A positive side to paywalls

A revenue generating model for online publishing remains elusive, and as the advertising approach loses traction paywalls may be best for both consumers and producers.

Apparently, on the internet information wants to be free.

The internet has liberated information, and in creating never before seen efficiencies has fostered a belief that because some of the physical costs of distributing information have been removed, free is a fair price for consumers to expect.

Former Wired editor and speaking circuit regular Chris Anderson is perhaps the most vocal supporter of this free model. In his book, which retailed at release for $US26.99, he bluntly stated that “in the digital realm you can try to keep free at bay with laws and locks, but eventually the force of economic gravity will win."

Like many others, Anderson subscribes to the view that you just can’t stop the all swallowing momentum of the digital revolution, so the only action possible is to rollover and find an alternative model.

The problem is, Anderson doesn’t really know what that model is. And neither does anyone else really. For a while it appeared that advertising was the saviour. Build a web brand, generate users, who generate pageviews, and make money selling advertising next to the content.

This appeared to work for a while but was contingent on four important factors: the rapid penetration of broadband internet in households within the developed world; significant venture capital which helped fund these businesses; even more significant patience from investors in generating a significant return; and a digital advertising market that enjoyed over 15 years of significant, consistent growth.

These things allowed all metrics to appear positive. Revenue was up. Costs too could go up as users were going up and the ultimate goal was to scale. Investment was relatively easy to find as a digital strategy was necessary to win the confidence of Wall Street and the venture capital community, regardless of whether it focused on revenue. In short, digital publishing for an extended period could operate without the restrictions of its broadcast media cousins.

Now for many, the situation is different. Revenues aren’t growing at the rate they used to. Many are experiencing no growth. Some are seeing revenue go backwards. A handful – Google, Linkedin, Facebook – are seeing the sort of growth the rest of the industry used to experience, 20-40 per cent annually. Investment and funding is difficult for a media company to obtain, as venture capitalists have grown weary of backing advertising based businesses and are moving more towards SAAS and Enterprise Tech organisations who make their revenue from end users. Traffic may still be growing, but internet consumption continues to fragment, which means it is entirely possible for a normal internet user to visit hundreds or thousands of websites a month. All of this combines to create a painful issue for many content creating media organisations.

It sounds terribly dire. Digital, the alleged saviour of the media industry faces all the same challenges and difficulties the rest of media industry has always faced – yield difficulties, share of wallet, user attention – but it isn’t really dire at all. It’s a positive thing. For too long digital media has fed solely on the breast of the advertiser and in many ways it has become all-consuming. They have serviced their one paying customer with such gusto that they have stopped worrying enough about giving their users something of monetary value. Users now trust Google to point them in the direction of content, as so much of it is the same regardless of the website masthead. The Internet has become an echo chamber of similar stories, similar news and similar views. While this once worked for the advertiser, the advertisers have evolved too, and they are demanding a lot more than a banner next to a story.

Advertisers now want more for their investment – driving down prices and ultimately driving down revenue. The supply of ad inventory on the web is infinite, but the demand is capped. What’s worse is every day more inventory is created. In addition, users aren’t paying for most content. It doesn’t take a genius to work out where things are headed.

Investors have stopped being excited by hockey stick growth on user numbers and page impressions and are now wondering why, in most cases, this isn’t accompanied by similar growth trajectories in regards to revenue and profit. This puts pressure on publishers to act, not only to appease the market but to also ensure survival.

The paywall has been the first real tool used as a way of earning non-advertising revenue from users. Most of the world’s most respected news brands are either in the process of implementing a paywall system, or have already done so. Will they be successful? In isolation they are unlikely to move the needle too much, but in tandem with some other actions they are an important part of a viable future model. Assuming a paywall alone will save the day is as naïve as the great hopes place on advertising as a sole saviour.

The paywall is important for reasons that go beyond its contribution to revenue. A paywall is a way to keep a publishing organisation honest as it provides a black and white assessment of the strength of its product and the competitive position the organisation occupies in the market. A product or service is generally only as good as what someone is willing to pay for it. Success can no longer be judged by the amount of users who access your content for free, or how many pageviews a photo gallery has generated – as that no longer has the currency it once had – success needs to be judged on how many people are willing to shell out money to access your content, and once they’ve done that continue to do it week after week.

By enacting paywalls media organisations will be forced to continue to improve their products, and it will force their people to try and solve a truly complex problem of incentivising payment rather than incentivising clicks. This will improve products, which will in turn benefit users and advertisers. Innovation will flourish despite the fact some incorrectly associate a pay model with a lack of innovation. In no way am I saying that all web publishers need to enact paywalls – far from it – but those with a cost base that is higher than their realistic revenue potential will.

Many will fail along the way but through this process online publishers will discover the true worth of what they are producing.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles