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NYT's Paywall Will Need a Little Dutch Boy to Plug Its Leaks [Update]

It's official: the New York Times (NYT) has launched its digital paywall, which goes into place today in Canada and elsewhere in the world on March 28. The company hopes that by forcing people to pay for articles beyond a set number each month, it will slow the loss of print subscribers, attract new users, and make more money.

But the Times has a number of strikes against it, including the self-inflicted injury of leaving a lot of room for people to get past the paywall if they wish. And that's bad news for the industry, because newspapers are desperate for a solution to decades of fiscal irresponsibility and poor choices. If the Times doesn't succeed, not only will it suffer, but so will many other publishers.

Long-term financial trouble
You can see the bottom line problem facing the company by looking at its statement of operations for 2010 (click to enlarge):


Year-over-year ad revenue was down 2.7 percent. Circulation revenue was off by 0.5 percent. Total revenue was down by almost 2 percent. Even though operating costs were down even more sharply, by 7.4 percent, belt-tightening will not do the job if revenue keeps dropping in the long run, as it has for years. Even in that financial wasteland of 2008, company revenue was about $2.94 million, or 23 percent higher than last year. Operating profit from 2009 to 2010 dropped 7.1 percent. And the economy is supposed to be getting better.

But as advertising shifts from print to far cheaper online, revenue drops. Digital ad revenues may have been up 15.9 percent, but that still puts them at only $341.4 million.

Costs go down as well, but they can't possibly keep pace, as the paper still needs reporters, editors, advertising salespeople, buildings, telecommunications equipment, computers, and so on. The Times has expanded into online sites beyond the many news organizations that it owns, but the latter brings in about 16.6 times more revenue. Diversifying out of a problem won't work.

If ads pay less, get readers to pay more
So the company, having looked at the success that the Wall Street Journal and Financial Times appear to have had with charging users for access, have decided that a paywall is the only solution. Get people to pay for the news they consume.

The Times doesn't have many other choices. Unfortunately, this particular approach is unlikely to work. Print subscribers get online access for free, which means additional revenue will have to come from digital-only subscribers. That means keeping digital rates up high enough to make the print version seem desirable -- at least for current subscribers, and possibly for those who would primarily want digital. Every print copy represents a chance to slow the transfer of advertisers from paper to digital. But print subscriptions remain far more expensive, so some portion will simply shift to digital only.

The Times has set online-only access subscription prices at $15 every four weeks -- not even a full month. So there will be 13 pay periods (talk about nickel and diming) and a year will run $195, not the $180 a year those who calculated payment by month thought. Add web and tablet access, and you're at $260 a year. (Given that Apple will get 30 percent of any iPad/iPhone subscriptions, figure on even less revenue for the Times.)

Those rates are a bit less than the Financial Times and Journal, but the New York Times doesn't have the sales advantage of being considered a must-read by businesspeople. Getting them will be hard.

Staying in the limelight
There's another consideration. The Times wants its flagship paper to retain its reputation for influence and importance. But you can't do that and constantly block everyone who doesn't pay. When the Times of London (NWS) did, traffic dropped by 90 percent. That would make the Times practically irrelevant, as other news organizations would be far less likely to quote them, given that readers wouldn't be able to reach the original articles. In addition, how can you entice new people if they can't see what they're missing?

So the Times has left open some might large gaps. Anyone can read up to 20 articles a month. (Or is that every four weeks?) Come in from a search engine like Google (GOOG), or social networking site such as Twitter or Facebook, and you can read up to 5 articles (only up to 5 a day for Google) that don't count toward the monthly quota. In other words, the paywall is unsustainable, given the combination of needs -- money and attention -- that the Times has. [Update: Corrected from saying that there was an article limit on links from social networking sites.]

Furthermore, remember Times Select? That was the company's previous attempt at a paywall. It was cheaper and only brought in $10 million annually from 300,000 subscribers, but the price was a little over half of what the Times wants today. Increase the price, and the additional number of subscribers will drop.

Not that the paper can shrug its shoulders and listen to the Internet cheerleaders who expect content to be free and paid for by advertisers. There simply isn't enough money. The Times is stuck between a rock and a hard place, just like virtually every other newspaper out there. Bar any other more viable change, and we could be seeing the beginning of the end of most newspapers.

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