Doing the Math on Online Newspaper Subscriptions

There's a reason why most journalists–including myself–were liberal arts majors. It's because, well, as Barbie once said, "Math class is tough."

But some of us became business reporters and learned to read balance sheets and other financial statements. A few of us moved from journalism to the business side of the operation, and got comfortable with Excel spreadsheets and financial modeling.

Unfortunately, it seems to be the liberal arts majors who are doing much of the advocating lately for broad paid subscriptions for newspaper Web sites (or paid subscriptions' nuttier cousin, micropayments). Because if they'd sit down and do the math on such an idea, they'd realize that it's not going to save the newspaper business. It might even hasten its demise.

Let's look at the numbers, and I'll keep this very simple: Imagine that a good-sized metro daily can charge $20 a year for access to its Web site, and that it attracts 500,000 people to pay that much to read whatever the paper puts online (and this assumes that the content is so unique that those readers won't decide to take their business elsewhere when confronted with a pay wall). How much revenue is that? It's $10 million a year.

That sounds like a lot of money–heck, it could pay the salaries for a good-sized newsroom. But it comes at a significant cost. 

Any paper big enough to attract 500,000 online subscribers is probably already making at least two or three times that $10 million annually in advertising revenue–$20 or $30 million or more a year. (Its print revenue is probably 8-10 times that.) But that online advertising revenue is based on traffic to the site. A subscription wall is going to drastically reduce traffic, and hence ad revenue. Some estimates put the traffic hit from a subscription model as high as 90 percent. Even if you only lost half the existing online ad revenue for that hypothetical newspaper site, that $10 million in subscription revenue won't make up for the loss. Oops. That's a problem.

Want to try it with a higher subscription price, like $50 or $100 a year? Fine, but you're not going to attract anything like the same number of subscribers. You might get, say, 200,000 online subscribers at $50 a year–the same $10 million in revenue, and the same risk to advertising revenue. Checkmate.

Those are optimistic numbers, incidentally. There aren't many papers with 500,000 print subscribers; it doesn't seem likely an online edition could attract that many paid customers. The Wall Street Journal, famously, charges about $100 a year to about 1.1 million online subscribers, for more than $100 million in revenue. That's good money, but it's a unique circumstance, driven by the Journal's high-quality business-targeted content, expense-account-paid subscriptions and nearly 15 years with a paid model. It's highly unlikely that any other paper could match numbers like that.

So there's the math: The problem is that the holy grail of online subscription revenue isn't actually a significant addition to revenue, and the associated cost in lost ad revenue makes it a wash, at best. Oh, and those subscription numbers would take years to achieve–while the damage to traffic and ad revenue from a pay wall would be immediate.

There is potential for some specific pay models. It's possible that some newspapers will be able to charge for online subscriptions for specific, targeted, exclusive, high-value products, such as microscopic coverage of state government or a local industry. But the audiences for those are likely to be fairly small, and the revenue correspondingly modest. The notion that newspapers can get people to pay subscription fees to access most of their content online is just silly. There are too many alternatives for news and information online. 

The place that those looking for additional online revenue should really be focusing is advertising, plain and simple. As I wrote the other day, there's plenty of evidence that newspapers haven't even come close to maximizing the potential revenue from advertising on their Web sites, and they've been chronically unsophisticated about online advertising. Paul Robinson recently argued that publishers have consistently undervalued and devalued Web advertising, and that's about right. They just haven't taken it seriously enough–even as they whine that Web advertising isn't as lucrative as print.

Clamoring for a few pennies from online subscriptions is not going to rescue the newspaper business, and in fact, it could strike a fatal blow if it undermines what advertising revenue is already there. There's much, much more money to be had by maximizing online advertising revenue opportunities than there is by trying to coerce readers to pay to visit newspaper sites. What's needed is serious effort to make newspaper Web advertising a robust form of revenue that supports quality news organizations. Even Barbie could probably understand that.

PS: Ken Doctor handicaps the odds of various newspaper pay schemes being attempted (their odds of success are much longer).

Comments

[Tim Windsor]

Mark,

I think you're right that we need to focus on finding better ways to build advertising solutions in our local markets. There are many more dollars available on that path than there are trying to squeeze payments for content out of site visitors.

I took a look at one interesting approach to advertising this morning on the Nieman Journalism Lab. It's long-form advertising that's essentially high-quality content that happens to be an ad in the bargain. I make the argument that thinking about advertising in such new ways -- getting outside of the banner and the text ad -- is key to growing ad dollars for local news operations.

More here: http://is.gd/lKXF

[tgdavidson]

Incisive, Mark. Let's run another set of numbers, shall we?

Let's deconstruct the myth of the newspaper-specific e-reader, ala Hearst. We'll assume it works; we'll assume it can (unlike the Kindle) provide color; we'll assume the form-factor issues get worked out (ever try to read one of those crappy e-editions on a laptop? Ooops! Horizontal screen, vertical layout!).

We're gonna beta-test our new toy at the SF Chron, daily circulation 375,000.

Because we're brilliant at assuming things, we're gonna say we're better - or at least more benevolent - than Amazon. No $359 price tag on this puppy, like the Kindle. Razors and razor blades and all that - we're going to sell the device to our loyal readers at cost.

Even if that cost were $100 per device (a really difficult price point to hit, by the way), do we expect a reasonable portion of our readers to shell out $100 for the device and pay us a subscription fee?

Ooops.

Oh-KAY, then. We'll follow the cable TV model with those fancy digital set-top boxes and DVRs. We'll rent people the device for a couple bucks a month. All we need to do is buy the devices first.

375,000 devices times $100 is ... $37.5 million.

Let's see: We have a newspaper that's losing $1 million to $2 million per week - and our plan to save it is going to require an up-front investment of another $37 million? With more ever year for the inevitable upgrades, replacements for lost/damaged/stolen units?

Tough thing, that math.

[mnmears]

Again, this advertising problem is another of several reasons that I think the most workable model for today and the immediate future is for electronic publication utilizing the existing design, layout and style of the printed publication.

The e-edition is a hybrid, but I think it's one that well serves both readers and advertisers. It doesn't require a special reader ... most any descent computer or laptop with Internet access will do. Utilizing hotlinks and such, it can offer a depth of coverage unavailable to printed publications.

As a local merchant, do you enjoy paying extra money for full or spot color that could be FREE with an e-edition? Would you rather have a banner ad or that quarter-page or half-page ad with a hotlink that takes people to your e-commerce site or a spot for a print-on-demand coupon?

Newspapers can charge advertisers based on page views as well as charge a small additional fee for click-throughs. Amazon.com offers a small stipend for some Web sites and bloggers if viewers use a link from those sites to purchase books, DVDS and other merchadise from Amazon.com. Why couldn't newspapers collect a teeny-tiny bit if a consumer buys from an advertiser's site because of that hotlink?

National advertising inserts could and should be put up as part of the publication's e-edition -- again with a fee based on circulation with a bonus for click-throughs to the retailer's site and a small .01 to .05 percent fee for online sales generated from that link and visit.

This might actually be a win/win for everyone involved. Think of the savings for advertisers with a 50 percent reduction of print publication (newsprint, press time, shipping, fuel, labor) ...

Newspapers should realize if they don't push this new technology, the retailers will eventually do a cost/benefit analysis and simply realize they're not getting enough bang for the buck distributing inserts in newspapers.

If local display and national advertising insert revenue dries up, even a complete Web-based e-edition will have a tough time making it without going to a nonprofit, NPR/PBS-type model.

[Bob]

Thanks for the great analysis, Mark.

As for the Wall Street Journal, I'd be suspect about its claims for paid online subscriptions. For instance, I know someone laid off from a financial services company three years ago when a division when kaput. She still can access the WSJ through that account even though no one's been paying for it for at least three years.

My guess is that it's more valuable for the Journal to claim it has that many subscribers than for the paper to audit the accounts and have to admit only a fraction of them are paying.