Monday Note

An idea is gaining momentum: online readers must open their wallet. In recent weeks, several suggestions for moving from wish to implementation have popped up. The latest one comes from Google. The company proposes to give a boost to its not-so-successful Checkout service by harnessing it to online newspapers interests. Quite a change here. Only a few months ago, Google’s haughty advice to the newspaper industry was : You’re on your own guys ; Darwin is in charge here ; adapt or face extinction. Last November in Paris, I personally witnessed Googlers’ poor performance in front of media barons — an embarrassing mixture of unpreparedness and arrogance. Some of us felt really sorry the search giant screwed up so badly.

Google was slow, but it finally got it. It understood that its position — “Thank us to the billion clicks a month we send to your sites, we bring value to your businesses, the rest is your problem” — was no longer defendable. Google can no longer ignore the dramatic deterioration of the news media sector. 
Here are key figures for the US market:
- The best recent period was 2005 ; that year, US newspapers reported a total advertising revenue of $49.4bn. 96% from print (35% from classifieds) and 4% from online. Since then, between 2005 and 2008, things changed dramatically :
Total ad revenue :…….. -23.4%
Print:………………………..-26,7% (and a drop in classifieds of -42.4%)
Online:……………………..+53,4%
It looks like this :

Now, to get a more precise and recent representation, let’s compare the last available quarter (Q2 2009), with the recession’s impact, to Q2 2005. Here is the evolution over four years :
Total ad revenue:……………-44%
Print:…………………………….-47% (classifieds dropping by : -64%)
Online:………………………….+30%

An important precision for the online ad revenue: it peaked in Q4 2007; since then it has dropped by 23% in Q2 2009. As for its share in the total revenue stream, it felt from 14.7% of the total for Q4 2007 to a mere 10.5% of the industry’s total advertising revenue. (Source : NAA). In a nutshell, American newspapers have invested quite a bit in a sector that is losing both in terms of absolute amount and percentage contribution to the revenue stream. OK, a large part of it  is due to the recession, but no one knows exactly how much of the decline is structural (due to the exponentially growing inventory among other factors).
European newspapers suffered less, mostly because of their limited dependency on advertising. Also, the economy’s downturn was less brutal. But seeing down here a soft “L” shaped economic cycle, while others will more likely endure a hard “U” curve elsewhere is a meager consolation. Speaking of the impact of the recession across all medias, watch this chart from Business Insider, which shows the “advertising apocalypse”.

In itself, this deterioration explains the rehabilitation of the paid-for content idea. Fact is : advertising doesn’t work as expected for news websites. Everywhere in the world, volumes dropped (that’s the recession part). But more worrisome, prices dropped as well (consensus is around minus 30% over the last 18 months), with a “ratchet effect” that will make it difficult for prices to come back to the pre-crisis level. Google bears some responsibility in this state of affairs: it forced a large chunk of the advertising market to shift to text-ads with the G-model built on large volumes and low per unit cost. Of course, Google got used to saying that, with 25,000+ sources of information on Google News worldwide (talk about information overload…), the company could afford to lose a few. But it finally yielded to facts and decided it should come up with a way to monetize online news. Well, It helped when the Newspaper Association of America issued a Request for Information, for third parties willing to create a centralized payment platform.

The first respondent was Journalism Online, a New York-based venture that media entrepreneur Steven Brill created a few months ago in association with Gordon Crovitz, the former Wall Street Journal publisher. These are high-caliber people. Journalism Online’s idea is erecting well-designed pay walls for news content, and “Preserving Valuable Journalism by Restoring the Value Proposition”. (Read Steven Brill’s interesting keynote speech at the last online publishing and marketing OMMA conference). Journalism Online’s full response to the NAA’s request is available here.
The second response came from Google with a platform based on its Checkout payment system. Google enters the fray with an impressive line-up: its huge, globe-spanning server infrastructure, technical expertise, economies of scale and, probably, a cheaper alternative to Journalism Online’s 20% fee. (Google’s full response to NAA is here).

Let’s summarize the key components of a modern paid-for system for news sites. The list below is based on the two proposals, on other papers addressing the issue, and on discussions I had with publishers:

• Single sign-on system. Forget about a proprietary transaction system. There is no room, nor time, for reinventing the wheel here. Actually, the only viable option is mutualizing the “wheel”, with broad multi-publication passes and proportional revenue redistribution. Hence the question : who will be the grand consolidator? We better keep a choice of platforms — as long as they are linked.
• Diversity of models. We need the ability to handle subscriptions and paid-per-article models as well as packages and bundles. Flexibility, adjustability will be key (and yes, it complicates the system, but that’s what we have computer systems for).
• A unified, “Friction free” micropayment system. The best examples are well-known: Amazon’s or iTunes’ “one-click” option allows impulse, hassle-free buying. To be asked for a password when you want a special report, or access to a special part of the site is out of question. We can even dream of cross-connected platforms: my subscription to Le Monde.fr tied to The New York Times’, and the system allowing the occasional purchase of a 5000 words feature in Vanity Fair. To those who roll their eyes thinking this is too convoluted, think about the Sabre or Amadeus  airlines reservation platform that makes possible to book a flight from San Francisco to Kirkenes (Norway) across three different airlines: that  is complicated.
• A cross media brands consolidation system. It aggregates micro-transactions (down to one cent) into monthlies and annuals.
• A database system. It provides multi-support subscription management, print and online, allowing combined marketing operations.
• Flexibility in pay-wall options. Publishers should be able to decide almost on the fly which content lives in the paid-zone system. Some will go for a package policy (x articles for y dollars or euros), other will charge on a per-view basis. Everyone should have the leeway to organize promotions and special operations based on news cycle or predictable events in sports or politics for instance.
• Ability to decide the criteria upon which some readers will be charged while others won’t. This goes well beyond the simple basic vs. premium concept; at some point usage intensity will have to be factored in, meaning the first taste is free but you must pay of you  keep coming back. Weirdly, all the papers I’m reading on the subject don’t do much to explore this notion; it is crucial to readership segmentation.
• Search engine management. For pay walls, the most quoted inconvenience is this: the huge traffic sent by search requests (frequently 40% of the total) ends up at the “subscription only” wall. Publishers must be smart in dealing with this fact: a reader who lands on their site doesn’t have to be rejected simply because he’s a first time visitor. Quite the contrary, actually. There are many ways to go around this obstacle, we’ll explore those later.
• (Most probably) An advertising management system. It will have to be embedded in the transaction system because the CPM structure is different between free and paid zones. Experience shows that an ad behind a pay wall commands a higher price: a 30% premium doesn’t seems overly optimistic.
• Integration of mobile terminals. Ignoring or treating separately eBooks, iPhone or Blackberrys would be a terrible mistake. That’s were the real money is.

Today, we just scratched the payment question’s surface. In the coming weeks we’ll explore realistic news consumptions patterns and see how those could translate and define a reliable transaction system. It will also be quite interesting to see how publishers will deal with the two proposals (so far), from Journalism Online and Google. —FF

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