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Feb. 4, 2010, noon

Is online news just ramen noodles? What media economics research can teach us about valuing paid content

The New York Times’ announcement that it would be charging for some access to its website, starting in 2011, rekindled yet another round of debate about paywalls for online news. Beyond the practical question (will it work?) or the theoretical one (what does this mean for the Times’ notion of the “public”?), there remains another question to be untangled here — perhaps one more relevant to the smaller papers who might be thinking of following the Times’ example:

What is the underlying economic value of online news, anyway?

Media economist Iris Chyi [see disclosure below] has a few ideas about this problem. An assistant professor in the School of Journalism at the University of Texas, she has been researching the paid-vs.-free, print-vs.-online conundrum since the late ’90s. Her research has consistently found that even while online news use continues growing, its preference lags behind that of traditional media. In other words: Even as audiences transition from TV/print news consumption to the web, they still like the traditional formats better for getting news, all other things being equal.

Now, this seemingly makes no sense: How could a format as clunky, messy and old-school as print “beat” such a faster, richer and more interactive medium on likability?

Chyi believes she found the answer in the economic principle of “inferior goods.” The idea is simple: When income increases, consumers buy more “normal goods” (think: steak) and fewer “inferior goods” (think: ramen noodles). When income goes down, the opposite occurs (again, all things being equal in economics terms). Inferiority, in this case, isn’t so much a statement of actual quality as it is of consumer perception and demand. If we get richer, our desires for steak go up and our desires for ramen go down.

What does this mean for journalism? “Users perceive online news in similar ways — online news fulfills certain needs but is not perceived as desirable as print newspapers,” Chyi said.

She and co-author Mengchieh Jacie Yang make this point through an analysis of data on news consumption gathered from a random sample of U.S. adults; their findings are published in the latest issue of Journalism & Mass Communication Quarterly, the flagship peer-reviewed journal for AEJMC. (See the related news release, overall highlights, and the full-text PDF). Chyi and Yang summarize their key findings as follows:

This analysis, based on data collected by the Pew Research Center in 2004, identified a negative relationship between income and online news consumption: When income increases, online news use decreases; when income decreases, online news use increases, other things (demographics, news interest, and/or other news media use) being equal — suggesting that online news is an inferior good among users. In contrast, the print newspaper is a normal good.

Such findings, at first glance, may surprise media scholars as well as online news professionals. After all, in communication research, no news products have been labeled as inferior goods before. In addition, major U.S. media companies have invested heavily in their online ventures, offering an array of interactive features and multimedia content — most of which are unattainable by print newspapers. It is therefore difficult to understand why online news could be an inferior good. Yet, from an economic perspective, “goods are what are thought of as goods.” Any product’s economic nature is determined by consumer perception and response. Based on this particular data set, which consists of survey responses collected from a national sample of online news users by a major polling institution in 2004, online news is an inferior good among users.

Clearly, the use of 2004 data is a limiting factor here (although the authors explain why more recent Pew surveys couldn’t be used for this kind of question). Yet, if we accept these findings, we’re left to unravel two mysteries: Why is online news perceived as an inferior good in the first place? And what should that mean for the future of web journalism?

On the first question, there are at least several possibilities, as Chyi suggests. Maybe the computer screen just isn’t an enjoyable reading device. (And how might that compare with smartphones and e-readers?) Or maybe online newspapers still have content/design problems — think of all the ads for teeth whitening and tummy tightening, not to mention the general lack of contextual cues afforded by print. Or maybe it’s simply because online news is free — and, as behavioral economics research has indicated, sometimes consumers perceive higher-price products as more enjoyable. In any case, as Chyi puts its: “More research, as opposed to guesswork or wishful thinking, on the perception of news products is essential.”

Then there’s the second question: What does this suggest about the future of online news? Perhaps nothing too dire, as people still do pay for ramen noodles when it suits them — when the price, convenience, or alternatives make ramen noodles the preferred choice. This isn’t to suggest that consumers invariably will pay for online news, but rather that they might if the perception calculation is right.

The key here is to recognize that consumers are rapidly adopting online news not necessarily because they prefer the medium to print, but because online news is “good enough” — cheap, convenient, flexible, and sufficient to satiate our information cravings. (This takes us into territory related to disruptive innovations and fidelity vs. convenience — interesting stuff, but something for a later post.) But the danger is in taking a “platform-neutral” approach if that leads one to assume that content value remains constant between print and online — that, basically, you can charge for content either way. Chyi suggests that is like trying to market ramen noodles as steak: Newspapers do so at their peril.

So, what does all of this say about the Times and its paywall? Perhaps not much because, after all, “the Times is the Times.” Yet, the notion of online news as an inferior good highlights a few salient points for thought: (1) news usage doesn’t always correlate with preference, counterintuitive as that is; (2) publishers hoping to charge for niche content need to understand where their offering fits in the normal-inferior goods relationship, and how that should affect pricing and marketing strategies; and (3) there’s a critical need for R&D to help us grasp why consumers perceive online news as inferior, and how that perception might vary among different demographics of users and/or according to different types of news content.

In the meantime, enjoy your ramen noodles.

[Disclosure: Chyi and I have collaborated on several research projects through her Media Economics Research Group in the School of Journalism at the University of Texas — including a recent peer-reviewed article on newspapers’ effectiveness in penetrating the local online market (PDF). Also, she’s currently a member of my dissertation committee.]

Photo of ramen by Broderick used under a Creative Commons license.

POSTED     Feb. 4, 2010, noon
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