Gigaom Pro Building A Better Paywall Strategies For Monetizing News Content

Building a better paywall:
strategies for monetizing news
content
By Paul Sweeting

This research was underwritten by PayPal

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Table of Contents
Table of Contents 2

EXECUTIVE SUMMARY ........................................................................................3

INTRODUCTION.....................................................................................................4

ECONOMIC CHALLENGES ..................................................................................5
The end of CPMs..............................................................................................6

SEARCHING FOR A NEW MODEL........................................................................9
Market segmentation ......................................................................................11

PAYING FOR CONTENT......................................................................................15
Cash or credit?................................................................................................17
Music and video..............................................................................................21
Beyond the bundle..........................................................................................22
Getting beyond subscriptions..........................................................................22
Retail trade......................................................................................................24
The audience-size paradox.............................................................................26
Other revenue streams....................................................................................28

AGGREGATION AND INVESTMENT...................................................................29
New tools needed............................................................................................30
The investment case.......................................................................................31

CONCLUSION AND KEY TAKEAWAYS..............................................................33

ABOUT PAUL SWEETING...................................................................................36

ABOUT GIGAOM PRO.........................................................................................36

FURTHER READING............................................................................................37

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Executive summary
Changes in technology have shaped the economics of news gathering and publishing
for centuries. The impact of digital technology, however, has undermined rather than
improved those economics by shattering long-established publishing monopolies. And
with that loss comes the loss of pricing power, which had long sustained publishers’
advertising-supported business model.

Newspaper publishers, then, must find ways to subsidize content-creation costs
directly. Some publishers are beginning to design new, more flexible paywalls and new
ways of packaging content.

Others have begun charging users directly for access. And some publishers are looking
to other content industries, such as online gaming, to navigate similar transitions, with
varying degrees of success. Information publishers can look to the experience of those
allied industries to learn important lessons about the importance of audience
segmentation, trade-offs between audience size and audience engagement, and factors
that influence users’ willingness to buy.

Going beyond such consumer-facing innovations, the industry needs to look for more
effective ways to cultivate business-to-business (B2B) commerce. Both ends of the
online information pipeline – content originators and downstream aggregators –
could benefit from the reduction in legal tension that effective B2B commerce would
bring about.

Technology providers and venture capitalists could gain a significant opportunity by
helping to create the tools and platforms needed to instigate B2B commerce.

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Introduction
As with previous periods of change, it’s not possible to completely foresee the new
commercial arrangements and business models that will emerge in today’s newspaper
publishing industry. But this time, the break between what came before and what will
come after is likely to be more radical than anything the industry has seen in more
than a century.

Many, or perhaps most, of the changes in the industrial technology of printing and
distribution that impacted the industry in the 19th and 20th centuries had the effect of
reinforcing publishing monopolies. By the 1880s, for instance, the sophisticated
printing presses, which could support a big-circulation company daily, could set a
publisher back $80,000 or more each, compared with $4,000–$5,000 for a steam
press in the 1840s. Those increased capital requirements raised significant barriers for
entry to would-be competitors and innovators.

Similarly, innovations in transportation (such as railroads) enabled wider circulation,
but only for publishers who could literally pay the freight.

The net effect of those mutually reinforcing factors resulted in a strong tendency
toward industry consolidation. In 1920, 92 percent of U.S. newspapers were
independently owned; by 2000 that number had dropped to fewer than 24 percent,
according to data compiled by the Newspaper Association of America.

The technology changes of the past two decades have had precisely the opposite effect.
By eliminating most of the high fixed costs associated with printing and distribution,
the Internet has shattered the industrial monopolies that sustained 19th- and 20th-
century publishers. The result has been an explosion of new entrants competing to
report, analyze, comment on and deliver the news.

Worse still for legacy publishers, the lack of geographic and other barriers on the
Internet, new user-driven means of content discovery like search and social media,

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and the rise of new third-party aggregators have together robbed publishers of their
traditional monopoly over readers.

While legacy publishers have themselves been able to benefit from Internet-driven
changes on the cost side by moving some of their operations online, those changes
have also brought a massive disruption to the revenue side of the business.

Both advertising sales and subscription fees — long established as the two main
revenue pillars of the publishing business — have been badly undermined in the
hypercompetitive era of online news. With myriad new ways of reaching potential
customers, marketers have been able to drive down the price of display advertising to a
fraction of what publishers were once able to charge, severely impacting publishers’
bottom lines. At the same time, publishers have seen subscription revenues plunge as
readers increasingly look to free online content to meet their information needs.

The disruption of their traditional revenue streams as a result of digital technology has
more than offset any gains publishers have seen on the cost side of their business,
posing a fundamental economic challenge to the future of the business. In this report,
we look at the nature of that challenge and consider ways publishers can begin to
rebuild the revenue side of their business on a more sustainable foundation.

Economic challenges
Historically, the monetization of general-interest news and information content has
been through indirect means. Publishers survived either on political/cultural
patronage, which values influence over content, or from the sale of advertising, which
values readership.

Even subscription and circulation revenue, often viewed as a kind of direct payment
for content by users, is more properly regarded as a payment for a service — timely
delivery — rather than for the content itself. Once in hand, actual use or redistribution
of the content was regarded as having no direct value. In fact, publishers often

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promoted their content’s unpaid “pass-along” circulation for setting advertising rates,
underscoring the primacy of reach and readership over the value of the content itself.

These long-standing habits of indirect monetization made it easy for most publishers
in the early days of the Internet to justify making their content freely available online.
Whatever circulation revenue might be lost, the theory went, would be more than
made up for by increased advertising revenue from the greatly expanded reach and
readership available on the web.

As recently as 2005, analysts at the Poynter Institute projected continued growth in
print revenue for another 14 years, even as online revenue growth accelerated.

Figure 1: Projected growth in U.S. print revenue

Source: Poynter.org analysis

Unfortunately, many publishers failed to adequately reckon with the critical role that
monopoly pricing power played in sustaining their indirect monetization models, or
what would happen if that pricing power was lost.

The end of CPMs
The CPM pricing model for advertising was premised on the fact that impressions

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were relatively hard to come by, given the high fixed costs associated with publishing.
However, once online, where fixed costs are low, monopolies vanished and
impressions became a commodity. The price for a thousand impressions quickly
collapsed.

According to an analysis by the Nieman Journalism Lab, which uses data provided by
the Newspaper Advertising Association, the average print CPM for daily newspapers in
the U.S. was $34.62 in 2010. That compares to an average online CPM of around
$7.00 for leading newspaper websites, according to comScore data, and $2.52 for the
web as a whole.

As more readers move online, publishers have faced sharp and irreversible declines in
print circulation, where high CPMs can still be achieved.

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Figure 2: Total paid circulation, U.S., 2000–2009

Source: Newspaper Assn. of America

Worse still for publishers, the content they had made freely available can also be freely
indexed and aggregated by a new type of competitor that can drive traffic to individual
stories on a publisher’s website but rob the publisher of the monopoly value of that
readership, such as Google News, the Huffington Post and Newser, further
undercutting CPMs.

Together, those factors have had a devastating effect on publishers’ overall advertising
revenue, putting enormous pressure on their indirect monetization strategies. The
chart below, compiled by the Federal Communications Commission as a part of its
investigation into the Information Needs of Communities from data supplied by the
Newspaper Association of America, shows the impact of that pricing power loss on
publishers’ gross advertising revenue over the past five years.

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Figure 3: Newspaper advertising revenue (millions), 2005–2010

Source: Newspaper Association of America

Searching for a new model
Given publishers’ lack of monopoly pricing power, it’s unlikely that CPMs for display
ads will ever return to a level that could restore the old cross-subsidy business model.
If profit margins are to be restored, we believe publishers will need to look for ways to
directly capture the value their content and readership creates. This can be done by
charging users directly for access and strictly controlling the amount of free content
publishers make available.

Some publications, such as the Wall Street Journal, have charged for online access
since the beginning. Today it boasts 1.1 million online subscribers, slightly more than
half of its total daily print circulation.

However, most of the online paywalls today are of a more recent vintage. The
Financial Times, for instance, began charging for access in 2001, using a complex
“metered” model in which non-subscribers got access to a limited number of online
stories each month. Nonpaying but registered readers got access to more stories

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online, while paying subscribers got access to the full site.

That model pulled in 126,000 paid online subscribers by 2009, representing about
one-third of the paper’s print subscriber base. In 2010 the FT toughened its paywall,
blocking access altogether for unregistered readers and limiting the number of stories
available to registered but unpaid readers. Online subscriptions jumped to 207,000 by
2010, representing over half of its print base at an average price of nearly $300 per
year (including both basic and premium subscriptions). Today content and
subscriptions account for 55 percent of the Financial Times’ revenue, while only 45
percent comes from advertising, according to the first-quarter financial report of its
parent company, Pearson.

In March 2011, the New York Times implemented a metered paywall modeled in part
after the Financial Times. Initial results have been encouraging: In its second-quarter
earnings report (the first full quarter after the paywall went up) the Times said it had
amassed 224,000 digital-only subscribers. That gave it about a million digital
subscribers in all, counting 756,000 print subs with digital access. It also reported
57,000 paid subscribers to its digital replica editions delivered to e-readers.

Under the new plan, all users will be entitled to read up to 20 stories a month for free,
at which point users will run into a multitiered paywall.

All print subscribers, from $35-per-month Sunday-only subs to $58-per-month seven-
day subscribers, get unlimited digital access to the Times on all platforms at no extra
charge. Digital-only subscribers are offered three packages: access to the Times’
website and smartphone app for $15 per month, access to the website and iPad app for
$20 per month, and unlimited digital access on all platforms for $35 per month.

Not all paywall experiments have been met with success, however. A survey of efforts
at three dozen papers conducted by Belden Interactive found that less than 1 percent of
readers on average are willing to pay for content. After online ad revenue fell sharply
due to a drop in readership, several of the papers in the survey dropped their paywalls.

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In other cases, publishers have erected paywalls largely as a defensive measure to try
to protect dwindling print CPMs rather than to create a new revenue stream. As Walter
Hussman, the publisher of the Arkansas Democrat-Gazette, admitted to researchers
at the Tow Center for Digital Journalism, at Columbia University, the publication’s
nine-year-old online paywall “does not justify itself as a revenue stream.” Instead, its
purpose has been to protect the print edition, which remains profitable.

Market segmentation
The lack of broader success for newspaper paywalls has generally been attributed to a
simple unwillingness of consumers to pay for information online, given the widespread
availability of free information that is just a click away. While that’s part of the
problem, the blame also lies with the relative inflexibility of most subscription
paywalls, the recent experiment by the New York Times notwithstanding.

We believe that that a more flexible approach to pricing and content offerings could
lead to better outcomes for many online publishers. By enabling multiple payment
scenarios, publishers could assign more appropriate price/value models to different
use cases for different types of users, potentially leading to greater overall willingness
to pay — even if only a small segment of users are paying the full subscription price.

Such market segmentation is common in many industries, from consumer goods to
business services, but it has not traditionally been a part of the publishing business.
Publishers had a strong incentive to ignore distinctions among readers. While it’s
intuitively obvious that newspaper and magazine readers do not read every article on
every page of each issue and that different readers are attracted to different articles or
sections, as long as publishers were basing advertising rates on total audience size it
was in their interest to overlook the obvious.

The same logic applies to subscription and newsstand pricing. Different readers
subscribe for different reasons, but as long as everyone can be induced to pay for the

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full bundle of content, there’s no point in breaking it up.

The online audience, however, is highly segmented by nature, due to the multitude of
paths by which different users come to the content. Indeed, a recent study by Scout
Analytics gathered user data from 70 online publishers in the U.S., including both
general interest and specialized publishers, grouping each site’s users into four
categories: fans (visit the site more than two times per week), regulars (one to two
times per week), occasionals (two to three times per month) and flybys (one visit a
month, usually via search engine). It then analyzed the total number of page views per
month that each category of visitor was responsible for.

It found a nearly perfect inverse relationship. Search-driven flybys composed three-
quarters of the sites’ total monthly unique users on average but accounted for only one
in five page views. The most loyal users, however, accounted for over half of all page
views, despite composing only 4 percent of total monthly unique visitors.

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Figure 4: Share of total monthly unique visitors by type of visitor, U.S.

Source: Scout Analytics

Figure 5: Share of total monthly page views by type of visitors, U.S.

Source: Scout Analytics

The figure below shows how the data broke down for one midsize newspaper with a

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daily print run of 90,000 and an online readership of 450,000 unique visitors per
month.

Figure 6: Traffic analysis for midsize newspaper website

Source: Scout Analytics’ analysis of client data; name of client is witheld

Clearly not all readers are alike in their level of engagement with the content and the
publisher’s brand. The potential revenue implications are obvious.

For the purposes of advertising sales, it means that 80 percent of the impressions
(page views) are being generated by just 25 percent of the audience. If the publisher is
selling display ad space on the basis of an aggregate audience, that means that 75
percent of the audience —what the advertiser is paying for — constitutes the least
engaged users — those likely to have the lowest levels of brand recall and other critical
metrics.

More importantly for this discussion, the different audience segments are likely to
exhibit different degrees of price sensitivity when it comes to paying for the content.
A study by PBS, reported by the Tow Center at the Columbia School of Journalism,
found that less than 5 percent of its website’s visitors fell into its most loyal category of
users, based on a set of criteria defined by the network. That group, however, was 38
percent more likely to contribute to their local PBS station than less-engaged users.

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To maximize revenue, therefore, it behooves publishers to discover where those price
sensitivities fall among their readers. They must also find ways to deploy appropriate
payment models to capture a fair portion of the value that different user segments are
assigning to their content.

Paying for content
Identifying the different levels of price sensitivity and the factors that influence
consumers’ willingness to pay among different segments of online information will no
doubt require experimentation by publishers. But some lessons can be gleaned from
research on purchase behavior around other types of digital content where paid-
content models are better established, such as music, video and especially online
gaming.

A study conducted in March 2011 by online payment processor PayPal, for instance,
found marked differences among online gamers in their willingness to pay for content,
based on their degree of involvement in gaming.

The study grouped online gamers into four categories based on the types of games they
typically play:

 Casual. Generally board games, puzzles or card games that require no ongoing
commitment from the player beyond the current session (e.g., Scrabble,
Bejeweled)

 Social. Games played over time, generally on social network platforms that
involve players developing virtual farms/cities/businesses (e.g., FarmVille,
Mafia Wars)

 Non-role-playing multiplayer. Arcadelike games that can be played over
time, in which players may assume characters but don’t develop the characters
themselves (e.g., Football Superstars)

 Role-playing multiplayer. Highly complex, menu-driven games in which

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players develop their own virtual alter egos, usually involving heavy interaction
with other players (e.g., World of Warcraft)

Casual online gamers spend an average of eight hours a week playing, according to the
study. Gamers who choose role-playing multiplayer games spend three times as long
playing online.

Figure 7: Game time: average weekly playtime

Source: PayPal

Given the correlation between game categories and time spent playing, the categories
can be considered a good proxy for the degree of engagement with online gaming,
echoing the Scout Analytics grouping of online news readers into flybys, occasionals,
regulars and fans.

Significantly, the level of engagement correlates closely with users’ willingness to pay.

Online gaming has two basic monetization models: direct payment to play (such as by
subscription or paid download) and the sale of virtual goods that can be used within
the game. In all payment scenarios, multiplayer gamers were significantly more likely

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to pay than were casual and social gamers.

Figure 8: Pay to play

Source: PayPal

According to a report in BusinessWeek, for example, less than 1 percent of online
gaming powerhouse Zynga’s 230 million users are responsible for one-quarter to one-
half of the company’s revenue. At Tagged, a San Francisco–based online social gaming
company, the top 1 percent of its 100 million registered users accounted for 46 percent
of its revenue through the first six months of 2011.

Cash or credit?
Even among the most engaged and willing to pay, however, gamers are highly sensitive
to the actual payment process. All four groups, for instance, showed a marked
preference for being presented with multiple payment options when negotiating a
paywall.

Figure 9: Payment preferences among gamers

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Source: PayPal

When it comes to purchasing virtual goods, in fact, online gamers are sensitive to the
same factors known to influence consumer spending on real goods and services: ease
and convenience of buying, incentives to spending more, and avoiding lock-ins and
long commitments. Convenience and reward factors were among the most frequently
cited factors that would motivate more purchases among gamers. The most engaged
gamers were more likely to be influenced by those factors than were the least engaged.

Perhaps the most notable example of that principle in action is Amazon.com, which
more than anyone else has demonstrated the value of paying attention to the online
transaction process with its 1-Click ordering system. The system targets the users most
engaged with the Amazon brand by having them set up accounts where they don’t have
to reenter payment and shipping information each time they make a purchase. It
rewards them with free shipping through Amazon Prime, and it merchandises to them
relentlessly through its recommendation engine and email alerts.

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Figure 10: More likely to purchase virtual goods if you could . . .

Source: PayPal

Significantly, gamers do not like having to purchase large bundles of virtual currency
when buying virtual goods. Online gamers in all four categories expressed a preference
for buying only the item they want at the time instead of having to buy a fixed bundle
of virtual currency that may be larger than needed for the purchase at hand. Heavily
engaged gamers, however, are more tolerant of bundles than are casual gamers.

Figure 11: Bundled or single?

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Source: PayPal

When it comes to paying directly for access to online games (pay to play), the game
experience itself is a bigger factor than buying virtual goods when it comes to
influencing users to pay.

The top five factors that would make gamers more willing to pay to play were:

 The ability to play with friends
 If paying made the game ad-free
 If paying made the game faster
 Access to a new feature
 Access to new levels/scenarios

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Those five factors were consistent across all four categories of gamers, although their
relative ranking shifted somewhat.

Music and video
Online music and video consumers exhibited similar tendencies and biases in the
PayPal study.

Among those who have ever paid for music or video content online, ease and
convenience of purchasing were the biggest motivating factors, significantly
outranking factors related to the content itself, such as making the content ad-free.

Figure 12: Reasons cited for purchasing premium content

Music Video
It’s convenient 71% 71%
It’s easy 59% 55%
I can get it on my portable device 42% 15%
I don’t have to leave home 41% 50%
To get unreleased material 11% 8%
To remove advertising 6% 16%
Cheaper than other sources 2% 1%
Other 7% 9%
Source: PayPal

Notably, given the popularity of Netflix’s subscription streaming service, online video
buyers in the study shared gamers’ preference for buying items individually rather
than in bundles. Nearly half of online video buyers said the ability to pay for items
individually would make them extremely or very likely to purchase content more often.

Also like gamers, online music and video buyers ranked convenience and user
friendliness of online transactions high among the factors that would make them more

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likely to increase their purchases. In particular, online video buyers placed a high
premium on being presented with multiple payment offers and options. Free trials, a
flat fee for a specified number of items per month and a flat fee giving unlimited access
for a specified period of time all ranked high among factors that would likely motivate
more purchasing.

Figure 13: More likely to purchase content if you could . . .

Music Video

Pay for items individually 52% 45%
Earn loyalty credits for frequent purchases 49% 45%
Get a free trial 45% 49%
Not have to enter payment information each time you purchase 35% 33%
Access unreleased material 34% 45%
Pay for unlimited access for specified period of time (e.g., day pass) 34% 42%
Pay flat fee to access certain number of items per month 28% 43%
Pay without navigating away from the content you’re interested in 25% 28%
Set spending alerts 22% 25%

Source: PayPal

Beyond the bundle
Games, music and movies are not perfect analogs for online news consumption. But
PayPal’s findings contain lessons that can be applied equally to the online publishing
industry, and they point to possible ways for online publishers to move forward.

Getting beyond subscriptions
For most publishers, charging for online content means selling subscriptions. Even
tiered paywalls such as the New York Times’ are largely modeled on the traditional
bundled subscription, in which the reader is asked to pay a flat monthly fee for

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unlimited access to content.

We know from the Scout Analytics study, however, that online readership is highly
differentiated. Different groups of readers are likely to have widely varied levels of
engagement with publishers’ content and brands, and they are therefore likely to have
different degrees of economic value to the publisher.

While all-you-can-eat subscriptions may remain an efficient way for highly engaged
users to pay for content, for most users the value of access is likely to be situational:
highly valuable at certain times, less valuable at others. Long-term, all-access
subscriptions likely will not accurately reflect the value those users place on the
content. More-flexible, à la carte pricing and product configurations, such as a limited,
onetime bundle of content or access for a limited time, might better fit the bill and
result in sales.

Autosport, for instance, a magazine for racing enthusiasts published by Haymarket
Media Group, offers a mix of free and subscription content on Autosport.com. It also
offers subscription content on an à la carte basis, for $1 per article. According to the
publisher, the pay-per-use offer has led to a 75–80 percent increase in first-time paid
users, who create a login account in the process. Some, but not all, end up being
converted to all-access subscribers.

Even among highly engaged high-volume users, the traditional bundled subscription
may not accurately reflect the value users assign to the content.

An analysis of its online readership by the Dallas Morning News, for instance, found
that engagement varies widely across different departments. While the main news
section of its website drew the most traffic — measured by unique monthly visitors and
views — the level of engagement with the paper’s brand among most of those visitors is
low. According to the Tow Center report, visitors to the DMN’s general news section
averaged around 2 visits per month, viewing an average of 1.5 pages per visit, for a
monthly average of 2.78 page views. Weather and sports, which drew fewer total visits,

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generated many more page views and averaged 4.83 and 7.71 page views per month,
respectively.

High school sports in particular generated an extremely high number of page views,
perhaps not surprising in the land of Friday Night Lights.

Armed with that data, the paper created a special online section called High School
GameTime, which includes up-to-the-minute statistics, rosters and other information,
along with real-time updates during games from around the state, generated by a
network of stringers and four full-time staffers. In 2010, the section generated a
whopping 14.07 page views per visitor per month.

Rather than using the popular section to try to sell subscriptions to the full site,
however, the Morning News broke out High School GameTime as a stand-alone, paid
product. It built a paid mobile app, and it now offers GameTime as part of a package
with Time Warner Cable’s local broadband service.

GameTime generated $700,000 in direct revenue last year, and it is expected to
exceed $1 million this year. The results suggest that it is possible for publishers to
create new types of paid products by breaking up the traditional subscription bundle
and matching a slice of their content with a particular segment of their audience.

Retail trade
The traditional indirect monetization model was essentially a wholesale business.
Publishers aggregated readers and sold them in bulk to advertisers: The bigger the
bulk, the higher the price.

Selling content online, however, is a retail trade. As demonstrated by the consumer
data from online gamers and music and video buyers, willingness to pay for online
content can be influenced by many of the same factors that consumer goods retailers
and marketers have long relied on: creating multiple SKUs at different price points,

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incentivizing desired behavior, simplifying and removing friction from the checkout
process, etc.

The most apposite model, in fact, is not the traditional media business but e-
commerce. The online video streaming service Hulu, for instance, achieved rapid
consumer adoption in part by paying close attention to the presentation of the material
and the user experience. It relied largely on advertising rather than direct consumer
payment. The e-commerce background of CEO Jason Kilar, who spent several years at
Amazon running its DVD business before joining Hulu, is evident in the site’s clean,
easy-to-navigate interface, simple playback and broad selection of content.

Hulu’s ad selector feature, which allows viewers to select which commercials to watch,
also shows the merchant’s touch by focusing on the user experience and encouraging
engagement.

That merchant’s touch is not always a comfortable one for media companies, of course.
Hulu has long had to struggle with its own network parent companies over control of
the marketing and merchandising of its content. Yet in the online information market,
where consumers have nearly infinite choices, competing successfully is as much a
function of merchandising as the merchandise itself.

In thinking about designing paywalls, therefore, publishers might do better to take the
job away from their subscription departments and hand it over to someone with
experience in retail and e-commerce. For instance, publishers might want to consider
creating a digital content sales team, with an incentive structure modeled after the
advertising sales department to encourage innovative merchandising. Management
should also encourage communication between the digital sales team and the senior
editorial staff, so editors can judge whether putting more resources into a particular
subject area would be likely to pay off, as the Dallas Morning News did with high
school sports.

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The audience-size paradox
Contrary to the experience of most publishers, size does not matter when it comes to
online audiences — at least, not as much as it did in the hard-copy world. What
matters, at least as far as paying for content is concerned, is engagement.

In the old, offline world, the shipment of physical media was the basis for generating
revenue: The more copies you shipped, the more revenue you generated. In the online
world, the amount of content consumed is the basis of generating revenue: The more
content a user consumes, the greater the potential economic value of that user.

That’s as true in the online gaming world of Zynga — where a sliver of the audience is
responsible for a majority of the revenue — as it is in the online information world of
the Dallas Morning News, where a sliver of content is responsible for an outsize
portion of the total use.

When evaluating paywalls, publishers understandably worry about the potential
impact on their total traffic and page views. No one in the business of disseminating
information to the public can or should be indifferent to the size of their audience.
When it comes to creating paid products, however, there’s something to be said for
fishing where the fish are.

According to data compiled by the Newspaper Association of America, total print
advertising revenue for U.S. newspapers in 2010 was $22.8 billion; circulation revenue
was just over $10 billion, for a grand total of roughly $33 billion. With a total U.S.
newspaper circulation of 152.2 million, average revenue per user (ARPU) works out to
be $215.84 ($32.9B/152.2M = $215.84).

Total online revenue last year, nearly all of it from advertising, was $3.04 billion, while
total unique monthly visitors came in at 105.3 million. That works out to an online
ARPU of just $28.89 per user ($3.04B/105.3M = $28.89).

Each print user, therefore, was worth $189.95 more on average than each online user,

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a reflection of the vast gulf between the CPM rates that publishers are able to charge in
the two channels.

It’s clear from those numbers that chasing audience size by itself quickly runs up
against the law of diminishing returns. The goal of any paywall or other type of paid
product, therefore, should be to drive ARPU — even at the expense of audience size.

The New York Times’ new paywall, for instance, is clearly designed with ARPU in
mind. The base price for a digital subscription to the Times is $195 per year ($3.75 per
week), almost precisely the difference between online and print ARPU.

While the Times will no doubt sacrifice some of its online audience as a result of the
paywall, in the long run bridging that gap is likely to prove more valuable. We have
other concerns about the Times’ paywall, at least as it’s currently designed, based on
its complete reliance on subscription payments (see above). But we believe it has
analyzed the problem to be solved correctly, even if its solution is not ideal.

Another approach to driving ARPU is to identify a hyperengaged segment of the
audience and cater to it by creating new pay products.

High School GameTime is one example of this. Another is the Washington, D.C.,
publication called Politico, a free, ad-supported website focused on politics (it also
distributes a free print product in the Washington metro area). Late last year it
launched a new service called Politico Pro, which features exclusive content in specific
subject areas not available in the print edition or anywhere else online, such as in
technology and health care. Politico charges from $1,495 to $2,500 per year for the
first topic and $1,000 per year for each additional topic.

While only a tiny slice of Politico’s readership is ever likely to subscribe to the Pro
service, it does has the effect of driving up ARPU across its entire readership base.

ESPN has pursued a similar strategy, albeit at a much lower price point, offering

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exclusive content to subscribers of its ESPN Insider service.

Other revenue streams
As with the sale of virtual goods in online games, some publishers are beginning to
explore paid models that do not involve pay-to-play content. The New York Times’
paywall, for instance, has enabled two complementary revenue streams apart from
subscription fees.

The Ford Motor Company is offering 200,000 regular Times readers free digital access
until the end of 2011 in exchange for viewing ads from Ford. While it’s likely Ford
purchased those 200,000 subscriptions at a discount to their $28.5 million sticker
price (34 weeks @ $3.95 a week x 200,000), the incremental revenue to the Times is
still most likely greater than what those readers would be worth on a CPM basis.

The Times is also making its content available to Wi-Fi users in Starbucks coffee shops
through a licensing deal with the Starbucks Digital Network.

Earlier this year, the Houston Chronicle launched a consulting service for retailers in
its market that are too small to justify advertising in the paper. For $500 a month and
a one-year contract, specialists working for the Chronicle evaluate a retailer’s website,
helping improve SEO and helping to write press releases that get posted on the
Chronicle’s website, chron.com. After four months, the paper had enrolled about 500
local businesses in the service, booking $2.5 million in revenue.

The Washington Post has sought to leverage the subject-matter expertise of its
columnists and reporters by offering paid “master classes” on specific topics, such as
basic economics, China and government. The classes include written materials, videos
and access to a “learning advisor” from the Post’s staff. The paper charges $399 per
class, but it has not yet disclosed how many it has sold.

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Aggregation and investment
The object of any paywall is to capture a portion of the value users are assigning to the
content. A significant portion of the value, however, will never be captured, even by the
best-designed consumer-facing paywall. As discussed above, a majority of the total
traffic that lands on most publishers’ websites today is composed of low-engagement,
low-value users.

That does not mean that no value is being exchanged in the process by which traffic
comes to a website, however. It’s just not being exchanged with the original publisher.
Rather, most of the potential value of that traffic is being captured by the aggregator or
search provider.

Aggregators create value for their own users by vacuuming up small increments of
potential value from around the web through algorithms or human intervention (or
some combination thereof), bundling them into a more immediately useful and
valuable form. They are then able to capture a portion of that value for themselves, in
ways the original publisher could not.

With little or no content-origination costs of their own, aggregators are better
positioned to realize respectable margins from the sale of advertising around their own
re-bundling of the content, even at the relatively low CPMs available online.

To hear many publishers tell it, that alchemy represents a massive and illegitimate
transfer of value from publishers to aggregators. While some of that value gets
returned to the original publisher through the traffic sent back by the aggregator, for
most publishers it is not commensurate with the value flowing the other way.

As things stand today, publishers face a stark choice between equally unpalatable
options for dealing with that value transfer. They can block access to their content by
search engines and aggregators, thereby writing off the traffic they would otherwise

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get, never to see it monetized. Or, as with metered paywalls, they can tolerate a certain
amount of unpaid traffic coming in, in the hope that they can eventually realize value
from it through advertising.

To many publishers, third-party aggregation represents a major defect in the digital
economy, tantamount to (if not substantively) copyright infringement. While the legal
argument around that point is beyond the scope of this discussion, we believe that the
dispute does highlight a critical area in which the digital publishing economy remains
badly underdeveloped: business-to-business commerce.

New tools needed
In perhaps most industries, B2B commerce usefully and profitably precedes consumer
or end-user commerce: Manufacturers sell or consign products to wholesalers and
retailers; content creators license programming to distributors or exhibitors; growers
sell to grocers.

In most cases, there is no way for the downstream operator to obtain the merchandise,
except by engaging in some sort of transaction with an upstream vendor. Assuming
those markets are operating in a reasonably efficient manner, those sequential
transactions fairly apportion the value that each operator is adding to the product or to
the ecosystem.

As things currently stand in the online publishing world, aggregators and other
downstream operators do not need to engage in a transaction with the content
originator to obtain what they need to operate. The technology is such that they are
able to add value merely by linking to content elsewhere on the web.

Since no transaction is necessary, there is no readily available mechanism by which the
upstream provider — in this case the publisher — can share fairly in the value added by
the downstream aggregator.

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While some publishers may see that as a loophole that ought to be closed, by legal or
other means, it might also be useful to ask whether that loophole could be bridged by
fostering a marketplace for the sort of B2B commerce common in other industries.

Could, in fact, a self-enforcing mechanism be devised that would compel some sort of
transaction between publishers and aggregators that fairly apportions the added
value? What might such a mechanism look like?

At a minimum, publishers would need to reclaim the downstream value of linking
directly to their content by placing it behind a paywall. Once in control of that value,
they could begin to think about ways to put a price on it for downstream operators.

For some publishers, that might be possible through more or less conventional
licensing deals that allow aggregators to link or index openly. Merely allowing content
to be accessed from an aggregator’s website might not be a sufficiently robust
mechanism, however: Once the content is accessed, nothing would prevent its
reaggregation.

Even if licensing could resolve some of the conflicts, search and aggregation are, by
nature, ad hoc enterprises. It is nearly impossible to anticipate in advance every
scenario in which a publisher’s content might become valuable, making it difficult to
assign an appropriate price.

For publishers to participate fully in the broader aggregation economy, some sort of
real-time mechanism for price discovery would be needed, along with a robust system
for clearing transactions rapidly.

The investment case
Currently, no such B2B marketplace exists, and few of the technology tools needed to
make it work are sitting on the shelf waiting to be used. Yet there is ample precedent
for online market making, some of it even B2B-oriented.

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The most obvious example is eBay, which has built a vast online auction and retail
marketplace. We’re not aware that eBay has ever seriously considered leveraging its
technology platform for B2B applications, but we would certainly consider it well-
positioned to do so if it chose to.

Google’s AdWords and AdSense also serve a market-making function, matching online
ad buyers with ad sellers in real time. It even qualifies as a B2B marketplace, since ad
buyers and sellers rarely include end users.

The web is also full of various types of “stock” exchanges, matching buyers and sellers
in everything, from virtual shares in political candidates to box-office features.

Today the online aggregation economy is inefficient in that it does not fairly apportion
value as it gets added throughout the ecosystem. Rather than try to shut that economy
down, however, we believe it is worth exploring opportunities to make it more
efficient, such as arming publishers with better and more appropriate tools for
capturing value whenever it’s created around their content.

To date, there has not been much investment in the B2B space within the content
aggregation economy, either by incumbents or venture capitalists. Most investment
has flowed either into content creation or into consumer-facing aggregation sites. Yet
value is clearly being exchanged along that channel. We believe there could be a
significant upside for whomever ends up providing the tools or platform to properly
capture and monetize that value. By more equitably apportioning that value, more
resources would become available for content creation, benefitting the entire
ecosystem.

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Conclusion and key takeaways
The strategy of making information content freely available on the web in order to
drive advertising revenue has largely failed, particularly for legacy publishers with high
content-creation costs and still-profitable print franchises to manage. The CPM
dilution caused by the lack of territorial exclusivity and the near-infinite number of ad-
bearing pages online has driven margins down to the point where the industry’s
traditional cross-subsidy business model simply does not work.

To survive, publishers need to aggressively explore new monetization strategies that
will enable them to support the high content-creation costs directly, either by charging
users directly for access to the content or by creating new types of paid products that
can support new revenue streams.

Unfortunately for legacy publishers, the business of selling content directly to users on
the web is unlike any consumer-facing business they’re generally familiar with. The
closest models are the consumer goods and e-commerce industries, not the traditional
subscription and delivery businesses most publishers know. To succeed, publishers
will need new sales and marketing skills and new ways of thinking about their
audiences.

But some lessons can be gleaned from research on purchase behavior around other
types of digital content where paid-content models are better established, such as
music, video and especially online gaming, where paid content is more established and
accepted.

 Audience. In addition to being larger, the online audience is much more
diverse than the offline audiences most publishers are used to. They come to the
audience by many different paths, exhibit widely varying degrees of engagement
with the publisher’s brand and most importantly have widely varied levels of
economic value to the publisher. Understanding who they are, where they come
from and what their behavior is with respect to the content is imperative.

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Most critically, engagement matters more than total audience size. The basis for
generating revenue in the online world is not about how much content a
publisher delivers in the aggregate but rather how much content individual users
consume. The more a user consumes, the greater her potential economic value is
to the publisher. Monetization strategies, therefore, should be geared toward
maximizing average consumption and average revenue per user (ARPU) more
than toward attracting more users.

 Merchandising. Selling content online is much more like other types of
retailing than it is like selling print subscriptions. It’s highly competitive,
margins are often slim and goods are often perishable. Success will depend as
much on getting the basics of retail merchandising and consumer marketing
right as it does on the merchandise itself.

 Buying experience. We know from related industries that online content
consumers are motivated by the same tricks of the trade that offline merchants
have practiced for years: convenience and flexibility in payment options, rewards
for frequent purchases and other incentives, and having multiple product
configurations to choose from, as well as consumer control. Publishers should
pay close attention to the buying experience in designing paid products.

 Segmentation. All-you-can-eat subscriptions can be an efficient way for high-
volume users to pay for content, and they need to be part of online publishers’
arsenals. They don’t, however, provide a value proposition that will appeal to all
segments of an audience that might be willing to pay for content if they are given
the right offer. Publishers also need to design payment options that appeal to
more moderate, less frequent users.
Smaller content bundles, time-limited all-access passes, à la carte menus and
other types of flexible offerings would allow publishers to establish multiple price
points that more accurately reflect the value that different segments of the
audience assign to the content.

 Product innovation. In all industries, certain basic products will be
evergreens. But almost every consumer-facing business needs to introduce new

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products from time to time to keep up with the shifts in consumer tastes and
demand and to offset flattening sales of earlier products. That pressure is likely
to be at least as acute where timeliness and relevance are critical product
attributes — probably more so for news publishers.
Publishers need not confine themselves to their traditional lines of business,
either. The process of gathering, editing and presenting information creates any
number of ancillary assets that can be tapped to create new online as well as
offline products, from the in-house expertise of the staff to the user community
to archival research.

Finally, business-to-business commerce remains a badly underdeveloped realm of the
online information business. Significant opportunities appear to exist for creating the
technology tools and platforms that enable reasonable, fair and efficient B2B
commerce between content originators and downstream aggregators.

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About Paul Sweeting
Paul Sweeting is the founder of Concurrent Media Strategies, a Washington, D.C.–
based consulting and editorial services firm specializing in digital media technology
and policy issues. In 2007 he developed and launched Content Agenda, a website
owned by Reed Business Information, the publisher of Daily Variety, Broadcasting &
Cable, Video Business, Publishers Weekly and other media-related properties. He left
RBI in 2009 and launched the Media Wonk blog, which examined the impact of digital
technology on the way cultural products are created, communicated and perceived,
both in commercial terms and as a cultural and political phenomenon. He also became
an analyst with the GigaOM Pro network and began contributing to the GigaOM and
NewTeeVee websites. In 2010 he launched Concurrent Media Strategies and the
Current Media website, which incorporated the Media Wonk blog.

About GigaOM Pro
GigaOM Pro gives you insider access to expert industry insights on emerging markets.
Focused on delivering highly relevant and timely research to the people who need it
most, our analysis, reports and original research come from the most respected voices
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Please visit us at http://pro.gigaom.com

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Further reading
What media companies can learn from the book industry’s disruption
We've written a lot here at GigaOM about the evolution — and disruption — of the
book-publishing industry, from the rise of self-publishing phenomenons like Amanda
Hocking to new e-book ventures like Harry Potter author J.K. Rowling's forthcoming
Pottermore site. The forces driving this disruption in traditional book publishing are
the same as those affecting other media, be it newspapers, magazines or virtually any
other publishing-based business. Here's what other types of publishers can learn from
the current state of the book industry.

What the New York Times can learn from Rupert Murdoch’s paywall
This week, executives from the Times of London revealed the latest news about its
attempts to get online customers to pay for the journalism they’d previously been
getting for free. While numbers suggest that a paywall can still get print readers to
engage in an online product, plenty of data suggests that that strategy might not be a
financial savior.

A modern media manifesto for the digital-first era
There’s talk of the future of media in the air. So let’s examine how NewNet
technologies like social media and real-time feeds are helping to reinvent the business.

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Want more information?
Contact Paul Sweeting, the author of this report,
or any of the other experts at GigaOM Pro.

Discuss this report online.

Suggest a research topic.

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