Bleeding red ink

It's time for newspaper publishers to wake up to the fact that relying on advertising to finance online ventures has not worked.

FT.com

Alan Rusbridger, the editor of The Guardian, spoke bluntly last week when he described the financial effects of the internet on his newspaper to journalism students in Coventry: "If I stop to think about the business model, it is sometimes quite scary.”

Scary indeed. Guardian News and Media, which publishes The Guardian and The Observer, last week published figures showing that it made a pre-tax loss of £57 million ($93 million, €65 million) in the 2008-09 financial year, and its auditors only approved it as a going concern because the Scott Trust – established in 1936 to protect the editorial independence of The Guardian – stands behind it.

Yet Mr Rusbridger reiterated The Guardian’s stand against charging people to read its articles, or view its photographs and videos, online. "It would be crazy if we were to all jump behind a paywall and imagine that would solve things,” he said, according to journalism.co.uk.

Other papers are, however, waking up to the fact that it is untenable to rely on sheer numbers of online readers – and online advertising – to save them. The New York Times, which experimented with charging for selected articles between 2005 and 2007, announced on Tuesday that it would reinstate subscriptions.

From next year, the NYT will follow the Financial Times in charging readers on a "metered” model. They will be permitted to read a set number of articles free each month (perhaps about the 10 the FT allows), but will have to pay a subscription for more.

In any other industry, charging customers would not be a radical idea. Even companies such as Skype and Flickr use a "freemium” pricing strategy of giving away services to casual users and charging customers who use them intensively.

Newspapers have, however, become caught up with the notion of what Jeff Jarvis, a journalism professor, calls "the link economy”, believing that any gains from subscriptions will be outweighed by losses in advertising and brand equity.

Maybe that was a fair calculation a few years ago, when rates for online ads appeared to be rising towards those in print publications. But publishers should remember John Maynard Keynes’ dictum: "When the facts change, I change my mind. What do you do, sir?”

Now the facts have changed in just the way you might expect. Instead of papers being able to reconstruct online their domination of print display and classified advertising, they are being swamped by competition from portals, blogs, search engines, and so forth.

The question for general newspapers such as the NYT and The Guardian is: is there any alternative? Many editors have been persuaded that there is not – people are so used to consuming news for free online that they will not pay.

The success of the FT and The Wall Street Journal in gaining subscriptions and advertising online is often dismissed as a special case. Business publications have corporate customers who are price-insensitive, and produce specialist information that is not easily replicated.

General newspapers, however, must take the plunge. If the metrics of the link economy – visitors, page impressions, etc – had enough value, then The Guardian (35 million unique users a month globally, 13 million in the UK) or The New York Times (17 million in the US) would be in fine shape. Editorially, they are doing very well; economically, they are in crisis.

The point that link economy enthusiasts miss, I think, is that the trade-off between subscription and advertising is not a zero-sum game. Rates for online display ads have been falling steadily as competition has proliferated, with most sites now finding it hard to get more than $4 per 1,000 impressions on their pages (or $14 million for the 3.5 billion hits on all US newspaper sites monthly).

But sites such as the FT and WSJ – or some health or energy websites – can charge $90 or more. The fact that customers are registering and paying not only shows commitment but provides publishers with personal data with which to target advertisements better.

Although online readership falls when any form of subscription is imposed, metering or similar freemium models help publishers to more than make up for it. Not only do they gain subscription revenues, but they can raise advertising rates to their core customers.

Only a small number of readers will convert to being customers, but that need not matter. Outsell, a research group, reported this week that only 6 per cent of US online readers say they would pay online news sites if they charged.

If we are to take the figure at face value (which I don’t think we should), then The Guardian could get 2.1 million people to subscribe to it online, making it highly profitable at a stroke. Even 1 per cent would give it a subscription base of 350,000.

Nothing will save a lot of general newspapers. They thrived for a time on local or regional advertising monopolies and, now that Craigslist and other advertising aggregators exist, are finished. They do not produce anything valuable enough to survive the transition.

Perhaps commodity general news is now so widely available that even a true premium provider cannot charge. But I don’t believe it – reading both The Guardian and The New York Times’ coverage from Haiti this week was a reminder of how distinctive they can be.

Relying on advertising alone to finance that has not worked, as The New York Times has acknowledged. If your business model is that scary, you should try another.