The New York Times Paywall

EXECUTIVE SUMMARY

Digitization of newspapers poses a major challenge to the traditional print subscription and advertisement based business model of newspaper companies. Print circulation has consistently declined in the United States. Online advertising revenues have not been able to make up for the associated decline in print-based revenues. The New York Times Company, a leading newspaper group in the United States, also faces the challenge of decisively moving to a new business model in the digital era. The company is pursuing a metered paywall based system to bolster revenues. The initial results are encouraging, and it is suggested that the company should continue with the model, albeit with some important changes. It is recommended that the paywall subscription should be promoted as a membership, and the pricing structure should be simplified. Growth in digital subscribers should be the main objective at this stage.

 

DIAGNOSIS OF THE PROBLEM

Background

The New York Times Company group is a leading newspaper company in the United States (US). It had a market share of around 7% in 2009, with revenues of $2.44billion in the $35billion industry. The group currently consists of three main companies. The New York Times Media Group is the main company. It accounted for 67% of the $2.3billion revenues of the company in 2011. The New York Times daily (NYT) and the International Herald Tribune newspapers are part of this company. NYT is the group’s flagship newspaper, and was the third largest newspaper in the US based on circulation after the Wall Street Journal (specialized content) and USA Today in 2011.  In 2011, advertising contributed 49% to the New York Times Media Group top-line, whereas circulation contributed 45%. The US newspaper industry has traditionally been dependent on retail (42%), subscription (25%), classified advertising (25%) and national (8%) revenues. Over the recent years, the revenues of the US newspaper industry have declined due to declining print subscription and print advertising revenues. This is attributed to factors such as digitization of newspapers, increase in online readership, and growth of competing online content. The revenues of the New York Times Company have also declined. In Q4 2011, the digital advertising revenue (28% of the total revenues) for the group increased by 5.3%, but the print advertising revenue (72% of the total revenues) declined by 7.8%. However, there are some positives for the company as well as well. Circulation revenues have increased since 2008 (Appendix A). The EBITDA margins have also improved significantly in 2010 (from 10% in 2009 to 15%) because the costs have come down. Further, the sharp revenue decline in 2009 can be attributed to the financial crisis. However, as discussed below, further declines in revenues may change the situation very quickly, resulting in a net loss.

 

Core issue

Digitization of newspapers poses a challenge to the traditional print subscription and advertisement based business model. Online advertising rates are lower, and online advertisement revenue growth has been modest. Consequently, online revenues have not been able to fill the gap caused by decline in advertisement revenues from the print version. The operating margin of the New York Times Company in 2011 was only 2.4% ($57 million operating profit), and further decline in revenues may lead to a negative bottom-line in the short-term. Therefore, the core issue that the company should focus on in the current situation is to arrest the decline in its revenues in the medium term, while maintaining and growing the margins in the long-term. The main challenge is to decisively move to a new business model suitable for the digital era. The group must actively manage its transition from print to digital.

 

The response so far

Newspapers have attempted to make up for the lost revenues by charging readers for access to content on their website. This is referred to as the paywall system, and it has 4 main variations. The ‘all-or-nothing’ version is where only the subscribers gain access to the site. The Economist and The Times of London have used this option. Launch of this paywall by The Times of London in May 2010 led to a decline in the number of unique visitors from 2.79 million to 1.61 million in a few months. The second type is the ‘exclusive content’ system where news content is free, but access to exclusive content requires subscription. TimesSelect paywall used by NYT in 2005 was based on this model. Third type is the ‘Metered system’, where all content is free till a pre-specified number of articles or pages. Thereafter, the user needs to subscribe to be able to access any content. In a ‘device-specific’ model, subscription rates are based on the medium used to consume the content, e.g., print newspaper, website, iPad.

 

In 1996, NYT launched its website with an all-or-nothing paywall model ($35 per month subscription). It was abandoned after two years because the company saw potential in an advertising-based model rather than a subscription based (paywall) model. TimesSelect, an exclusive content based model, was the second paywall program launched by NYT (September 2005). At $49.95 per year, subscribers could access articles by some noted columnists. Subscription increased to 227,000 in two years, but the rise of social media and high-quality blogs posed a challenge to the customer value proposition offered by the NYT subscription. The program was withdrawn in September 2007. The existing, third paywall launched by NYT (May 2011) is a metered paywall system. Users are required to purchase a digital subscription if they exceed the free quota of 20 articles for a month. The home page at nytimes.com and all sections of the front page are free for all users at all times, whereas only the “Top News” is free for the iPhone and iPad apps users. The new paywall is ‘leaky’ as it encourages users who come in from traffic generators like social networks and search engines by providing them with extra benefits / free access. The effective price for digital subscription is around $4.00 per week. All print subscribers are granted full access to all content across all media without any additional charge. Despite initial success of the paywall, there are concerns that the initial growth is only a result of the introductory offer and the paywall model will not work.

 

PROPOSED SOLUTION – THE WAY FORWARD

The paywall is working

Given the change in consumer habits due to the proliferation of internet, some cannibalization of print subscriptions by digital subscriptions is inevitable. It is better that NYT’s digital subscription cannibalises its print subscription rather than some other newspaper’s digital subscription doing so. The 2011 paywall program has definitely worked and has created a new revenue stream for the company. So the core issue is being addressed. Importantly, success of NYT paywall is despite the fact that its subscription rates are the highest. With 390,000 subscribers in a few months, the impact is better than that of the 2005 paywall. This indicates that the customers value the NYT news content. The Times of London paywall case indicates that an all-or-nothing paywall model, which NYT also used in 1996, may not be suitable in the present context. For NYT, the number of unique visitors and page views was not significantly impacted after the launch of the 2011 paywall. The number of visitors and the page views for NYT was the highest among all newspapers during May 2010 to Jan 2012. It is, therefore, recommended that the paywall should be continued, albeit with some changes discussed in the following sections. Like many new products, the paywall requires development and active promotion.

 

 

The opportunity & the target

More than 123 million people in the US visited newspaper websites in May 2010 (around 70 million in January 2009). Internet became the number-two source of news after television. Increase in usage of smartphones and other mobile devices will only accelerate the growth. This is a huge opportunity. If NYT can attract 3% of this traffic to its site, engage the visitors, and convert 1.5% of the visitors each month, the number of digital subscribers will cross 1.3 million in 24 months. This should be the target. Considering around 44 million daily circulation of printed newspapers in the US, the circulation share of NYT works out to nearly 2.61% (1.15 million circulation in 2011). With this perspective, 1.3 million subscribers is not a steep target. Broadly, the other alternative is an online-advertising based model. However, based on recent experience, online advertising revenues are unlikely to make up for the lost print revenues even in the medium term.

 

Position the ‘subscription’ as a ‘membership’

Readers have paid, and will continue to pay for NYT’s top quality content. So the paywall should be aggressively promoted as a ‘membership’ to an elite group. This will introduce a sense of belonging. Value added products and benefits should be provided free of cost to increase the customer value proposition. However, the special privileges can be meaningful only if the customer values them. Therefore, it is imperative to understand the customers who come to the site and provide them with targeted offerings. Customer insights will help identify appropriate companies for tie-ups. Proper data mining is the key to achieving this. Further, age group of the largest number of members may be identified. This can be the focus segment, with special offers being provided to this group. All this will also improve the value of advertising on the NYT site because only relevant advertisements will be shown to the customers. The company should actively promote the ‘membership’ on social media sites through its own Facebook and Twitter accounts.

 

Simplify pricing

The digital subscription rate structure should be simplified. For example, the differentiation between smartphone and tablets user may be discontinued. As a special offer, the effective subscription rate may be reduced by 25% to $3 per week, with further discounts and membership benefits for longer-term subscriptions. The number of free views should be reduced from 20 to 10. Simultaneously, the subscription rate for print should be increased by 10%. This will offset the revenue loss because the existing ratio of online/print advertising revenues is 28%/72%. Print customers, who get the digital subscription free, will not mind the 10% hike if the perceived value of digital membership increases. To reduce the confusion on what is free, there should be no rewards for accessing the NYT website through search engines and social media sites. This change will not have a material impact because, for example, Facebook accounted for only 5.7% of the traffic to the New York Times brand in January 2011. A micro-payment system can be explored as an alternative for infrequent users whereby they can deposit some money with NYT and use it on a per-article or per-view basis.

 

As the US economy picks up, advertising and discretionary spending will pick up. Therefore, the New York Times Company group should take the opportunity to decisively move towards a paywall based system for its digital operations. It should focus on building a membership base over the next 2-3 years. Profits will follow.