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March 17, 2011, 11:28 a.m.

The Newsonomics of The New York Times’ pay fence

Editor’s Note: Each week, Ken Doctor — author of Newsonomics and longtime watcher of the business side of digital news — writes about the economics of news for the Lab.

It’s official — and the world still turns. After 14 months of planning, The New York Times is finally launching its pay system, starting in the U.S. March 28. It’s been a gestation period longer than a manatee’s, due to customer-service identification and coordination issues, tech development schedules, pricing thinking (and rethinking), and new tablet relaunch preparations. As I wrote earlier this week (“NYT’s Good Timing on Pay Launch, Amid News Chaos“), its timing is remarkably good — playing to the astounding iPad 2 launch, big news around the world, and a growing sense of the Times’ outsized importance as media chaos multiplies.

The Times’ approach is simple on the surface. It has adopted the metered approach pioneered, since 2002, by the Financial Times. It will offer digital readers about 20 article views a month without paying, with all kinds of exceptions for commercial pages, section fronts, big breaking news (as it decides), search and social traffic and “Top News” on smartphones and tablets. Unlike some daily efforts, like the just-launched pay system at The Dallas Morning News, or The Times of London’s recent one, or the long-standing one at the Arkansas Democrat-Gazette, it won’t lock up all its proprietary data, allowing readers to make their choice of those 20 views. That’s a positive in my view, maintaining a far less scary open look and inviting in samplers — good for ad selling and customer development.

Its initial pricing — and it’s worth noting that all of this is initial; the FT, for example, has been tweaking pricing and access rules for nine years — is $15 per four weeks (now that’s a newspaper model, eschewing what most humans call “months,” to revenue advantage) for a desktop/laptop + smartphone bundle, or $20 per four weeks for desktop + laptop + tablet or, finally, $35 per four weeks for “all digital access.” Print subscribers of any kind get digital access newly included at no extra cost.

It’s a high price, a gamble, and a big hedge — see Test 5 below — against print subscribers migrating too quickly to the tablet. Since it is not charging print subs, it’s going to be an uphill battle to get non-print people to pay a minimum of $195 a year for something that was free, and it eschews conventional wisdom that $9.95 a month is a consumer limit on many digital items. The lack of an annual offer is glaring, and makes it far less friendly to expense accounts for business readers.

Though the FT and the Wall Street Journal have long operated successful pay models, the Times’ leap is a big one: The Times isn’t mainly a business newspaper. If it can succeed charging readers for “general news,” that’s a milestone for newspapers around the world. Most fundamentally, it adds a second leg — digital circulation revenue — to the new business model for newspaper companies. Fifteen years into the Internet, they’ve proven to themselves that digital advertising money alone won’t sustain their newsrooms in the years ahead, as print continues its inevitable decline.

The Times now faces big tests, and lots of watchful eyes from legions of critics. I’ve identified seven tests of the Times’ new pay fence. (I call it a fence because it is climbable and purposely porous, so “paywall” doesn’t apply well.) Even if it passes all seven tests, that doesn’t mean it’s ready for a graduation celebration. Passing grades just let it move on to the next class, which involves the further development of a sustainable, tablet-inflected business model meant for the digital/print hybrid age into which we’re moving.

The seven tests:

Test One: Cross the one percent line

The Times has about 32 million monthly unique visitors in the United States, out of 45 million worldwide. While all are potential customers, its U.S. population is the first, key market. Something less than a million people are 7-day subscribers to the print paper (more on Sunday), and they’ll get digital access (“The Newsonomics of Overnight Customers“) included in their print subs. The Times knows that a great number of those uniques are Google-sent “fly-by” traffic; only a tiny percentage of visitors will ever pay.

How tiny? Maybe one, two, or three percent.

So one percent would be about 300,000 digital-only subs. Two percent would be, of course, twice that, 600,000. Three percent — probably a dream, at this point — at 900,000.

Let’s take the $20 price point as an average sales price, figuring both that tablets will drive sales and that smartphone-only and all-access digital subs will balance themselves out. At $20 per month, that’s about $78 million a year in digital circulation revenue — a new line item. Double it and you have $156 million a year.

Let’s put that number in perspective. The New York Times Media group — essentially the Times — took in $683 million in circulation revenue in 2010. So a one-percent digital success rate would yield a 11 percent increase in circulation revenue, if print revenue stays flat (which it won’t). Not bad, but not world-beating. Two percent, or a 22 percent increase on the print base, would be something to shout about — and a great platform for growth. Three percent is an almost magical number: $230 million a year. Even if the new scheme works, it will take some time to get there.

Test Two: Dispel the ghost of TimesSelect

Just the thought of revisiting The Times’ first foray into “paid content” may have sent ace columnist Frank Rich scurrying away before the fence could come down. TimesSelect erected barriers to columnists and other premium content, confusing readers until it ended its short run in September 2007. It brought in only about $10 million a year — worth comparing to the new results — from about 300,000 non-print subscriber customers. (Another number worth remembering.)

The uncertainty of TimesSelect hurt the Times’ overall traffic, as readers weren’t sure where and when they’d run into walls. The Times has taken pains to prevent that problem from recurring, and we can figure that only 20 percent or fewer of digital readers will run into a pay fence at all, as non-payers get those 20 free monthly article views.

If the Times’ new system succeeds, it’s in part because it kept its site looking open and welcoming to samplers.

Test Three: Keep the bumpers coming back

We know that the vast majority of visitors won’t reach the 20-article-view level and won’t bump into the fence. They are fodder for advertising, and a slim few will become more regular users over time. Then, there’s that small percentage — one to three percent — who do pay for digital-only subscriptions, in addition, of course to the print subscribers who will now get “all-access” (Prego: It’s in there!) included at no extra charge. It’s the bumpers — those who do run into the fence and don’t pay up — who are the big concern of the Times.

If they are bumping, they’re consuming a significant number of pages per month. They’re news readers. So figuring out their behavior after they bump is key.

Do they use another browser or account to get more articles? Do they go off to competitive national/global news sites? Which ones? Do they come back the following month and bump again? Or do they say “forget the Times — I’m going elsewhere” and mean it?

This is the group that offers the Times the greatest potential of new digital customers, on the upside, and would be terrible to lose, on the downside. And there’s lots of nuance involved in getting them inside the tent: Targeted special introductory offers, assuming the bumpers can be well-identified, should take advantage of the flexibility of digital marketing, for instance.

Test Four: Keep digital ad revenue steady as she goes

This is the publisher’s corollary of the Hippocratic oath: First, do no harm. The Times Co.’s digital ad business is growing well — accounting for 26 percent of its overall ad business in the fourth quarter of 2010, according to CEO Janet Robinson. Yes, reader revenue is a big part of the future business model, but digital advertising is likely to be bigger. In the U.S. alone (and remember that the Times has more than 10 million monthly uniques outside the U.S., potentially more monetizable down the road), digital advertising will reach about $28 billion a year. If the Times could nab another half a percentage point in market share of that still-growing pie, that would amount to $140 million a year, dwarfing new digital circulation money. So the Times is taking pains to keep traffic — especially to advertiser-sought parts of its site — high.

Denise Warren, the Times’ senior vice president of advertising, also heads — no accident, and the result of the last reorg after Vivian Schiller went to NPR.

Test Five: Make All-Access a big win — and not a big loss

How does digital bundle pricing affect print circulation? The hoped-for genius of All-Access pricing — print + desktop + laptop + smartphone + tablet — is that it slows down print loss, or churn, as it’s known. If The New York Times slows down print loss by 1 percent a year, that would mean about $7 million a year in circulation revenue. Slow it down by 2 percent and you save $14 million a year. All-Access pricing says to print subscribers: “You’ve now got digital that other people have to pay for, so just enjoy the whole bundle (and don’t consider dropping your subscription).”

Or All-Access could prove to be an historic folly. It could actually increase churn, as readers compare the $600-a-year-plus for an undiscounted 7-day NYT sub against the digital bundle prices, starting at $195 annually and up to $455. If digital bundle pricing hastens the digital transition, especially from print to tablet, then the Times loses not just the print revenue, but the ad revenue that’s attached to that circulation — before the tablet has matured as a replacement ad medium, yielding as much per digital customer (or close to it) as the print newspaper does.

The nervousness about how to treat print subscribers is obvious. Like The Dallas Morning News, the Times isn’t charging print subscribers anything extra for digital access. Consequently, the Times could be leaving lots of money on the table. If print subscribers paid a small $5 a month for access (adding less than 10 percent to their overall bills), that would open up a big new revenue stream. It could, though, also hasten that print to tablet move — so the Times is erring on the side of caution.

There’s no rulebook here, and all newspapers testing these waters are nervous, consequently, about the initial digital pricing. Listen to NYT competitor and WSJ publisher Les Hinton talk last week about the print/online/mobile transition — noting its inevitability, but then pointing to the ungainly and hard-to-control process ahead: “The issue is balancing out the migration.”

Test Six: Remain part of the conversation

Though the national conversation lately feels a lot more like bouts of yelling interrupted by tragedy, the Times and Times watchers are concerned that it remain part of the daily dialogue. That means an accessible flow of both news and commentary.

The open nature of the metered system is intended to preserve that while balancing revenue goals. How open the Times will be to social traffic is a big consideration, as social traffic is the fastest growing source of all traffic, and represents a more engaged audience than search-driven visitors. But maintaining high Google rankings is also key for growth — and influence.

Text Seven: Keep improving the product(s)

Let’s remember that the launch is just a moment in time. The pay model will play out over months and years, as publishers seek to reverse more than a decade of habit, and the free-news world morphs (witness AOL’s comings and goings) all around it.

We as consumers won’t be making a one-time decision. We expect that the news products (and services) we’re offered will get better over time.

Tablet products should fully embrace the wondrous potential of the platform. HTML5 should revolutionize the browser experience. The Times is working on both.

Over the years, the Times has thrown lots of products at the wall — Times Skimmer, TimesPeople, Times Topics, Times Reader, among others. It’s thrown so many that most of us don’t have time to track them or use them, no matter how useful they might be. Its product challenge in 2011-12: Match the journalism of the Times with a singular, surpassing everyday digital experience.

POSTED     March 17, 2011, 11:28 a.m.
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