapers can claim none of those three advantages, he says, and are kidding themselves if they think local news is exclusive content. “What happened at the library board, or whether there’ll be an ordinance to put the numbers on the street curb — that’s not mission critical, and that’s not even defensible, because people can find out about it somewhere else.”
 
Count Freedom Communications’ Bennett as another, like Mutter, who believes an industry that moved in lockstep toward paywalls might have had a chance at succeeding. In an environment when some papers do and others do not, however, it’s nearly impossible.
 
“If the Orange County Register put a paywall up, the L.A. Times would probably assign 20 reporters to Orange County and fill in the gaps. So I think it will be very difficult unless the industry as a whole decides this is the way to go,” he says. “I feel like our job is to grow audience, and if paywalls, unless everybody does it, will give you a smaller audience. More targeted, but smaller.”
 
Another possibility, Bennett says, is that the “different experience” of consuming media on iPads and other tablets can allow for charging, but “if all you’re doing is giving more of the same experience with your newspaper and your Web site and it’s not game-changing, it’s going to be harder to charge.”
 
The experts are not unanimous, however. Greg Harmon of San Francisco-based Belden Interactive says he got involved in the issue after the Isaacson Time magazine article last year, helping write an internal memo for an interactive department about how charging for content isn’t a smart idea. But with more research, he says, he’s coming to a different conclusion.
 
He figures that there are three types of Web audiences at newspaper sites: The “fly-by” user who usually comes from a search engine; the “incidental loyalists” who come by one to three days in a month; and “core loyalists” who are on 20 days per month, twice per day.
 
If a newspaper charged 50 cents per visit, he says, the revenue from each type of Web user would resemble print subscribers, in a way: 50 cents from a fly-by user would equate to a single-copy purchaser; the $1.50 from the incidental loyalists is about the price of a Sunday paper; and the $20 from a visitor who comes 40 times a month is akin to a monthly print subscription.
 
At this type of pricing, Harmon says, the top 500 newspapers in the U.S. are generating $4 billion worth of online content. Capture just 25% of that, and it’s $1 billion.
 
“That’s when I went, ‘This is not stupid. This looks like this is sort of possible,’” he says. “This is a game worth playing for everybody.”
 
Harmon is an advocate of metered models, though, not strict paywalls. “All you have to do is cookie them and when they reach 20 times in a month, you say, ‘Hey, you really love us — here are your payment options,’” he says.
 
Harmon then studied about 70 newspapers trying to charge for monthly online subscriptions, from as little as $1 per month to $350 per year.
 
Measuring the number of online subscribers as a percentage of print subscribers (what he calls “uptake”), he found “absolutely no correlation between expected uptake and how much you charge.” The $1 per month paper had uptake of 1.8%, while the $350 per year paper had 1.9%.
 
“An unformed economy will have that price irrationality,” Harmon says. “If your expectation is to charge $3 instead of $12 in expectations of having greater uptake, don’t kid yourself, because you won’t.”
 
And uptake can range well above the low single-digit range, says Harmon, citing examples from Florida to Quebec of dailies that have jumped into the high single or low double-digits. “Newspapers don’t have the courage of their convictions,” he adds. “The idea you can get 10%, 20%, 30% of your current audience to commit is perfectly reasonable.”
 
The new summer model
 
The Summer of Paywalls kicked off in June, when Rupert Murdoch’s Times and The Sunday Times of London introduced their pay models — making them the first of his papers in his avowed campaign to charge for all content.
 
A click on an article summary yields a message that says access costs one pound per day; there’s a trial offer of one pound for 30 days, followed by a 2-pounds-per-week subscription. (American readers are asked to pay $2 per day, with a trial offer of $2 for 30 days, then $4 per week.)
 
In announcing the paywall this spring, News International CEO Rebekah Brooks said, “At a defining moment for journalism, this is a crucial step towards making the business of news an economically exciting proposition. We are proud of our journalism and unashamed to say that we believe it has value.”
 
On July 1, Gannett walled off the content at three of its local newspapers in Greenville, S.C., Tallahassee, Fla. and St. George, Utah. The company considers Greenville, at 64,543 daily circulation, one of its “mid-sized markets,” while St. George, at 19,878, is a “smaller” market, the company told investors in its most recent annual report. Tallahassee sits in between, with daily circulation of 41,420.
 
The most routine of local stories are now behind the wall. On July 5 on greenvilleonline.com, readers who clicked on the weather report “Sweltering days ahead as temps expected to climb to upper 90s Wednesday” and the traffic story “Cleveland Street to be shut down for 3 days” were greeted with a message that “This article and other exclusive local content now require a subscription.”
 
All three of the Gannett papers ask $9.95 a month for Web site access, if the user doesn’t already have a print subscription. For $14.95, readers get access to the Web site and the PDF-style electronic edition. A 24-hour “day pass” costs $2. (All three of the papers charge $10 or less for a Sunday-only print subscription, which would entitle the reader to online access.)
 
“It’s important to emphasize that what we’re doing is testing different paid-content models in those three communities, so we understand how consumers behave with paid content models,” says Gannett spokeswoman Robin Pence. “One of the benefits of our company is the number of markets we’re in. We've got 81 markets to test and see.”
 
Pence says there are no current plans to test any other system than a paywall — for example, a metered model that allows for a certain number of free views before payment:  “We don’t have anything down the road right now. We’re going to see how those efforts go in the marketplace.”
 
Denver-based MediaNews Group plans its own paywall experiment this summer, intending to introduce a pay model in two small markets — at the Chico, Calif. Enterprise-Record and in York, Penn., where it owns both The York Dispatch and the York Daily Record.
 
David Bessen, MediaNews Group’s former chief information officer, was one of the executives who developed the plan before his departure from the company this summer in a reorganizational move.
 
“It isn’t simply putting a paywall at the perimeter, like Newsday did,” he says. A significant number of articles will remain free, but certain stories will ultimately trigger a meter and the user will be asked to enter a “Member Zone” and pay for access.
 
“As a general rule, content behind the paywall is content that could not be found elsewhere,” says Bessen. “It’s not AP content, it’s not something [Denver’s] 9News, or Channel 4 might have, even if they cover it differently. It’s investigative journalism, enterprise reporting, special columnists.”
 
Articles tucked behind the paywall could be supplemented or replaced with low-cost, outside content on the same topic, which could then have links back to the premium content, Bessen adds.
 
In a decentralization plan, each MediaNews paper’s newsroom will get to decide which stories go behind the wall and which stay out.
 
The New York Times, of course, is the most celebrated of the converts, although many of the details of its pay plan, to be introduced in 2011, remain undecided or undisclosed.
 
The company calls it a “metered model,” not a paywall, as an as-yet-undetermined number of stories will be free before a reader is asked to pay for access to the site, says Executive Director of Corporate Communications Diane McNulty. At this stage, the Times is planning monthly and annual subscriptions, not micropayments, and it’s still developing the pricing structure.
 
“We are currently deciding what the final product will be, including pricing, reading limit and what content will count toward the reading limit,” says McNulty. “We have decided the model will be designed so readers referred from third-party sites, such as blogs and social media, will be able to access that content. Links from referrals will count toward reading limits but will never trigger the gate, enabling NYTimes.com to continue being a part of the open Web.”
 
Subscribers to the print edition “will be treated in a special way,” she adds. “We’re just starting to develop that aspect of the plan.”
 
SIDEBAR 1:
 
Are small-town, paywalled sites undercharging?
 
A new study of weekly community newspaper Websites with paywalls suggests publishers don’t realize how much revenue they could generate — if they would only raise their prices.
 
This counterintuitive finding comes from Our-Hometown Inc. (OHT), the newspaper Website hosting service, which says newspapers could make more revenue online even as its audience shrinks. To a point.
 
OHT worked with Clarke County newspapers of Grove Hill, Ala., which provided a stark illustration of the point. Until last December, Clarke charged $26 a year for an online subscription, the same price as the print edition. Conveniently, for the purposes of the study, it didn’t offer any combination discount for taking both digital and print editions.
 
As of Dec. 1, that pricing attracted 219 subscribers. Later in the month, the price was jacked up to $79.99, and subscribers predictably bailed as their renewals came due. OHT calculates that if online subscribers continue to re-up at the same anemic rate, there will be 72 subscribers in December 2010.
 
But guess what? Those 72 would generate $5,759 — $65 more than the $5,694 the 219 subscribers were bringing in at $26 a year.
 
Using a classic price elasticity bell curve out of Economics 101, the Cooke newspapers and OHT figure the maximum revenue can be captured at a rate of $53 a year, which if the theory holds should attract 146 subscribers who generate a total of $7,738 — more than $2,000 than at the cheap or high-priced rates.
 
The Cooke papers say they’re going to let the $79.99 price experiment run through the rest of the year to confirm the theory, and then pursue the maximum pricing strategy.
 
“The Clarke data indicates that the price at which publishers like Clarke can expect to maximize online subscription revenue is higher than most think, at over 200% of the price of the print edition,” OHT concludes. — Mark Fitzgerald
 
 
SIDEBAR 2:
 
Paywall pioneer now feeling like a prophet
 
For publishers wrestling with the paywall issue, one mandatory step in the decision-making process seems to be a phone call to Walter E. Hussman Jr. in Little Rock.
 
The owner of Wehco Media and publisher of its flagship Arkansas Democrat-Gazette is too discreet to publicly name the names that have come calling for advice, but you’d recognize them. And several of them are now making well-publicized leaps into paid online models.
 
Hussman was roundly razzed by the industry’s digerati several years ago when he walled off most of the Democrat-Gazette’s content because he believed giving away the news was a big factor in the paper’s slipping print circulation. In the next couple of years, he seemed to prove the worth of paywalls as circ stabilized and even rose slightly. But until recently, the Democrat-Gazette was a lonely practitioner of paywalls.
 
Now Hussman appears to be leading a crowd.
 
“Our most recent thinking on paywalls is that we’re glad we pursued the strategy we did, because right now we’re thinking paid is more important than it ever was,” says Hussman. Requiring readers to pay for online content has positioned the Democrat-Gazette to take maximum advantage of the proliferation of new devices for newspaper content, particularly the iPad, he argues.
 
And the business model won’t simply include charging users, but delivering more effective advertising at higher rates, dispensing at last with the digital-dimes dilemma. “With the new devices like the iPad, it’s going to be much easier for newspapers to go from the one-to-many model of advertising to the one-to-one model,” he says. “When somebody pulls up a replica edition of our paper, we will know exactly who is coming to our replica editions. We’ll know their ZIP code and demographics. And we can now start serving different ads to different customers from the same retailer.”
 
A pay model provides far more information about readers than “than simply throwing the site open to a whole bunch of people,” adds Hussman.
 
The paper is developing its own iPad app — the Democrat-Gazette is already available on the Apple device through Newsstand — but its subscription-based paywall remains old-fashioned compared to the metered and hybrid models being adopted by the newcomers to paid online. But Hussman says the paper sees no reason to change the pay model.
 
In the last couple of reporting periods Democrat-Gazette circulation has fallen by a little more than 6% — in a period when other metros are showing double-digit declines. Hussman ascribes the slippage to two substantial subscription increases, and hiking the cover price outside of the Little Rock market to 75 cents. He says he’s keeping the faith with paywalls: “We’re happy with what we’ve got.”