In defining business strategies for modern medias such as online newspapers, the most difficult part is finding the right combination of revenue streams. Advertising, pay-per-view, flat fee… All are part of the new spectrum media companies now have to deal with.

The gamut looks like this:

As we can see, newspapers mostly consist of one product line, confined to the mainstream, value-added news category. By going digital, this segment is likely to lose most of its value (expect a 60% meltdown as expressed in revenue per reader). Therefore, for these companies, it becomes critical to expand into new territories already taken over by other players. For instance, big media outlets endowed with strong brands should go into commodity news and participatory/social contents. This doesn’t mean a frontal attack on Facebook or Twitter, obviously; instead, the new reality dictates using and monetizing through them (see last week’s Monday Note on Facebook monetization).

Ancillary publishing should also be considered a natural expansion: news outlets retain large editorial staffs that could be harnessed to produce high value digital books (see this earlier Monday Note on Profitable Long Form Journalism). The “Events” item, on the list/graph above, is more questionable, but it remains a significant source of potential income tied to the brand’s notoriety. I left aside the classifieds business: except for a few media groups (Schibsted all over Europe or Le Figaro Group in France) that boarded the train on time, positions are now too entrenched to justify an investment to gain a position in that segment.

Advertising is likely to remain the biggest money maker for the two dominant categories: Commodity/Participatory/Social Media and Mainstream Value-Added. Unfortunately, in its digital form, advertising has run in deflationary mode for the past decade due to flat (at best) CPMs, with huge inventories putting further pressure on prices.

Print doesn’t look great either as investments shift en masse to digital; this reflects the growing imbalance between time spent by users on print and advertising investments in the medium. According to Nielsen Media Research, the Internet now accounts for 38% of time spent but only for 8% of ad spending; newspapers are on a symmetrical trend as they captured 20% of advertising dollars for only 8% of users’ time.

In spite of this, advertising still retains much potential, if two conditions are (quickly) met:

a) Online media can recoup a large chunk of revenue by reorganizing their ever growing inventories. As of today, any large Western newspaper keeps adding between 400 and 800 new URLs (pages) every single day. Not a chance the ad market could absorb that glut. The solution is therefore to close down a large part of the unsold inventory instead of sticking to the current method of dumping the dregs at a fraction of the prices achieved by premium space.

b) Targeted advertising is also a high potential market. At this time, some players in this market are proposing to track down, say, someone who intends to buy a car, through every possible site. Should online media be able to aggregate the best part of their unsold pages, they’d attract premium brands interested in seeing their ads stay in a flattering environment (better be on a political site than on trashy celebs one). Tapping into this trend requires collective action and the right partnerships.

Building a paywall is not that complicated. Over the years, many platforms and payment solutions have emerged to facilitate the development of transaction systems for medias. Implementations costs have gone down as well. If you add the platform expenses, payments for the transaction itself (including the bank’s cut), software licenses, you can contain the final cost to 10%-15% of the posted price. That’s what makes platforms such as Apple iTunes and related, or Amazon, who charge 30%, not quite competitive — especially since they are not keen to handle customer data to publishers.

Here are three of the biggest challenges for paywalls:

  • Dealing with the drawback of putting what used to be highly visible contents behind a paywall. Expect a massive drop in viewership: The Times of London is said to have lost 90% for its audience. Does it pay? Depends on your vantage point : at this year’s World Editors Forum in Hamburg, New York Times’ CEO Janet Robinson recalled the metric of the Times Select experiment, when the NYT put exclusive contents such high prized columnists behind a paywall; the move yielded 780,000 subscribers bringing about $10m a year, that’s a $12.8 ARPU. The more exclusive and proprietary the content is, the better things are likely to work. Also, highly targeted newsletters turn to be extremely profitable, as demonstrated by the Thomson-Reuter’s Breaking Views example.
  • Finding the right price structures. Several of them actually. Let’s remain modest: at this time, no one knows which model will be successful: flat-fee, subscription, metered, or third party kiosk (such as billing through a mobile carrier, or an internet access provider) or pay-per-use. Cable TV taught us the virtues of the automated bank account deduction, iTunes lowered the mental costs of transaction to nil thanks to a friction-free payment system, and Amazon favored the impulse buying with its One-Click button. Impossible to tell what is the most likely to work for news. We’ll have to carefully watch how the market changes its mind. One sure thing: it will be crucial to keep things simple, intelligible.
  • Working out the CRM. This, in itself, excludes dealing with the Apples and Amazons who don’t to share customers data. If Google demonstrates some flexibility on the issue, they are likely to get the prize (publishers who do not like Google should be reminded that the brand is fantastically popular among its one billion a week users). Mobile carriers might also be reluctant to share data, but contracts should allow at least partial access to the customer base or, at least, selective cooperation in that matter.

Expanding in new business territories doesn’t happen by itself. It will collide with management cultures that remain often ignorant of the technology and mores of the digital world. Money-losing media companies won’t be prone to invest in technologies needed for the turnaround, and restructuring strictures are also likely to slow-down the transition. But, for media companies, moving in that direction is also a matter of survival.