Will Newspaper Readers Pay the Freight for Survival?Published: May 19, 2010 in Knowledge@Wharton
The Internet has disrupted the habits of both readers and advertisers in ways that are destroying ad-supported media, according to speakers from the newspaper industry, digital businesses and academia who attended Wharton's recent Future of Publishing Conference in New York. Participants analyzed how the Internet has turned current business models on their heads, and they offered strategies to cope with the new publishing landscape.
Readers have always thought they were paying the operating expenses of newspapers through their subscriptions. But since World War II, those payments have covered just 20% of newspapers' costs (the figure is even lower for magazines). The business was mostly about selling ads to companies interested in reaching those audiences. Now advertising has slipped to about 50% of newspaper revenue, and it will probably fall further.
Consequently, newspapers are increasingly looking to get their readers to pay much or all of the cost of producing the news they read. Gordon Crovitz, former publisher of The Wall Street Journal, stated in a keynote speech at the conference that "everybody has the opportunity to make money from readers if their journalism is distinctive enough." He cited a study by The Boston Consulting Group noting that 48% of online readers said they would pay for access to their favorite sites, although they weren't willing to pay much.
Crovitz advocates a "freemium" strategy -- in which casual readers get limited free access but dedicated readers are pushed to buy subscriptions -- which he says would significantly increase a newspaper's revenue while keeping ad revenue steady. About half of the people who visit a news site are casual visitors coming via links to articles on other sites, he stated, while the rest are dedicated readers who choose to come to the site itself. Many free newspaper sites don't dare charge visitors for fear of losing most of their audience and the ad dollars that go with it.
In a lunchtime presentation at the conference, Martin Nisenholtz, the New York Times Co. senior vice president for digital operations, suggested that "building two revenue streams into the model is critical for us." He noted that the advertising stream "is very cyclical," which is a problem for newspapers with high fixed costs for reporting, newsprint and distribution.
According to Crovitz, "metered access will become the most common model." This means that readers will be allowed to view a certain number of articles on a newspaper web site for free each month. After that, they will have to subscribe if they want to see more. He cited the Financial Times web site as having successfully introduced a metered model, noting that it started out by giving away 30 articles a month before cutting to 20, then 10, and most recently, to eight.
Like most people in the industry, Crovitz will closely watch The New York Times as it goes to a partly paid model next year. He estimated that a paper with circulation and online presence similar to The Times could convert 10% of users to paying subscribers, and that such a company could boost its revenue by $34 million in the first year and $86 million in the second, even with a decline in ad sales. The decline need not be large, however, because advertisers will pay 30% premiums to reach paying subscribers. "It's incremental, high margin revenue," he added. "That's real money today. It used to be a rounding error."
Crovitz has started a company called Journalism Online LLC. It is working with 1,400 news sites around the world and reaching 135 million readers; some of the organizations will launch paid sites in the next few weeks, he said, adding that the service, Press+, takes care of registering and billing readers and minimizes the number of times they have to enter their credit card information.
Newspapers and magazines will also look for other ways to sort out the core customers. They will try to separate subscribers who are willing to pay a significant amount from lower-tier customers who will pay little or nothing. For example, magazines might charge a premium price for articles on the day they are published in print, and an even higher price to let eager readers see them the day before.
Speaking on a panel at the conference, David Carey, group president of magazine publisher Conde Nast, said "the opportunity is segmentation of customers. Historically we have priced to the lowest [10% of customers] to get a 1.7 million circulation for Golf Digest." Without disclosing specific plans for augmenting the value of subscriptions, he added that "there could be $1,000 subscriptions for The New Yorker for the most loyal and engaged."
Engaging readers online is key to monetizing the audience, several speakers added. "No newspaper is satisfied with its level of engagement," stated Richard Baum, global editor of Reuters.com. "Facebook makes us all very jealous."
The New York Times Co.'s Nisenholtz said Facebook's "engagement metrics are off the charts," noting that the paper is taking a variety of steps to increase the level of engagement by readers. However, readers still spend much more time with the print newspaper than they do with the online version. "We have made great strides in digital story telling" with slide shows and videos, which increase page views, he said, but "that's not more engagement."
"Identity is fundamental" to engagement, he added. The Times requires registration by readers, and it is trying to get them more involved through reader-produced content. When users have to include their real names, "quality of comments improves. Anonymity has become the enemy of good stuff." The Times has found that "readers who write reviews for us use the site more." The site is also experimenting with user photos, and is making it easy for users to link with blog sites like Tumblr.com. In addition, the site is interested in using geo-location networking tools like FourSquare.com. However, he cautioned that user-created content often doesn't fit with The Times' model of producing content that isn't affected by commercial influences. "It's hard to find people to write for you who are free of conflict."
Jennifer Preston, The Times' social media editor, noted that the paper is trying to develop automated ways to filter out comments that are off-topic or potentially libelous, and is also working to create "curatorial" tools that would preserve Twitter feeds and other information streams related to articles. In addition, The Times is considering ranking comments and also highlighting comments from a reader's own network.
In a later panel, Peter Fader -- Wharton School marketing professor and co-director of the Wharton Interactive Media Initative, which sponsored the conference along with Knowledge@Wharton and Wharton School Publishing -- suggested that "engagement is a means to an end. Does it result in dollars?" Panel participants said that if a service makes readers more willing to pay for their relationship with a particular site or advertisers more confident of whom they are reaching, it can boost revenue.
"Geotargeting for out-of-market access" is another possible way to find new revenue, Crovitz said. For a UK newspaper with heavy print readership, three-quarters of the online readers are outside the country. Except for airlines and freight-forwarders, advertisers aren't interested in reaching them. "How do you monetize?" Crovitz asked. He speculated that those readers are desperate for news from home, and would be willing to pay for a subscription. So would Japanese expatriates all over the world trying to stay on top of news in Japan, he said.
Among the first-announced clients for Press+ is the Lancaster (Pa.) Intelligencer Journal. One of its most searched online topics is obituaries, Crovitz said, and therefore the paper plans to charge out-of-towners a fee to read death notices. Another potential revenue source would be creating a club "based on deep affiliation with the brand." Crovitz pointed to National Public Radio, which gets about 10% of its listeners to pay annual dues in return for a coffee cup and other "thank you" gifts. GlobalPost.com, an international news service, plans to use a meter model to select frequent readers that it will solicit for membership donations.
Newspapers and magazines can also be subsidized by other organizations. Crovitz cited Cablevision's system of monopolizing the Long Island ad market by acquiring Newsday and giving free online access to subscribers to the print newspaper and customers of its cable system, while charging $260 a year to anyone else.
Last fall, Bloomberg LLC, the financial news and data company, bought BusinessWeek and boosted spending on reporting to enhance its own image. Paul Bascobert, a WSJ.com veteran who became president of Bloomberg BusinessWeek at the beginning of the year, said in an interview that BusinessWeek reporters can do stories that Bloomberg reporters can't. For example, BusinessWeek recently landed an interview with President Obama; it was featured on Bloomberg's terminals for stock traders even before it was available in BusinessWeek.
From Sky to Shrubbery
Although advertising has recently picked up, speakers at the conference don't foresee robust prospects for online ads. Just four years ago, newspapers were optimistic that 30% annual growth in online advertising would continue for years to come and eventually replace lost print advertising. "It grew to the sky before falling down to the shrubbery," Crovitz said. The problem is that "the inventory of page views is approaching infinity." In the paper world, press capacity and delivery issues have created a scarcity value for newspaper advertising.
CPMs (cost for 1,000 impressions) on top web sites "went from a peak of $100 to $50 to $10. Lots of inventory is now selling for $1," he said, while classified ads for cars, jobs and real estate -- the bulwark of many local papers -- have been siphoned away by specialized sites like Cars.com, Monster.com and Zillow.com. Free CraigsList ads take another chunk of the classified and personal ads market. Department store mergers have reduced the number of display advertisers for many metro dailies. While first quarter advertising showed a pick-up from the depressed year-earlier levels, according to newspaper reports, speakers still predicted it won't return to the record levels of 2006 any time soon.
Many things about the new digital world are giving publishers heartburn. For one thing, the makers of the new digital readers are gaining control of the papers' readers. Amazon sells newspaper subscriptions on the Kindle and takes a large cut. Apple takes a cut from publishers who sell apps to readers. Crovitz compared the system to Sony decreeing that "every time someone watches 'The Sopranos' on a Sony TV, Sony would get a cut."
According to Crovitz, readers don't understand why they can't get access on any electronic device when they buy a subscription, but he said it's difficult when the device makers control their platforms. Nisenholtz later added that "apps are all colliding at different price points," noting that on the Kindle there isn't any advertsing to subsidize costs, while on a web site there is "a robust advertising model."
Still, magazine publishers are excited about Apple's new iPad because its colorful screen is large enough to display high quality photos and interactive ads. Conde Nast's Carey predicted that the iPad app from Wired magazine will "set the bar" for magazines when it appears in June.
The media experts at the conference all acknowledged that the future is likely to be dramatically different than anticipated today. Ten years ago, Carey reminded the crowd, "we were all terrified about the merger of AOL and Time Warner." Google and Facebook "didn't even exist."