Media industry research shows that more and more newspapers are implementing paywalls, possibly inspired by the launch of a “metered” wall at the New York Times earlier this year. Frederic Filloux argues in a blog post at The Monday Note that the metered approach can have benefits for papers that implement it, by boosting revenue and appealing to advertisers. But those positives can be more than outweighed by the negatives of a paywall, particularly for smaller newspapers — the main one being that a wall creates an opportunity for free competitors, of which there are a growing number.
In his post, Filloux makes the case that a well-constructed metered wall such as the one the New York Times launched in March — which was based in part on the experiences at the Financial Times‘ similar metered approach launched in 2007 — can produce revenue from a paper’s most devoted readers, and can do so without having much of an impact on advertising revenue. Even though page views inevitably decline with the launch of a wall, Filloux says most news sites don’t sell all of their advertising inventory anyway, and the loss of those eyeballs is made up for by subscription revenue.
The amount of inventory sold to advertisers varies widely. In the U.S. market, the “sell-trough” [sic] ratio is about 60 percent, but it can go as low as 30 percent on some markets. This means the media can sustain some loss in page views due to the implementation of the metered system without losing ad revenue.
Filloux theorizes that a site getting 5 million unique visitors and about 100 million page views per month likely has advertising revenue of about $15 million a year. If it can convince even 2 percent of its regular readers to pay $10 a month — which is similar to the approach taken by the New York Times — it could generate $10 million in additional income without eating into its existing ad revenue. In some cases, Filloux says, advertisers are even willing to pay more to advertise to readers who have subscribed, because they are seen as more engaged and therefore more valuable.
This is clearly the kind of math that the New York Times is hoping will work in its favor. A month or so after the paywall launched, the newspaper said it had racked up about 100,000 new subscribers, and NYT executives have said it hopes to increase that figure to about 300,000 by the end of the year. Despite those rosy numbers, however, even an optimistic view of the paywall’s financial outcome produces only $35 million or so in revenue — a drop in the bucket for a media company whose overall revenues are more than $500 million. According to Reuters media blogger Felix Salmon:
I hear that the brass at the New York Times expect its paywall to be revenue neutral — the amount of money they expect to bring in from online subscriptions is pretty much equal to the amount of money they expect to lose from online advertising.
Despite the math, a recent survey of the newspaper industry done by the Missouri School of Journalism found almost half of the small papers surveyed said they were implementing a paywall of some kind. Why do this if the numbers are so inconclusive? In most cases, these walls are likely to be driven by the same rationale that Rupert Murdoch used in launching paywalls at two of his British newspapers: namely, to keep print readers from deserting the paper product in favor of reading online, something that would remove a paper’s main source of ad revenue.
But to me, the biggest flaw in a paywall isn’t that the math is questionable, or even that a wall is inherently a backward-facing strategy, aimed at stacking sandbags around a paper’s content to try to keep out the digital hordes. The biggest flaw from a business perspective, particularly for smaller newspapers, is that walling up your content is an invitation to free competitors — from AOL’s Patch.com and Huffington Post to Mainstreet Connect and Neighborhoodr and Topix.net — to come and take away your readers.
Newspapers like the Financial Times and the Wall Street Journal can make paywalls work because their content is extremely focused and (arguably) more valuable than that produced by free competitors. The New York Times is hoping it falls into that category as well, although as a mass-market newspaper, that conclusion is more of a gamble. But if you are a small-town or even medium-sized metro paper, walling off your content could be a recipe for disaster, by giving your more nimble competitors exactly what they are looking for: readers eager for a free alternative.