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March 7, 2013, 12:56 p.m.

The newsonomics of Why Paywalls Now?

Paywalls are generating real money for American newspapers in 2013. But would they have in 2007, or 2002, or 1997?

Though it’s spring training season, forget Moneyball — think Paywall. The money now flowing into newspaper companies due to paywalls is getting to be seriously countable.

hg-wells-the-time-machineFor the New York Times Company, the circulation revenue increase amounted to $63 million in 2012. For Gannett, which installed its metered systems throughout the year, overall circulation revenue was up almost $40 million in the fourth quarter. That should lead to more than $100 million in added revenue in 2013. Add in the multiple millions pulled in by paywall leaders like the Star Tribune, the Columbus Dispatch and the Charleston Post and Courier, and you’ve got serious money. Figure that U.S. paywall programs will generate more than $300 million this year. When the 2012 final numbers come in, the industry’s circulation revenue should punch back through the $10 billion level — on their way to beating the $11.2 billion zenith, set in 2003, by 2016.

It’s money that’s stabilizing the business, really for the first time since 2006. Newspaper revenue trends among those top performers are getting back to that under-appreciated “zero” number (“The newsonomics of zero, and the New York Times”), making up for continuing losses in ad revenue. It also means we’ll see more top-line growth this year — and that’s milestone territory. That’s the reason why the U.S. system of metered paywalls is now being applied around the world.

As I’ve covered this phenomenon, a couple of questions has been bedeviling me: Why paywalls now? Why weren’t paywalls put into place in 2007, or 2002, or 1997?

dam-paywall-austria

Might such paywalls have prevented the massive loss of reporting that local papers — and local readers — have suffered? Would they have saved a good number of the more than 15,000 newsroom jobs (a 28 percent decline since 2001) that have evaporated? Might the global bureaus of the big metros been spared? Would regional business news coverage be as robust as it was in the 1990s? Would investigative units be off the endangered species list?

Why, oh, why, after the newsroom carnage of the last decade, are we only now seeing paywalls being erected and reader revenues being harvested? We can sum it up in two words: thinking and technology. It’s the intertwining of the two, in a hard-to-distinguish chicken-and-egg digital dance that appears to have led us to today.

Let’s start with early thinking, or some would like to say, “What were they thinking?”

Ask veterans of the trade, and they’ll remember the history this way: Reuters, in an earlier foray to establish a greatest U.S. presence, began licensing its national and global coverage to the portals — Yahoo, AOL, Excite, MSN, Lycos — of the day. The Associated Press followed suit. National and global coverage — a key ingredient of the daily newspaper mix — had gone free overnight. Digital evangelists seemed born anew on every street corner of the web; “free” became the new article of faith. The “death of distance” realization confirmed that local news consumers could no longer be held “captive.” There were paid forays by individual companies, and the outline of a bigger “national press pass” idea considered by then-industry chieftains through the New Century Network.

The tests and ideas fizzled. “Circulation” was a term only associated with Big Iron. Further, circulation was viewed only a means to advertising profits. The basic, unquestioned model of the U.S. industry: Keep reader prices really low, maximizing your “rate base” for mass advertising, and charge top dollar for those huge audiences. Reader revenue had never been thought of as a profit center in and of itself — the readers were only a means to an advertising end.

All of that led newspaper publishers to embrace digital advertising as the only way forward. They decried the poor man’s alchemy of turning shiny dollars into tinny dimes, and privately said they couldn’t quite see how the arithmetic was going to work. Again, though, as an article of faith, they told investors and analysts that advertising sales were the key to the digital transition. They believed that advertising, which had got them to where they were, was the key to the future.

A newly laid brick wall

That mistake is the vital one in the chain of events for FT.com managing director Rob Grimshaw:

I think the key factor is a growing realisation that online ads are not going to pay the bills. Online ad revenue growth at most publishers has slowed to a trickle. What many interpreted as a blip is now an established pattern over several years. As a result, many publishers are revisiting strategic plans and concluding that they have no hope of building exclusively ad-funded online businesses. Paywalls and content revenues are the obvious alternative.

The fact that major general news players like NYT have jumped into the water also encourages others to take the plunge. The industry could have got to this place a lot earlier because the warning signs around online ads have been evident for a while to anyone that was looking. Unfortunately publishers were watching each other when they should have been paying attention to developments with ad networks, search and social media.

Watching each other. Or, as Orwell called it: groupthink. Publishers early on rejected reader payment in the digital age. The Wall Street Journal and Financial Times paywalls? Well, that’s not the news, it’s business news, publishers told each other, and besides the FT’s both British and, for God’s sake, printed in on salmon-pink paper. What stands out most is how little testing of a general news pay model we saw.

Only a handful, most prominently Arkansas Democrat-Gazette publisher Walter Hussman (just lauded by Warren Buffett) offered this heresy: Why would I give away a product on the web that I am asking people in the community to pay a couple of hundred dollars a year for? In retrospect, Hussman only had part of the answer. His contrariness did stem his papers’ circulation losses, because the paper only put a part of its daily print report online. His papers may not have been able to greatly grow circulation revenues, and they experienced a tougher time getting the digital ad business going — but that simple-minded thought for which he was ridiculed is now the root of the reader-revenue revolution.

Faith. Religion. Heresy. They seem like appropriate words. It’s only natural for the inhabitants of any industry to think inside their boxes. And those newspaper boxes were wonders, producing 20 percent-plus annual profits; contrary thinkers weren’t really welcome. It’s the structure of the U.S. newspaper industry that reinforced the problem. Daily newspaper publishers, by and large, don’t compete with each other. In our spread-out geographies, the age of competitive dailies largely disappeared 60 years ago.

Though mindset was clearly an issue, it wasn’t just that mindset that delayed reaping of new reader money. Enter the metered model, and the evolving technology that is still being built out to support it.

It’s at the nexus of mindset and technology that we find our answer. Now, “content wants to be free” seems silly to an increasing number of us. Yes, some content — lots of content! — is free and will always be. What the metered idea — allowing some number of free articles to each unique visitor — dispels is the either/or thinking of the early Internet news age. News doesn’t have to be either free or paid. It can a combination of the two.

The Wall Street Journal pioneered its “freemium” approach, offering a myriad of free gateways into paid subscription content. And then the meter came along. Built on the simple proposition of sampling, the Financial Times ‘ 2007 innovation blew open the either/or door. Now the meter — further innovated by the FT itself, The New York Times, Press+, and others — has reversed the industry’s groupthink. We’ve gone from “it’ll never work” to “Why were we free so long?” almost overnight.

Providing choices beyond either/or, in the form of a metered ecology, takes a lot of work. The New York Times famously spent a year, and about $25 million, getting its system built before it a launched its paywall in January 2011. Press+ has been building its system for more than four years.

What’s needed under the hood? Press+ cofounder (and former WSJ publisher) Gordon Crovitz ticks off the parts: “geotargeting, trial offers, coupons, enterprise licenses, multivariate testing” — in addition, of course, to the basic authentication and e-commerce functions. Add in skilled staff: developers and engineers with e-commerce backgrounds, data scientists, data analysts. Of the 30 staffers at Press+, 20 are on the technology side, both making the system flexible enough to match up with print audiences (enabling those high-priced all-access subscriptions) and building a strong base of best practice data. Press+ makes possible the kind of flexibility that we only dreamed about as New Century Network concluded its last supper in noisy disarray in Denver in March 1998. The technology, developed by Press+ and now separately by a number of chains and individual papers, is a gating factor in the beginning success of flexible, metered, connected-to-print-databases subscription paywalls.

Add in another technology to our that-was-then, this-is-now thinking: easy and secure digital payment, says Maribel Perez-Wadsworth, VP for audience development & engagement for Gannett. “Consumers are much more used to and comfortable with paying for things digitally. (Thank you, Amazon.) Buying content, games, and services online is now easy and safe. And of course, the iTunes experience has helped to further cement the no-brainer aspect of such purchase decisions.”

Another set of technologies, brought to market by Apple, clearly have played a huge part in the all-access revolution. Newspapers could have offered combined print/web subscriptions at any point in the last 15 years. Yet it’s been the growth of mobile that has spurred both publisher confidence in selling bundled subscriptions and consumer willingness to accept the deal. It’s basic psychology: As consumers, we have the sense we’re getting more when our favorite newspaper or magazine promises (and delivers!) to get us its product via web, smartphone, tablet, or print. For publishers, it’s easier to offer that full package — at a higher price — even if most who take the deal only use a couple of the products.

Further, our on-the-go reading lifestyle is bolstered by broadband speeds: Selling digital subs in the dialup era made less intuitive sense. Of course, as Perez-Wadsworth points out, tablet and smartphone value is only enhanced as publishers have gone digital-first with their news reports and added rich(er) media. John Murray, the Newspaper Association of America’s VP for audience development, agrees: “Newspapers are fortunate that they did move slowly and deliberately because they now have better product(s) to offer.”

New York Times CIO Marc Frons adds in another factor worth considering: scale. “I don’t think paywalls would have ‘worked’ in 1998 or 2003. And they didn’t work in 2007 either, with the Times trying and failing with Times Select. I don’t think a meter would have worked back then either, because the Times and other publishers lacked sufficient scale to reach and then convert the plurality of the audience who would pay. But by 2011, when The Times launched its metered paywall, our traffic was close to an all-time high, so we had the scale.”

The new metered tech capability also allowed publishers to do what they had rarely done before, but which had become standard in so many businesses: segment their audiences. It allowed new testing of pricing.

Matt Lindsay’s Mather Economics is now the go-to circulation advisory firm for more than 300 U.S. dailies. He explains how that segmentation developed: “I think it was the innovation of the metering model for customer price discrimination, much as other industries have found other pricing models that worked well for them. The cell phone industry stopped charging by the minutes of use in favor of fixed prices for numbers of minutes. Airlines used the “Saturday night stay” to separate business from leisure travelers. Prior to the metered model, there was an open or closed choice for newspapers. The meter is successful in segmenting the customers based on engagement and likelihood of subscribing.”

Further, it allows newspaper companies to remain, in a phrase we haven’t heard as much since the beginning of the paywall debate, “creatures of the open web.” Stories, themselves, can be part of the public debate, findable by search and sharable through social.

Could our scenario — and the life and near-death of the U.S. metro daily — have played out differently? Sure, it could have, even with the technological limitations.

“I don’t see why paywalls wouldn’t have worked even better in 2003 or 1998 before people had gotten as accustomed to the prevalence of “free” news online,” says Star Tribune publisher Mike Klingensmith, whose company now takes in 44 percent of its revenue from readers. “In addition, there was less digital ad revenue in those days; a minimal loss of ad revenue seems like it would have been even more minimal.”

So, maybe, newspaper companies would be in better shape today, with a lot less bleeding along the way. Maybe, sort of, in part, some way.

Clearly, though, we’ve seen a harmonic convergence in 2013. The coming ubiquity of mobile news reading. Sophisticated metered systems. The stunning death spiral of the ad subsidy. Audience scale. Pricing segmentation. The reassertion of community news value by publishers. Consequently, pay models are becoming a part of the new business model — but clearly only a part. So what other conventional wisdoms, business and editorial, need to be challenged in the remaking of the news business?

POSTED     March 7, 2013, 12:56 p.m.
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