AJR  Features
From AJR,   August/September 2009

Build That Pay Wall High   

Since there’s no indication that online ad revenue will ever be robust enough to support newspapers, maybe they’d be better off charging steep fees for online content or keeping material off the Web entirely and putting their emphasis on—gasp—that retro old print product.

By Paul Farhi
Senior contributing writer Paul Farhi (farhip@washpost.com) is a reporter for the Washington Post.     

Albert K. "Buck" Sherman thinks the newspaper industry just might be able to save itself by taking a bold step...backward. Starting in June, Sherman, the publisher of his family-owned newspaper, the Newport Daily News in Rhode Island, began charging $345 a year for unlimited access to the paper's Web site. Talk about a pay wall – the online price is a whopping 138 percent premium over the annual cost of subscribing to the printed, home-delivered News. If that sounds like a disincentive to reading the News online, well, now you're starting to understand what Sherman is up to. "We want to drive people to the print version of the paper," he says. "That's our goal."

The print version? Isn't that so very last century? Well, yes – and emphatically no. For a newspaper like the 12,000-circulation Daily News, print – not online – is where the money is. By Sherman's way of thinking, moving to the Web has been one long distraction for the newspaper industry. "Ten to 15 years ago, everyone held out high hopes for the Internet as a revenue source," he says. "And that has never happened."

The notion of emphasizing print in an age of pixels seems counterintuitive at best, downright loony at worst. Newspapers have all of the worst characteristics of Old Media products: High manufacturing and distribution costs, deteriorating readership and an advertising base that has been ravaged by technology and recession. Try picking up a copy of the Rocky Mountain News if you disagree.

But as you may have noticed, online news sites aren't exactly cash cows. The still-unanswered question is whether there's a business model to sustain news online. Even as each day brings new talk of online subscription models, pay walls and micropayment schemes, there's very little certainty about whether any of it will work. As Sherman points out, it hasn't yet.

That's why downplaying the Web, or dropping it altogether and going back to print only, looks not just smart for the struggling newspaper industry, but potentially lifesaving.

The cost of producing news online is admittedly far lower (and more environmentally attractive) than the old business of pressing ink onto ground-up trees. Yet the American newspaper industry generated nearly $35 billion in revenue from that kind of industrial production last year, which dwarfs its online revenue by a factor of 10 to 1. Throw in the money generated by subscription sales and print accounts for almost 95 percent of all the dollars newspapers still generate. Rick Edmonds, Poynter.org's media business columnist, says this lopsided ratio is unlikely to change anytime soon. "The ad dollars are still mostly in print for a while," Edmonds says.

It's true that print is declining. Classifieds, the most lucrative type of newspaper ads, began to dry up like a desert lake several years ago. Retail consolidation came next, followed by economic convulsions that undermined banking, automotive and real estate advertising. Put it all together, and newspaper revenue was down 18 percent last year. This year could be worse.

But Web advertising has problems, too. If anything, its economic underpinnings are shakier – or at least more uncertain – than print.

For starters, recessions affect Web advertisers, too (witness the nearly 2 percent drop in online revenue for newspaper sites last year). More important, the Internet has destroyed every ad seller's power to set advertising prices. Long before ad revenue began to shrivel, the Internet had begun robbing the news industry of this key advantage over advertisers. When most cities had one daily newspaper and a handful of television and radio stations, advertisers had few options. Now that anyone can be a news publisher simply by assembling links to the work of the world's most handsomely paid journalists, the options for advertisers have grown exponentially.

The result: A supply and demand imbalance. As too many Web sites chase too few ad dollars, the price of online ads has plummeted to Depression-like levels. The cost of distributing an ad to a thousand people on the Web (a standard ad industry measure for comparing one medium to another) has crashed through the $1 floor and is rapidly on its way to zero (newsprint ads, by contrast, still command $20 or more for the same thousand readers). Randy Siegel, the president and publisher of Parade, the Sunday newspaper supplement, says much of the dotcom information sector is wobbly: "The economics of ad-dependent consumer sites are unsustainable, and we're heading for a crash. I predict 95 percent will be out of business within three years. Too many copycat sites in every category... Only the dominant player in each category will survive."

Some part of this may be cured by economic recovery. But much of it is structural, a fact of life in the digital age. Unless the newspaper industry can persuade the rest of the digital world to stop creating new Web sites, or can persuade many more millions of people to start visiting their own sites, everyone in the online news business will be on the wrong side of the supply and demand problem. Forever.

Charging readers for access won't really solve this problem, and in some respects it may make matters worse. Pay walls invariably reduce traffic. Whatever revenue a news-paper might gain by charging readers will likely come at the cost of ad revenue (Sherman isn't counting on much revenue from his online pay scheme; remember, he really wants to discourage online readership). You think online ad rates are low now? Just wait until advertisers discover that the newspaper is delivering a much smaller audience after it starts charging for access.

Moreover, even the most optimistic pay scenario wouldn't come close to generating enough revenue to replace what's being lost. Newspapers haven't supported themselves on subscription revenue for generations; subscriptions and newsstand sales contribute a mere 20 percent or so to a newspaper's revenue now; the rest comes from ads. Converting print subscribers to online subscribers would take years. Even if it were possible to get everyone to make the switch, the transition period would be a bloodbath. When freeloaders are denied access to the site, traffic drops substantially. Bye-bye, advertising revenue.

Pay-per-article plans (micropayments) are no more promising. Asking readers to pay a few cents for a story they haven't read sounds like a massive info-gambling scheme; why would anyone spend even a few cents on something that might turn out to be disappointing, infuriating or just plain unsatisfying? And what nightmares lurk for journalism in any scheme predicated on persuading people to hand over money on the basis of just a headline or story synopsis?

All of which is why newspapers should make online access to their work very expensive or stop offering it at all:

• A massive migration back to print would restore some balance to the industry's crippled supply and demand equation. If there were truly no other place on the Web for readers to get the valuable information that daily newspapers provide exclusively each day – local news and photos, enterprise reporting, columnists, ads from local businesses, etc. – advertising dollars would have to follow. That's because....

• Newspaper readers are "better" than Web visitors. Online readers are a notoriously fickle bunch, and apparently are getting more so by the day. Web visitors barely stick around, yet they are counted in broad traffic statistics as if they were the same as the reader who lingers over his Sunday paper. In May, for example, the average visitor to washingtonpost.com spent 10 minutes and 58 seconds on the site. That's for the entire month. On a daily basis, this works out to just 21.2 seconds a day. Depressing as this figure is, it's even more appalling when you consider that the time spent on most newspaper Web sites has actually fallen since the election-inflated totals of last year. Can any advertiser-supported business hope to sustain itself by capturing its customers' attention for about the time it takes to read a stop sign? Online advertising, with the possible exception of search, still bears the burden of proving its effectiveness. Most people don't look at online ads, and even fewer click through. The Internet may be the biggest and greatest communications tool ever devised, but it still has some major bugs as an advertising vehicle.

• Eliminating Web offerings would save precious dollars now being spent on a product that does little more than undercut the printed paper. Even smaller papers are devoting a growing share of their limited newsroom budgets to Web-only content. The cost is substantial, and growing, at larger metropolitan papers, which for years have been pouring resources into new Web features (video, search, Twitter feeds, blogs, etc.) without seeing much financial reward for their efforts. Question: How deep does the hole have to get before publishers stop digging? Another question: What would happen if those same resources were focused exclusively on producing a first-class newspaper?

• Dropping or downplaying the Web would give readers one less reason to drop their print subscriptions. Despite what you may have read (repeatedly), newspaper readers actually are a pretty loyal bunch. Some 43 million people still subscribe to a paper each day, and a few million more read pass-along copies. There's no question the trends are bad – newspaper circulation declined 13.1 percent between 1999 and 2008. But the trend has arguably been bad for a very long time – circulation declined 10.3 percent from 1990 to 1999. The dawn of the Internet gets some of the blame, of course. But newspaper publishers deserve some of the discredit, too, for giving away their product. Wouldn't you expect sales of Oreos to fall if Nabisco started handing out free cookies every day?

Rick Edmonds points to the example of the Arkansas Democrat-Gazette in Little Rock: Led by its tenacious publisher and owner, Walter E. Hussman, Arkansas' largest newspaper has largely maintained the same circulation over the past decade by giving free access to its Web site only to its print subscribers. "Circulation holds up; that supports ad volume and better [print ad] rates," Edmonds says. "The Web site doesn't do much in traffic or ads. Presumably the pay wall blocks links. So if you want to find out what the Democrat-Gazette is reporting, you need to buy one version or the other."

• Dropping the Web might also have a tonic effect on the siphoning of news content. The Web isn't just a news junkie's dream; it's a news pusher's dream, too, and the supply of "product" is endless and free. By going back to print, newspapers would literally sever the links that connect them to the world's content freeloaders. Randy Siegel of Parade imagines a single day in which all of the nation's newspapers went back to print only: "I could see The Huffington Post, Drudge Report and other aggregators collapse under their own weight as their lowly cut-and-pasters had to retype or scan in every newspaper article or column they wanted to pilfer and profit from. It would be revealing, and hilarious, on every level."

Removing newspaper content from the Web would be the info-age equivalent of removing a cup of water from the Pacific Ocean. It's true that the Internet is like outer space – vast, endless, unfathomable. But it's not really so unfathomable when it comes to news, and newspapers. Let's do some simple math. Google says that 25,000 news organizations around the world make their content available to Google News and other search engines. Since there are about 1,400 daily newspapers in the U.S., and 6,000 weeklies, almost all of which are indexed by Google, this means that roughly 30 percent of all the news organizations supplying news content to Google are American newspapers.

Impressive. But it's even more impressive when you screen out foreign news sources from the total. Since foreign sources offer little domestic news, it's clear that a huge proportion of the news of keenest interest to Americans is being supplied to Google by domestic newspapers. In many cases, the information they provide has no direct substitute; if you're not reading it in the Daily Bugle (or on the Bugle's Web site), you're very likely not going to know about it.

Alan Mutter, a former newspaper editor and widely read news industry blogger (Reflections of a Newsosaur), doubts that such a scenario would ever take place, and wouldn't make much difference if it did. First, he says, it's almost impossible to imagine newspapers doing anything in a coordinated way. Second, nature – and Google – abhor a vacuum; readers would still have plenty of non-newspaper sources to choose from. "Newspapers think they're a more important source of information than they are," Mutter says. "There's still great stuff being produced by newspapers large and small. But we wouldn't be in the dark if newspapers throttled themselves tomorrow. We'd see new sources of information emerge, and a great number of them would be as good as or better than what we're seeing today in newspapers."

Skeptics like Mutter think boycotting the Web would only certify newspapers' irrelevance among younger readers, who've grown up on the Internet and expect free news as their birthright. This argument merits two replies. First, it's unclear that newspaper publishers really are commanding anyone's loyalty online (see the time-spent statistics above), or that efforts to woo young readers have really made any economic difference (see declining ad prices above). Second, I'd argue that younger people have migrated online not only because it's superior to print, but because newspapers have made it easy for them to do so.

Kill off online newspapers and they might eventually find their way back to print. Hard to believe? Well, they're already doing it. Check out a college campus sometime. Despite the availability of student newspapers online, and despite the ubiquity of laptops and smart phones on campus, college students still avidly read their school's printed newspaper. Why would the most wired, most tech savvy generation of readers embrace that oldest of news media, print? Maybe because it's efficient, because it feels good to hold a paper, because it fits their lifestyle or because the student newspaper addresses some subtle lifestyle need; you can read it in the quad or in class or in the dorm lounge without worrying about whether a Wi-Fi connection is available.

Going print-only implies that newspapers will have to evolve into something they're not right now. To compensate for the loss of immediacy, they would have to be distinctive and singular, offering something that no Internet competitor could. They would have to differentiate themselves with exclusive information – all fresh, all local – compelling photography and courageous commentary. They'd still have to cover the news, but in a way that offered additional perspective, beyond the broad outlines available elsewhere. Even more than telling readers something they don't already know, newspapers will need tons of hustle and enterprise and a unique personality. Moving away from the Web might pressure a paper "to define what it does well," says Edmonds, mostly by focusing on unique local and state content.

Mutter agrees, but thinks it's way too late for that. In his view, the ravages of the past three years have taken such a heavy toll on newsrooms that newspapers don't have the strength to fight their way out of trouble, online or in print. "Metropolitan papers no longer have much exclusive content," he says. "Many of them have very little left to say. The Chronicle in San Francisco [Mutter's former paper] has nothing going on. No one I know reads the Chronicle anymore."

He adds, "I wish we could go back to black-and-white movies, or the day when men wore hats and women wore gloves and only sailors had tattoos. But things have changed. The newspaper model is broken.... Advertisers have moved on. Readers have moved on. The only people who have not moved on are the publishers. And they're putting duct tape around a rickety box that is falling apart when they should be thinking outside the box."

Buck Sherman acknowledges that the Newport Daily News' enormous pay wall may not be a panacea for every newspaper, especially those in big cities, where competition for readers and ad dollars is most intense. But he also says the current trends in the industry are unsustainable, and that it's way past time for experimentation, if not radical measures.

"It has to start somewhere," he says. "We've waited years for a larger paper with more resources to set up the model, and no one has. We're a small, family-owned paper. We don't have a large chain of command. We can do things faster than big newspapers can."

And maybe, just maybe, show an ailing industry how to rescue itself.

Paul Farhi (farhip@washpost.com), a Washington Post reporter, writes frequently about the media for the Post and AJR.