Monday Note

Today, both Jean-Louis and I struggle with the same topic: last week’s announcement of the New York Time’s strange paywall structure.

For a digital newspaper, there is no such thing as a fair price. Too many questionable assumptions, too many variables, too many ways to play with data. The Monday Note and my day job as the head of the French digital press consortium both gave me opportunities to work on such numbers for weeks. Intellectually stimulating as the exercise might be, when analyzing readers’ migration to digital, you can’t reach useable conclusions through a mere extrapolation of the eroding print model. Nor can you reliably model price elasticity in an electronic medium where “free” is the rule, “freemium” the minority, and paid-for the exception.

Let’s start with the basic problem: the free model (read: advertising supported) cannot provide the financial support for an ambitious, in-depth, global information enterprise. This type of organization is inherently expensive. The depletion of print readership (expect a real 5-8% drop every year), and the corresponding loss in advertising revenue create an urgent need for new financial models. Otherwise, the likes of the Huffington Post will find nothing to aggregate other than the vast echo chamber they built their ephemeral value on.
As the past fails to provide a solid foundation, the most prudent way of building a new business model starts with basic building blocks. For instance, the cost of a high-volume digital transaction platform for news products (all sorts of products, not just dumb PDF shovelware) should be around 8% to 10% of revenue, all included. Then, covering the news should require x hundreds of editorial staff, y dozens of support positions, all costing z. In addition, the news organization’s value proposition need to be factored in these numbers. That value proposition, in turn, translates into who and how many would be willing to pay for such (perceived) qualities. All this leads to the most important task: rethinking the organization in order to achieve these goals — in a context where the print’s old money flow now looks like a dried-up creek in Summer.

Trial and error is the only way to find answers to all these questions. Experimenting requires humility, agility, ability to learn from mistakes. Let’s admit it: such traits are in short supply in century-old news organizations that – until recently – thrived on their unchallenged confidence. In contrast, an ability to adjust quickly is a dominant feature of the most successful digital companies. Another characteristic of the best tech companies being a relentless quest for simplicity. As an example, think of Apple’s fixation on removing unnecessary buttons and dials, or just look at Google’s main search page.

Unsurprisingly, the New York Times chose the opposite path. One possibility entailed weighing how much its large audience of faithful readers would be willing to pay for its content and shooting for a single subscription price aimed at generating volume. Instead, the NYT went for a convoluted pricing structure.

In a nutshell: after reading 20 articles over 4 weeks, you hit the wall. Then you must choose your plan: $15/month for web viewing + smartphone; $20/month for web access + app on a tablet; or $35/month for accessing the NYTimes on all devices (something the most valuable regulars do), details here. It took 14 months, and according to the Times digital czar Martin Nisenholtz, reams of market research to come up with this. I also involved a serious investment : $40m-$50m (!!) according to this Bloomberg story.

The New York Times paywall is like the French tax system: expensive, utterly complicated, disconnected from the reality and designed to be bypassed.

Loopholes abound. To avoid hitting the wall, take your pick:

• Use different email accounts. If, like me, you own or operate several different domain names, bingo!
• Easier: use three browsers as the cookies placed by the NYTimes on each are not interconnected; if you have Internet Explorer, Chrome, Firefox and Safari, that’s 80 stories a month! The paywall is fading away.
• Delete your cookies. Many paranoid users do it every day, sometimes automatically. Deleting cookies introduces several drawbacks for those who want to navigate quickly, but penny-pinchers will like it.
• Visit the NYTimes from other sites, such as Twitter or Facebook, but in fact from any site, including Google (see Jean-Louis’ view on this below).

This list goes on an on.

Whom is this paywall aiming at? According to the Times itself, about 15% of their current readership will hit the wall. The bet is that segment – affluent, busy, non-nerdy – won’t bother tricking the system and will instead pay up. Let’s accept that assumption and run the numbers (and notice the level of uncertainty):

Global audience for NYTimes.com: in February, according to Comscore, 48.5 million unique visitors worldwide. (Note that no one uses Nielsen numbers any longer.) Should we focus the analysis solely on the domestic market and reduce the UV number to 32m? Advertisers would agree: foreign audiences carry little value. But, when looking at those potentially willing to pay for the NYTimes, the answer is the opposite: let’s stick to the 48.5m.

Now, let’s remove those who just fly-by, i.e. people coming from search engine or social medias: they will look at one story and jump elsewhere. Google accounts for 15% of the NYTimes traffic; Facebook, 4%. Add others such as Twitter and round it up to 25% of the global audience. This leaves about 36m monthly regular users to play with, of which 15% (5.4m), according to the Times’ estimates, are heavy users likely to hit the wall. How many would take the jump and pay? And how much money would they contribute to the Times revenue line?

Here are the numbers for an average monthly spending of $20.00 :

Transformation rate => number of subscribers => annual revenue

5%  => 270,000 => $65m
10% => 540,000 => $130m
15% => 810,000 => $194m
20% => 1.08m => $259m

OK. Let’s stick to a reasonable 10%. How does the extra $130m compare to the current Times revenue structure? In 2010, The NYT Media Group (print + digital) made $1.55 billion all together. $780m came from advertising revenues, of which about $160m from NYTimes.com. Interestingly, 44% of the total  ($683m) came from circulation — at $2.00/day in newsstands, the NYTimes is expensive.

In this case, the Grey Lady’s digital operation would total: $130m+$160m = $290m. This is enough to support the huge 1000+ editorial staff (the newsroom expense line is said to be in the $200m range).

Let’s stop here. The New York Times’ pricing structure, the fact that it is also designed to protect the paper’s physical circulation, the paywall’s porosity all complicate projections. One thing is sure: $35 a month ($420/year — $455 year for 52wks) to view the online paper on three devices is ridiculous, not matter how elitist the target group is fantasized to be. You simply don’t charge such an amount in a (US) market where services like Hulu or Netflix cost $7.99 per month. The Times would have been better inspired to go for a simple $15 a month on all devices. Such a price would allow to shoot for a goal of 2 or 3 million digital subscribers worldwide within three years. This would yield $360m-$540m in extra revenue, corresponding to between 5% and 8% of the regular digital readers mentioned above. For a global brand of the NY Times’ stature, such numbers are not unattainable.

—frederic.filloux@mondaynote.com

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