How fast has the paywall revolution swept the daily newspaper world?

This adoption of charging for digital access took flight as the New York Times pioneered its general news pay model in 2011, and the rest is history: half of U.S. dailies and as many as 20 percent of European dailies have moved in that direction, with Latin America and parts of Asia joining the parade. Today’s announcement of the merger of Press+ and Piano Media further ratifies the paywall notion — and yet marks an early consolidation in a still-toddling marketplace. Smaller European-centric Piano Media has bought U.S.-centric Press+, creating by far the largest paywall tech company. That’s a double sign: showing the necessity of paywalls to the future of news business models — and the fact that there’s not a huge amount of money to be made in supplying this technology to the world’s press. Further, we can see how fast some things change, and the many ways the legacy press takes so long to innovate, even when presented with winning models.

It’s also worth noting this is also a global play, one more indication that news is going global as a business. We can see that in Huffington Post’s and Buzzfeed’s global forays, just as we can News Corp’s wide reach and the efforts of The New York Times, the FT, and BBC to build truly global news businesses. This new merged company will operate on at least four continents.

In the transaction, the money behind Piano Media buys Press+, with central European venture fund 3TS Capital as majority owner. The new company retains the Piano name, with the Press+ moniker still attached to that product. But we can expect further branding changes as the combined operations are sorted out.

The price is close to the approximately $45 million that printer RR Donnelley paid for Press+ three years ago. Donnelley, seeking to both diversify its Big Iron operations and get Wall Street to believe its modernization story, didn’t do much integration of Press+ with its other products, though it has enjoyed some benefit from cross-selling. Consequently, the company began searching for a new owner last November, when I first reported it was back on the market.

Some observers may dismiss the long sales process, and relatively low price, as the mating of two unprofitable companies. But that interpretation needs far more nuance. Both of these companies are young, and have had to invest a lot just to get into — and ahead of — the game against a half dozen or so smaller players. Both are in the red, but not by a lot, and efficiencies gained by the merger should help on the road to profitability.

In addition, though the paywall adoption rate is incredibly fast, especially for a newspaper industry that moves notoriously slowly, the revenue going to paywall providers is small and won’t ramp up wildly over time. Paywall tech isn’t a hockey stick investment; it’s a slow growing stream of partnered revenue, at least with current business models.

Combined revenue for the new company is in the range of $25-30 million annually with Press+ contributing more than 80 percent. The total initial workforce will be about 65, 40 on the Press+ side and 25 on Piano’s.

Press+ co-founders Gordon Crovitz’s and Steve Brill’s close involvement with the business will likely end by the close of the year. The two deserve credit for advocating a reader revenue strategy when most of the industry was oblivious to it, despite the early success of the metered model at the Financial Times. They launched the company as Journalism Online in 2009, later adopting the Press+ name associated with its first product. They’ve built out the company and have done quite well themselves financially, both in the Donnelley sale and the prove-out payments earned as the company hit its number-of-client milestones.

In one fell swoop the new company will dominate its field through sheer reach, though they face innovative competitors, each with its own niche. That list includes TinyPass, Cleeng, MediaPass, and Zuora, which counts some of the largest publishers like the FT, Guardian, News Corp and Australia’s Fairfax Media among its clients.

The new Piano can count 645 total paywalls, 570 driven by Press+ and 75 by Piano Media. Press+ has somewhat saturated the U.S. market, as almost all the newspaper chains are now spoken for, with smaller dailies the likely growth area. Among their customers are numerous chains like McClatchy, Digital First Media, Gatehouse, Morris, and Canada’s Postmedia. Piano’s number of publishers is close, at 27, but it powers 75 websites. Outside the U.S., Press+ hasn’t gotten much traction; its non-North American clients number less than 10 percent of its total. Meanwhile, Piano Media has begun to outgrow its early label as a Slovakian company powering “national” paywalls mainly in that central/eastern European region.

The new Piano also announced today that experienced newspaper executive Kelly Leach, would take over as new CEO. The 11-year veteran of Dow Jones acknowledges that paywall-nascent Europe is the first priority for the new company (“The newsonomics of paywalls all over the world.”). She’ll remain in London, where she has escaped the worst wrath of Dow Jones’ Lex Fenwick years, now leaving her job as managing director for Europe, the Middle East, and Africa and publisher of The Wall Street Journal’s European edition. Tomas Bella, who had served as Piano’s founding CEO, left the company in the spring.

Consolidation will provide the new company numerous benefits:

• Cost consolidation is likely. Piano’s 25 employees are largely based in lower-cost central Europe, while Press+ employees are largely in New York City. As decisions are made on how to combine technologies, efficiencies will be found that should reduce total expenses.
• One company can work sales in both Europe and U.S., as well as the rest of the world. The market will see a certain clarity in the “how” of paywalls — if the new company can satisfy the many paywall-related demands of publishers.
• The new Piano will have access to more data on actual paywall performance, pricing and marketing results than any other supplier. Both companies have increasingly found themselves becoming paywall implementation advisors to publishers. They’ve begun to make sense of what’s actually happened in the digital subscription marketplace, and that may end up being the most important value proposition going forward.

As much as consolidation will help, the company will face one major headwind. Publishers’ near-religious conversion to “paid content” (remember that fading term, and that now-retired, Rafat Ali-pioneered website) is happening so quickly that the major publishers now consider digital reader revenue absolutely core to their future business model. If reader revenue overall — some combination of print-only, digital-only, and all-access — becomes not only pivotal, but the majority source of revenue, then publishers often lean toward building, rather than buying a paywall.

Recall how The New York Times was derided for the year it took to build out its paywall system? That year required both extensive consumer modeling and the development of new payment technologies that connected to larger customer databases. That kind of architecture costs lots of money, and, of course, time. Press+ and Piano Media have both successfully made the case to hundreds of publishers that they are better off licensing technology, with improvements that can be iterated centrally, instead of building, operating, and improving their own systems. That’s a powerful argument, but one rejected by companies like Gannett, Tribune, and The Washington Post. The contrarian notion: If digital reader revenue is so important, and so tied to print reader revenue, and evolving knowledge of reader habits, then much better to own the entire system.

The future of the business will rise or fall on analytics. One way or the other, connecting digital customer data to print customer data is becoming essential to customer relationship management. “Customers are asking for the building of a single customer views,” affirms Matt Lindsay, head of econometrics firm Mather Consulting, which works with more than 400 newspapers.

Put it together, and the build/buy choice is a matter of pride, strategy, and economics. Those companies that can invest — and staff appropriately — can make a good argument. Many others haven’t been be able to justify their own investment yet.

Consequently, the new Piano Media faces that longer-term challenge.

The company is acutely aware of it, and has more recently invested resources in better, deeper integration with publishers’ own customer databases, winning praise from such clients as German publisher DuMont Schauberg.

“Our key reason for picking Piano was having variable instead of fixed costs as long as the entire market is still figuring out what potential online premium products really have – and it is working well,” says Patrick Woelke, managing director of DuMont Net, the digital arm of M. DuMont Schauberg. “Also, we got a lot of expertise via Piano. We attached Piano to our subscriber/CRM tool, so we can handle online-print-subscriptions, cross-selling and up-selling.”

Ultimately, Piano has to stack the buy/build proposition more strongly in its favor by upping its game, and the combined company should have a better chance of achieving that. Further, it must continue to build out its customer service and tech integration capabilities; some customers cite slowness in both areas.

Alongside that question are the basic business models. Publishers don’t like to pay a revenue share on each paying reader (just as they don’t like paying an ongoing revenue share to participate in Apple’s Newsstand), and they also don’t like paying ongoing fees. If the expanded Piano Media is to grow to profitability and provide ramping pay services to publishers, then publishers and Piano will have to find workable sweet spots for pricing. For most U.S. publishers, the all-access subscription has turned out to be a greater revenue source than digital-only offerings. There, Press+ takes about 25 cents per print subscriber per month to provide “authentication” services, a significantly smaller take than the 20 percent revenue share of what customers pay for digital-only subscriptions — which the company thought would be stronger when it first launched.

It’s a tough business given the individual vendor demands by publishers, and the need to both improve and scale technology to meet the challenges of paywall times.

Both companies talk a good game — and partially deliver. Clearly, analytics and the application of market-customized best practice consulting lies ahead of Piano as its largest opportunity. As a paywall tech leader Piano sits atop the heap of so much reader pricing and usage data, it will offer to tame that Big Data into knowable little data, on which publishers can optimize their businesses. “Customer group segmentation,” is what Pekka Maki, managing partner of 3TS and deal-maker behind the merger, called it when I talked to him about the deal last week. He believes Piano’s timing is good, as many publishers begin to move away from the world of installed software to buying more cloud-based services.

New CEO Leach outlines her sales pitch, based on the benchmarking/best practices argument: “If you are getting started in the paid space, you don’t have to start at square one. You can leapfrog over trial and error.”

At this juncture, though, both Piano and Press+ have just scratched the surface of that knowledge. All of that technology work will require investment for the next several years, even as the increased engineering work is located in the lower-cost eastern Europe. Maki says that the investors — Vienna-based 3TS Capital Partners, with junior partners aws Gründerfonds (Austria), Neulogy Ventures (Slovakia), and North Base Media (USA) — put in new investment capital in addition to the cash for the Press+ acquisition. Will it have the capital to truly meet the opportunity of a paid content world? It’s a balancing act for the company, which Maki says will “sell or IPO in five years, plus or minus.”

Finally, there’s the unique issue of Piano’s #1 target market: Europe.

As Valerie Arnould, deputy editor-in-chief of WAN-IFRA, notes, “We are still at the start of reader revenue trends.” Or, to put it another way: Europe is just different.

While paywalls have more room to grow, the main model adopted by publishers in Europe is “freemium.” That means that some articles (usually wire+) are free and much of the staff-written content is behind a hard paywall, with little or no metered sampling allowed. Why do European publishers take a different strategic path from their American cousins, most of whom have embraced the meter? In my talks with them, I hear much concern about the potential for lost digital advertising and about readers evading the cookies paywall systems set. Further, the editorial cultures of many of the still family-owned European press are stronger than they are in the U.S. There’s the sense that readers should pay for proprietary staff content, even if evolving metrics tell us that metered sampling produces far better reader revenue results. How much of a revenue difference are we seeing in Europe?

“If you go for freemium, you are reaping only about 10 percent of your potential paid content revenues,” says Gregor Waller, a Hamburg-based consultant highly knowledgeable about the business model changes of the press there.

Given those challenges, Waller believes that companies like Piano and Press+ are “transition-technology-providers — thus only interesting for publishers who want to test the waters or who have underestimated the technological challenge for an owned paywall-system….If paywall-tech companies want to survive, I would suggest they concentrate on the small to medium size publishers; reduce the paywall-cost to a flat fee (not related to paid content revenues) and actively sell data/marketing-know-how which those publishers will never be able both to attract and pay.”

Photo of a Lego wall by mkorsakov used under a Creative Commons license.