Will Readers Ever Pay For Online News?

More newspapers considering charging online users a fee. journalism, media, news, web, internet, subscriber, subscription, ad revenue, advertising, circulation,
The Monday Note covers the intersection between media and technology and the shift of business models. It is jointly edited by Frédéric Filloux, a Paris-based journalist and Jean-Louis Gassée, a Silicon Valley veteran currently general partner for the venture capital firm Allegis Capital in Palo Alto. Their column appears on CBS News.com each Monday.

An idea is gaining momentum: online readers must open their wallet.

In recent weeks, several suggestions for moving from wish to implementation have popped up. The latest one comes from Google. The company proposes to give a boost to its not-so-successful Checkout service by harnessing it to online newspapers interests.

Quite a change here. Only a few months ago, Google's haughty advice to the newspaper industry was: "You're on your own guys. Darwin is in charge here. Adapt or face extinction." Last November in Paris, I personally witnessed the Googlers' poor performance in front of local media barons. It was an embarrassing mixture of unpreparedness and arrogance. Some of us felt really sorry the search giant screwed up so badly.

Google was slow, but it finally got it. It understood that its position -"Thank us for the billion clicks a month we send to your sites. We bring value to your businesses. The rest is your problem" - was no longer defendable. Google can no longer ignore the dramatic deterioration of the news media sector.

Here are key figures for the U.S. market. The best recent period was 2005. In that year, U.S. newspapers reported total advertising revenue of $49.4 billion. 96% came from print (35% from classifieds) and 4% from online. Between 2005 and 2008, things changed dramatically. Total ad revenue fell 23.4%. Print declined 26.7% (including a 42.4% drop in classifieds.)Meanwhile, online revenue soared 53.4%.

To get a more precise and recent representation, let's compare the last available quarter (Q2 2009) to Q2 2005. Over those four years, here's what's happened: Total ad revenue fell 44%. Print declined 47% with classifieds plummeting 64%. But online still grew by 30% over the same period.

In a nutshell, American newspapers have invested quite a bit in a sector that is losing - both in terms of absolute amount and percentage contribution to the revenue stream. A large part of the decline is due to the recession, but no one knows exactly how much of that is structural (due to the exponentially growing inventory, among other factors).

European newspapers suffered less, mostly because of their limited dependency on advertising. Also, the European economy's downturn was less brutal. But that's meager consolation. Speaking of the impact of the recession across all media, watch this chart from Business Insider, which details the extent of the "advertising apocalypse"

In itself, this deterioration explains the rehabilitation of the paid-for content idea. The fact is that advertising doesn't work as expected for news web sites. Everywhere in the world, volumes dropped (that's the recession part). But more worrisome, prices dropped as well with a "ratchet effect" that will make it difficult for prices to return to the pre-crisis level.

Google bears some responsibility in this state of affairs: it forced a large chunk of the advertising market to shift to text ads with the G-model built on large volumes and low per unit cost. Of course, Google got used to saying that with 25,000-plus sources of information on Google News worldwide, the company could afford to lose a few. But it finally yielded to facts and decided it should come up with a way to monetize online news.

It helped when the Newspaper Association of America issued a Request for Information for third parties willing to create a centralized payment platform.

The first respondent was Journalism Online, a New York-based venture that media entrepreneur Steven Brill created a few months ago in association with Gordon Crovitz, the former Wall Street Journal publisher. These are high-caliber people. Journalism Online's idea is erecting well-designed pay walls for news content, and "Preserving Valuable Journalism by Restoring the Value Proposition." (Read Steven Brill's interesting keynote speech at the last online publishing and marketing OMMA conference). Journalism Online's full response to the NAA's request is available here.

The second response came from Google with a platform based on its Checkout payment system. Google enters the fray with an impressive line-up: its huge, globe-spanning server infrastructure, technical expertise, economies of scale and, probably, a cheaper alternative to Journalism Online's 20% fee. (Google's full response to NAA is here).

Let's summarize the key components of a modern paid-for system for news sites.

• Single sign-on system. Forget about a proprietary transaction system. There is neither room nor time for reinventing the wheel. Actually, the only viable option is mutualizing the "wheel," with broad multi-publication passes and proportional revenue redistribution. Hence the question: who will be the grand consolidator? We better keep a choice of platforms - as long as they are linked.

• Diversity of models. We need the ability to handle subscriptions and paid-per-article models, as well as packages and bundles. Flexibility, adjustability will be key (and yes, it complicates the system, but that's what we have computer systems for).

• A unified "friction free" micropayment system. The best examples are well-known: Amazon's or iTunes' "one-click" option allows impulse, hassle-free buying. We can even dream of cross-connected platforms: my subscription to Le Monde.fr tied to The New York Times,' and the system allowing the occasional purchase of a 5,000 word feature in Vanity Fair. To those who roll their eyes thinking this is too convoluted, think about the Sabre or Amadeus airlines reservation platforms that makes it possible to book a flight from San Francisco to Kirkenes (Norway) across three different airlines.

• A cross-media brands consolidation system. It aggregates micro-transactions (down to one cent) into monthlies and annuals.

• A database system. It provides multi-support subscription management, print and online, allowing combined marketing operations.

• Flexibility in pay-wall options. Publishers should be able to decide almost on the fly which content lives in the paid-zone system. Some will go for a package policy - x articles for y dollars or euros - while others will charge on a per-view basis.

• The ability to decide the criteria to charge readers and not others. This goes well beyond the simple basic vs. premium concept. At some point, usage intensity will have to be factored in. That means the first taste is free but you must pay if you keep coming back. Weirdly, all the papers I'm reading on the subject don't do much to explore this notion. Yet, it is crucial to readership segmentation.

• Search engine management. For pay walls, the most quoted inconvenience is this: the huge traffic sent by search requests (frequently 40% of the total) ends up at the "subscription only" wall. Publishers must be smart in dealing with this fact: a reader who lands on their site doesn't have to be rejected simply because he's a first time visitor. Quite the contrary, actually. There are many ways to go around this obstacle, we'll explore those later.

• (Most probably) An advertising management system. It will have to be embedded in the transaction system because the CPM structure is different between free and paid zones. Experience shows that an ad behind a pay wall commands a higher price. A 30% premium doesn't seems overly optimistic.

• Integration of mobile terminals. Ignoring or treating separately eBooks, iPhone or Blackberrys would be a terrible mistake. That's where the real money is.

This just scratches the surface of the payment question. In coming weeks, we'll explore realistic news consumptions patterns and examine how those could translate and define a reliable transaction system. Meanwhile, it will also be quite interesting to watch how publishers deal with the two proposals (so far), from Journalism Online and Google.

By Jean-Louis Gassée and Frederic Filloux
Special to CBSNews.com