Have you ever noticed that whenever there’s a story about Fairfax or News Limited introducing paywalls to their domestic mastheads, there is generally a user comment from someone cleverly named ‘Ex Reader’ who says that they will stop reading once they’re forced to pay?
The one thing these throngs of ‘Ex Readers' are forgetting is that with the paywall products News and Fairfax have introduced there’s probably no reason to be ex-readers as it’s more than likely they will be able to continue digesting the same amount of content for free regardless of the paywall.
At Fairfax’s investor briefing yesterday, publishing chief executive Allen Williams outlined the new model going forward for the paywall on The Age and Sydney Morning Herald. The prices range from $15 per month for the web-only (both desktop and mobile) product, to $44 per month for the full suite of digital (desktop, mobile, tablet) plus print (weekday and weekend delivered). The bundle most likely to gain traction is the $25 full digital (desktop, mobile and tablet) plus weekend print package.
However, you can continue accessing the SMH and The Age without paying, with users having the ability to access 30 stories per month without the paywall being triggered. These 30 stories are articles only – which means high pageview driving content such as slideshows are not included. Fairfax has stated that at 30 articles per month, only the heaviest users reach the meter limit.
This approach is a softly-softly one which indicates that despite many assertive pronouncements that paywalls are the way forward. The move to paywalls comes with a stack of currently unanswered questions. Allowing access to 30 stories a month basically ensures, for the time being, the paywall will not throttle pageview counts and will keep advertising inventory on these assets at current levels. Given that, it is unlikely that the paywall that Fairfax has outlined, or the Newsplus model News Limited has launched, will jeopardise current levels of digital advertising revenue.
The big unanswered question is a simple but scary one – just how many people will pay for 'all you can eat' access? This is something no one currently knows the answer to.
One of the more visible and scrutinised paywall products is that of the New York Times. It currently has around 700,000 subscribers paying for access to the digital product. Pricing for the NY Times product ranges from $US15-$US35. With 700,000 people paying say, on average, $25 a month, that would bring in about $US210 million per year – not bad. Add that to digital advertising revenue and it’s a handy and growing piece of the revenue pie.
Yet what percentage of the NY Times global users have so far converted to being paying customers? According to Doubleclick Ad Planner, the NY Times has 60 million users a month accessing the site, 48 million of these residing in the US. Given the NY Times paying customer base is predominantly within the US, this means that 1.4 per cent of its readers have so far made the transition from free to paid.
According to Fairfax numbers, the SMH and The Age have an unduplicated audience between them of 3.7 million via desktop. If Fairfax was to achieve the same ratio the NY Times has enjoyed to date (1.4 per cent) in year one, it would see 51,800 paying customers come on board. At $25 per month this would bring in annual paywall revenue of $15.5 million in year one. It’s entirely possible that by 2018 the combined SMH and The Age paywall could be generating north of $50 million annually for Fairfax with a paying customer base around the 200,000-people mark. However, that is an awfully long time to try to plug the gap between falling print advertising and circulation revenues and emerging paywall revenues.
If the experts are right and in the future newspapers will be digital-only concerns, what does this mean for the economic model of newspaper publishing in this country? The reality is that Fairfax and News Limited (publisher of Business Spectator) have massive significant operational costs that will be extremely challenging to sustain. And while both are promising to continue to find savings, the likely reality is that the cuts to date can only be the tip of the iceberg. Just what does the digital-only publishing economic model look like and what level of costs and people can it truly cover?
Can Fairfax continue to incur costs in the vicinity of $700 million annually for digital and print versions of The Age, SMH as well as the costs incurred within the print classifieds business? What would those publications look like with a much more modest cost base?
Take the Australian Financial Review Group for example. In the first half it spent over $65 million and generated an adjusted EBIT of $1.8 million, troubled by falling revenue and increasing costs. The AFR is a great product but it’s currently a product that is ultimately failing to deliver much in the way of a return. For it to deliver a 20 per cent return on half yearly revenue of around $60 million, the group would need to cut costs for the same period from $65 million to $48 million. Annually, that’s a $30 million-plus haircut.
The Age and Sydney Morning Herald face a similar issue, the real innovation will be around curbing costs. And no, this doesn’t just mean cutting costs; it is more about finding ways to do much more with much less. Finding ways to continually evolve the product while simultaneously lowering costs. Maintaining the volume and quality of content whilst ultimately spending less to do so.
One thing Fairfax’s investor presentation demonstrated is that the company is a collection of strong, enduring assets. Fairfax remains a high quality publishing outfit that, in my opinion, has been progressive both in its approach to digital and the way it has managed the structural issues print has been faced with. It’s just the current overhead structure is too high.
While this is a never before seen challenge for the newspaper industry, it is eerily similar to the structural changes that have swept the music industry between the year 2000 and now. In 2004 the Australian music industry sold 64 million units and generated revenue of $606.9 million. In 2012 it sold 148 million units, yet generated $398 million in revenue. What happened? Highly lucrative physical album units were replaced with not so lucrative digital single units, slashing 35 per cent of the value of the industry. And what happened in Australia was happening elsewhere. This forced global consolidation of record labels, a reduced investment in locally signed acts as well as a reduction in the overhead structure industry wide – including a significant shift in the mechanics behind recording agreements with artists.
Labels needed to yank 50 per cent of costs, deliver a product that appealed to the evolving tastes of consumers and generate a return to investors. Some are succeeding. That’s no easy feat. It’s also one that print-led publishing companies, Fairfax included, are going to need to do.