Sunday, November 14, 2010

The pros and cons of charging for news

Robb Crocker, a mid-career grad student in communications at Rutgers, did an email interview with me about the pros and cons of charging readers for news content. He posted the interview on his blog, here's the Q and A portion.

Q. In your opinion, what are the pros and cons of charging readers for online news?

A. On the pro side: it helps put in the minds of readers the idea that this content has some value; that there is a cost to producing it. And of course, in theory it creates a revenue stream for the publisher. Against this, on the con side, are these arguments:

(a)  Before online distribution, news in most media was free: radio, TV, and even newspapers — the subscription price or newsstand cost of a newspaper is really a convenience fee readers were willing to pay for their own personal copy. Historically, at least until the 1980s, it was a kind of freemium model: you were likely to find a newspaper to read sometime in the course of your day: at the barbershop, on a bus, in a waiting room, at the lunch counter, etc., and the pass-along readership factor was quite high. So if the prior news media never established value and a willingness of consumers to pay for news as distinct from convenience, then doing so for online news will be very difficult.
(b)  Except for a handful of publications with high-value content, like WSJ, FT, possibly NYT and various more topical niche publishers, it will be very difficult to implement a paid model in which the loss of ad revenue from lower page views is offset by the subscription income. Small local publications will simply not be able to implement pay systems by looking at the models that work for the high-value and niche publishers. 
(c)  Content has become atomized. The typical reader assembles a stream of online news not from a single source but from multiple sources, and will be unwilling to return to a single-source model.  

Q. Did newspapers wait too long to try to charge?

A. Newspapers waited too long to innovate, and now they are turning to pay models not strategically but in desperation. Most newspapers got on the web early on, but they assumed that the Web was an extension of print, that the business model would be the same as print. They sold online ads as "value added" benefits for print advertisers, rather than understanding Web advertising and helping their customers maximize results from online ads. While most large companies in the 90s began to reinvent themselves as digital enterprises, newspapers continued, to this day, to operate print-centered businesses. If you don't believe this, go to any newspaper and probe employees about their jobs — you'll find that the central organizing element in 90 percent of the jobs is the moment the press starts: advertising, newsroom and prepress work toward it; pressroom, mailroom, distribution, circulation and the business office pick it up from there. The Web is a sideline, an afterthought, no matter what some of the slogans may be. In a truly digital news enterprise, most jobs would focus on digital publishing; print would be a niche product; and production, printing and distribution would be outsourced.

The real question is not whether newspapers should charge or not, or whether they waited too long. Even if they had charged from the beginning they would have failed, because they would not have made that fundamental shift to digital enterprises. If huge new Web-based businesses like Ebay, Amazon, Google, Yahoo and Facebook could arise without charging for any content, while newspapers got at best a toehold online, then the fault is not in whether they charged their readers or not; the fault is in their fundamental strategy.   
Q. How's charging going to stop sites like the Drudge Report from subscribing, cutting and pasting news articles? Do you see that as potentially creating copyright issues?

A. Well, if they subscribed and then cut and pasted, with current protocols that would be a copyright issue. The content owners would sue the pants off Drudge et al, and they would win. What publishers are complaining about is snippet aggregation, but they also know that it drives traffic back to their own sites. And they claim that they lose money from the more unscrupulous, generally offshore operators who cut and paste whole articles and try to make money on Google ads and the like — but in reality, that revenue leak is probably less than one percent of all newspaper revenue. 

If newspapers started thinking strategically they would realize that the whole nature of the Web is to cut, paste, share and link, and that they will never make money online if they focus on confining content to their own sites and syndication channels. As I  proposed at NiemanLab in July, what they should really do is find a way to go with the flow, leverage the way the Web works, and allow their content to travel the Web in search of readers, with a rights and payments clearinghouse to channel revenue back to them. The Associated Press, in October, announced their intent to create just such a clearinghouse, which I believe will fundamentally change the way news content is created, distributed and consumed and enables a large new set of business opportunities around it, as outlined in this second NiemanLab post on the topic.

Q. Will charging for online content bring people back to print editions or push them to news sites such as CNN, Fox, and other network news sites? Or will charging create a domino effect, where those sites will begin to charge?

A. Charging for news on the publishers' proprietary channels like Web sites and mobile apps will limit the audience for their news, and hence limit the revenue opportunity. It will certainly not push CNN et al into charging for news, because it will demonstrably fail to create big new revenue streams. Without the shift to an open clearinghouse system, paid models will have very limited success for the reasons outlined above. But with the rights and payments clearinghouse, a local publisher's content might find a much wider audience on other news sites, niche sites (like Drudge) and even on CNN, Fox and the like, with revenue channeled back to the originating publisher. That publisher, themselves, can do the same thing: aggregate content from many sources, deliver it on a variety of platforms to their local audience, and share in the ensuing revenue growth. 

Q. Will a changing signal the near end of print media or will charging online fail disastrously?

A. Charging will have little impact on the sustainability of print. US newspapers have already lost about half their total revenue over the last five years; they are still losing revenue year-over-year in each succeeding calendar quarter, and very little of that will ever come back, because no retailer, brand marketer or advertising agency is trying to figure out how to spend more money in print. They all want to connect with consumers digitally, because that's where consumers are shifting their attention more and more (with a significant age skew, but even baby boomers are buying iPads and reading more and more of their news online). Print publishers may think that they can stabilize things and survive on a lower profit margin, but (a) they have no cushion left against the next recession, (b) those demographic trends will continue inexorably, (c) the impact of iPad and other tablets and ereaders on reading habits is just beginning, and (d) newspaper circulation continues to fall at five or six percent year over year, as well (which is much faster than it ever was until five years ago. So clearly, at some point there's a tipping point, where daily print is no longer sustainable — you might see publishers switching to weekly or twice-weekly, and perhaps that's sustained for another 5-10 years in most markets on the strength of preprinted advertising. But even that still-lucrative revenue stream will dry up as marketers find ways to deliver those promotions digitally.

The premise of your questions seems to be that charging is the hail-Mary do-or-die option facing publishers right now. But in reality, the do-or-die choice is to follow their audience to the digital side, to figure out how to connect with them and stay connected, and make their money by facilitating transactions. Essentially, that's what newspapers always did: retailers had to reach out to customers, customers had to show up at stores to buy things, and newspaper advertising made that connection. Now, the transaction can happen anywhere, anytime. So it's no longer a question of presenting a two-dimensional advertising message to move a customer to a store — it's about connecting a customer with a retailer and moving the merchandise (or services) to the customer. Ebay and Amazon do that very well. Newspapers could figure out how to do it, but I'm afraid very few of them have the requisite capacity for innovation, change, and entrepreneurship — let alone the financial resources to make it possible.


Mark Potts said...

You imply--as have others--that newspapers chose early on not to charge for Web content. That's factually incorrect. Many newspapers tried charging for online content in the early days, but for various reasons--small audiences, inadequate technology, bad models/pricing, outright customer rejection--they were unable to make it work. The proliferation of free news on the Web has made the success of online news subscriptions even more unlikely. But to suggest that there was no attempt to charge for news online in the early days is just flat wrong

Martin Langeveld said...

Mark, the question implied that, I did not. In any event, those early attempts you mention are now a historical footnote. The reality is that for most of the history of the Web the vast majority of newspapers have had no paid content.

Walter Dnes said...

I'm very pessimistic about "news websites" as a *STANDALONE* business proposition. The web has very low barriers to entry. There are millions of bloggers out there, with each blog running ads by various aggregators. The Wordpresses, Googles, etc. collect enough ad revenue to make a profit after bandwidth costs. Newspapers are no longer "the only game in town", and they can't charge anywhere near what they used to.

Let's run some numbers. Three often-quoted rules of thumb are...

1) many newspapers make approximately 10% as much web revenue as ad revenue,

2) the cost of newsprint plus publishing plus delivery is 50% of total cost

3) subscriptions amount to 10% of revenues and newspaper ads amount to 90% of revenues.

Note that the above is for "dead-tree" papers. Now for some simple algebra. Let's say that a paper had total revenue of 100X, composed of 90X advertising and 10X subscription revenue.

* Dropping the physical paper means they can get by with 50X revenue.

* But they're only getting 10X from subscribers and 9X from advertisers (remember electronic = 1/10th of paper rate). Where is the additional 31X revenue coming from?

* Are advertisers going to pay you 4 and a half times as much for ads as they're paying now? I didn't think so.

* So you try to boost your subscription revenue to 41X. Did I mention that Amazon takes 30% off the top, leaving you with 70%? So if you boost the subscription price by a factor of 6 (YES !!!), your subscriber base will pay 60X, of which you will net 42X. Given the rate at which people are "staying away in droves" right now, do you *REALLY* want to boost subscription prices to 6 times their current levels?

Before you think of doing your own fileserving, you'll have to convince people to buy a 3rd-party "reader", and you'll need a few servers and professional admins to run them. Amazon has server farms for "cloud computing" as well as thousands of clients (newspapers and book authors). They can amortize IT costs over this large base. "The Podunk Post", on the other hand, is going to be looking at a major bump to its cost base.

Sorry, it just doesn't work.

Martin Langeveld said...

Walter, digital revenue does run about 10 percent of total ad revenue, but you're off in your other premises.

Newsprint plus production plus delivery is less than 50 percent of total cost. Usually, it more or less equals circulation revenue.

Typically, circulation revenue (subscriptions plus single copy) these days runs around 20 percent of total revenue. At McClatchy, a good stand-in for the industry as a whole, it's 18.9 percent. Unfortunately the NAA stopped aggregating circulation revenue some years ago so we don't have a good industry number.

Beyond that, the question is not whether the dead-tree edition can be dropped entirely. That calculation will always show a negative result. The question is whether, by focusing on the digital side, eventually the balance can shift and print becomes a niche sideline rather than the primary engine of revenues and profits at newspaper firms. That won't happen as long as print is Job One, as it is at nearly all newspapers.

Robb Crocker said...

Hi all, I am Robb Crocker, the student who interviewed Martin. If you would like to see other expert interviews and other content from my blog (there are only 7 posts), which was an assignment for a New Media Studies course at Rutgers University, log on to

Feel free to post any comments, questions, and feedback.