Saturday, November 12, 2005

NYTimes Nocera column: Trying to Wean Internet Users from Free


Today 27 percent of The Times's revenue comes from circulation, and 66 percent
from advertising. Six percent of all newspaper ads are now online -- and for
many, the website only gets paid when a readers "clicksthrough" the ad.
Does it make sense for newspapers to start charging for content online?
Columnist Joseph Nocera says yes -- although it is painful.

November 12, 2005
Trying to Wean Internet Users From Free

The New York Times

PEOPLE hate, hate, hate to subscribe to things on the Internet," Microsoft's
chairman, Bill Gates, said a few weeks ago.

Mr. Gates was sitting in the 14th-floor boardroom of The New York Times,
speaking to a small gathering of executives, editors, editorial board members
and reporters. Rather painfully for us, while he was making a broad point about
consumers and the Web, the specific example under discussion was TimesSelect.
That, of course, is this company's nearly two-month experiment to, well, see if
people will subscribe to things on the Internet.

Or at least to see if they'll pay a subscription fee to read New York Times
columnists online. For years now, The Times has largely posted its content
free, relying on advertising to generate revenue. With the TimesSelect program,
however, the columnists have been put behind a wall.

Newspaper subscribers can still read the columnists online free - though they
have to sign up for TimesSelect to do so. But those who read The Times only
online must now pay $49.95 a year (or $7.95 a month) to get their fix of
Maureen Dowd, Thomas L. Friedman, Frank Rich and the newspaper's other
columnists, myself included. (TimesSelect subscribers also gain access to the
newspaper's archives and some other online-only goodies.)

From the start, TimesSelect has been controversial. Part of the opposition
comes from that segment of the digerati who tend to believe that information on
the Internet should be free as a matter of principle. Others simply don't want
to pay for something they're used to getting free. Twice in the last month or
so, I've had the odd experience of having wealthy Wall Street guys I've
interviewed for this column ask me to e-mail it to them because they refuse to
subscribe to TimesSelect.

There are other, more philosophical, objections as well. Mickey Kaus, an
unrelenting critic of TimesSelect who writes the popular kausfiles blog for the
Slate online magazine, told me recently that he had no particular objection to
paying for Internet content. "What I object to," he said, "is the idea that The
New York Times is essentially saying that its columnists' opinions are so much
superior to everyone else's that they are going to charge for it."

Jay Rosen, a New York University journalism professor who writes a blog called
PressThink, said he believed that the move would wind up hurting the
columnists. "What is the product?" he said. "It's influence." With so much of
the political conversation now taking place online, he said, Times columnists
would inevitably be less influential if only paying subscribers could read
them. This view is shared by some of the columnists themselves.

SO it was a bit of a surprise, after all the sturm und drang, to see the early
results of The Times's online subscription experiment. They're not half bad. In
a news release issued Wednesday morning, the company reported that since it
began in mid-September, TimesSelect has generated 270,000 subscribers, half of
whom already subscribed to the newspaper (and hence get the new service free)
and half of whom were plunking down cold, hard cash.

To be sure, that is a far cry from the million-plus people who spend as much as
$600 a year to buy the dead-tree version of The Times, and it's not even
remotely close to the 20 million-plus "unique visitors" who come to the Times
Web site each month. But it's something. Martin Nisenholtz, who is in charge of
digital operations for The New York Times Company, told me that the numbers
were "at the high end" of expectations.

It is far too early, of course, to predict whether TimesSelect will ultimately
succeed. The roughly 135,000 online-only subscribers could represent a new
willingness on the part of consumers to pay for newspaper content online - or
not. But what I've wound up wondering is whether, even if it is a roaring
success, TimesSelect - and other online subscription models that are bound to
follow - will be enough to stop the erosion of the economics that underlie
newspaper journalism. I'm not terribly sanguine.

Mr. Nisenholtz said that The Times had always assumed that it would eventually
find a second revenue stream. "Advertising is always going to be cyclical," he
said. "And businesses that have only one revenue stream tend not to be as
healthy as those with multiple revenue streams."

It is hardly a surprise that a newspaper company executive would want to
generate subscription revenue as well as advertising revenue: that's the way it
has always worked in the business. Today, for instance, 27 percent of The
Times's revenue comes from circulation, and 66 percent from advertising. (The
other 7 percent come from things like syndication.) Indeed, in the world of
paper and print, a healthy paid circulation helps generate ad revenue, because
advertisers like to see that readers care enough about a publication to pay for

But on the Internet, general interest publications charge for content at their
peril. The Wall Street Journal has largely pulled it off - it has 764,000
subscribers to its Web site, and it even charges people who subscribe to the
actual newspaper (though at a reduced rate).

But The Journal is the exception to the rule. In 1998, Slate magazine put its
site behind a paid wall. It was a dismal failure - "the worst year in Slate's
history," recalls the editor, Jacob Weisberg, who was then a writer for the
site. The Atlanta Journal-Constitution tried to get readers to pay for some of
its online sports content; it gave up after a year. For two years, The Los
Angeles Times charged readers for its online Calendarlive section; it threw in
the towel in May.

These efforts didn't work because they generated too few subscribers to
interest advertisers. Calendarlive was particularly misguided because the movie
and other entertainment listings it produced were exactly the kind of content
advertisers love.

Which also helps explain the series of choices The New York Times has made.
Like many newspapers, including The Washington Post, The Times focused on
generating large numbers of viewers that it could deliver to advertisers. To do
that, it needed to keep its content free, even if it meant that some readers
were bound to give up their newspaper subscription and go to the free Web site

And then, when the company decided that its Web operation was strong enough
that it could experiment with a second revenue stream, it chose to use its
columnists as the guinea pigs for basic economic reasons.

For starters, the Op-Ed columnists in particular are popular with readers, so
there was a decent chance that consumers might be willing to pay to read them.
In addition, though, moving the columnists from free to paid brought the least
risk of cutting into advertising revenue. You'll notice that the company hasn't
put New York Times movie reviewers, who are also quite popular, into
TimesSelect. Movie and entertainment pages are as important to New York Times
advertisers as they are to Los Angeles Times advertisers.

From a purely business point of view, this all makes a reasonable amount of
sense. TimesSelect strikes me as a worthy experiment, even with the obvious
downside for the paper's columnists, who don't have the readership they had
before going behind the paid wall.

Besides, at a time when newspapers are struggling - with circulation down at
many newspapers, and readers and advertisers increasingly moving to the
Internet - The Times has to do everything it can to find ways to maximize the
amount of money it generates from its Web site. So does any newspaper that
wants to continue doing ambitious journalism. When journalists criticize
TimesSelect, Mr. Nisenholtz said, they seem to forget that the primary goal is
to find a business model that will make it possible to continue paying for
serious journalism, which at The Times costs over $200 million a year.

This, though, is precisely where I become discouraged. Look at what happened to
the music industry, which tried - and has largely failed - to sustain its
pre-Internet revenue as the Web destroyed its business model. It has
ham-handedly tried to beat back technology with litigation, but no matter how
many courtroom victories it reaps, the technology keeps winning in the

Or look at what is happening to telephony, or film, or all sorts of businesses
that are undergoing wrenching change thanks to the rise of the Internet.
Margins shrink. Revenue drops. Profits dwindle.

From where I'm sitting, it sure looks as if the same is happening in the
newspaper business. The ruthless efficiency of the Internet, for instance, is
changing the way ads are paid for. In print, an advertiser places an ad and
pays for it - end of story. Online, most ads generate revenue only when readers
click on them. And the rates are much lower.

William G. Bird, a Citigroup analyst who covers the newspaper business, says
that 6 percent of all newspaper ads are now online. He compared it to taking
money out of one pocket and putting it in another. But here's the painful
twist: "For every dollar coming out of the dead-tree pocket," he said, "only 33
cents is going back into the online pocket."

Doesn't TimesSelect - which, remember, costs $49.95 a year - suggest that down
the line, there will be a similar contraction in circulation revenue? And
that's if the experiment succeeds! Yes, as more readers gravitate to the Web,
distribution and paper costs will surely be reduced. But it's highly unlikely
that those savings will offset the hit to revenues.

Esther Dyson, who edits the influential technology newsletter Release 1.0,
compared the Internet's effect on newspapers to the effect of the open source
movement on the software industry: "It doesn't steal your business," she said.
"It erodes it."

As a business journalist, I've tended not to worry a lot about music executives
trying to salvage their broken business model. My general view has been that if
they can't adapt to disruptive technologies, then they probably deserve their
fate. But in the six months I've been in the newspaper business, I've learned
to have some sympathy for those who are staring down the barrel of the

It's not fun.

Copyright 2005 The New York Times Company


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