Sunday, November 13, 2005

Contending with expectations--and behaviors.

Joseph Nocera: Staring down the barrel of the Internet

By Joseph Nocera
The New York Times

"People hate, hate, hate to subscribe to things on the Internet," Bill Gates, the chairman of Microsoft, said a few weeks ago.
Gates was sitting in the boardroom of The New York Times, speaking to a small gathering of Times executives, editors, editorial board members and journalists. Rather painfully for us, while he was making a broad point about consumers and the Web, the specific example under discussion was TimesSelect, the nearly two-month-old experiment by The New York Times Co. to, well, see if people will subscribe to things on the Internet.

Or at least to see if they will pay a subscription fee to read New York Times columnists online. For years now, The Times has largely posted its content on its Web site free of charge, with advertising being the primary means of generating online revenue. With the TimesSelect program, however, the columnists have been put behind a wall. Subscribers to the newspaper can still read the columnists online for free, though they have to sign up for TimesSelect to do so. But those who only read The Times online now have to pay $49.95 a year, or $7.95 a month, to get their fix of Maureen Dowd, Thomas Friedman, Frank Rich and the newspaper's other columnists, myself included. (TimesSelect subscribers also get access to the newspaper's archives and some other online-only goodies.)

From the start, TimesSelect has generated strong opinions, both inside and outside the Times Building. Part of the opposition comes from that segment of the digerati who tend to believe that information on the Internet should be free as a matter of principle. Others simply don't want to pay for something they're used to getting for free. Twice in the last month or so, for instance, I've had the odd experience of having hedge fund guys I've interviewed - people with seven-figure incomes - ask me to e-mail my column to them because they refuse to subscribe to TimesSelect.

There are other, more philosophical, objections as well. Mickey Kaus, an unrelenting critic of TimesSelect who writes the popular kausfiles blog for Slate magazine, told me recently that he had no particular objection to paying for Internet content.

"What I object to," Kaus said, "is the idea that The New York Times is essentially saying that its columnists' opinions are so much superior to everyone else's that they are going to charge for it."

Jay Rosen, a journalism professor at New York University who writes a blog called PressThink, said that he believed the move would wind up hurting the op-ed columnists. "What is the product?" Rosen said. "It's influence." And with so much of the political conversation now taking place online, Times columnists would inevitably be less influential if only paying subscribers can read them. This view is shared by some of the columnists themselves.

So it was a bit of a surprise, after all the sturm und drang, to see the early results of the Times online subscription experiment. They're not half bad. In a news release issued Wednesday morning, the company reported that since it began in mid-September, TimesSelect had generated 270,000 subscribers, half of whom already subscribed to the newspaper (and hence get the new service free), and half of whom were plunking down cold, hard cash.

To be sure, that is a far cry from the million-plus people who spend hundreds of dollars a year to buy the dead-tree version of The Times, and it's not even remotely close to the 20 million-plus "unique visitors" who come to the Times Web site each month. But it's something. Martin Nisenholtz, who is in charge of digital operations for The New York Times Co., told me that the numbers were "at the high end" of the company's expectations.

It is far too early, of course, to predict whether TimesSelect will ultimately succeed. Those 270,000 subscribers could represent a new willingness on the part of consumers to pay for newspaper content online - or not. But what I've wound up wondering is whether, even if it is a roaring success, TimesSelect and other online subscription models that are bound to follow will be enough to stop the erosion of the economics that underlie newspaper journalism. I'm not terribly sanguine.

"We have been after a second revenue stream from the start," Nisenholtz said the day after the TimesSelect results were announced. "Advertising is always going to be cyclical. And businesses that have only one revenue stream tend not to be as healthy as those with multiple revenue streams."

It is hardly a surprise that a newspaper executive would want to generate subscription revenue as well as advertising revenue: that's the way it has always worked in the business. Today, for instance, 27 percent of revenue at The Times comes from circulation, and 66 percent from advertising. The other 7 percent comes from such things as syndication.) Indeed, in the non-virtual world, a healthy paid circulation helps generate ad revenue because advertisers like to see that readers care enough about a publication to pay for it.

But on the Internet, general interest publications charge for content at their peril. The Wall Street Journal has largely pulled it off: It has 764,000 subscribers to its Web site, and it even charges people who subscribe to the actual newspaper (though at a reduced rate). But The Journal is the exception to the rule. In 1998, the online magazine Slate put its site behind a paid wall. It was a dismal failure - "the worst year in Slate's history," recalled Jacob Weisberg, the magazine's editor, who was then a writer for the Web site. The Atlanta Journal-Constitution tried to get readers to pay for its online sports news. It gave up after a year. For two years, The Los Angeles Times charged readers for its online CalendarLive section. It threw in the towel this past May.

The reason these efforts didn't work is that they generated too few subscribers to interest advertisers. CalendarLive was particularly misguided because the movie and other entertainment listings it produced are exactly the kind of content advertisers love.

Which also helps explain the series of choices The New York Times has made. Like many newspaper companies, including The Washington Post, The Times focused on generating large numbers of viewers that it could deliver to advertisers. To do that, it needed to keep its content free, even if it meant that some readers were bound to give up their newspaper subscription and go to the free Web site instead.

And then, when the company decided that its Web operation was strong enough that it could experiment with a second revenue stream, it chose to use its columnists as the guinea pigs for basic economic reasons. For starters, the op-ed columnists in particular are popular with readers, so there was a decent chance that consumers might be willing to pay to read them. In addition, though, moving the columnists from free to paid brought the least risk of cutting into advertising revenues. You'll notice that the company hasn't put its movie reviewers, who are also quite popular, into TimesSelect. Movie and entertainment pages are as important to New York Times advertisers as they are to Los Angeles Times advertisers.
From a purely business point of view, this all makes a reasonable amount of sense. TimesSelect strikes me as a worthy experiment, even with the obvious downside for the paper's columnists, who don't have the readership they had prior to going behind the paid wall.

Besides, at a time when newspapers are struggling - with circulation down at many newspapers, and readers and advertisers increasingly moving to the Internet - The Times has to do everything it can to find ways to maximize the amount of money it generates from its Web site. So does any newspaper that wants to continue doing ambitious journalism. Nisenholtz said that when journalists criticize TimesSelect, they seem to forget that the primary goal is to find a business model that will make it possible to continue paying for serious journalism.

This, though, is precisely where I get discouraged. Look at what happened to the music industry, which tried, and has largely failed, to sustain its pre-Internet revenues as the Web destroyed its business model. Look at what is happening to telephony, or video or all sorts of businesses that are undergoing wrenching change thanks to the rise of the Internet. Margins shrink. Revenues drop. Profits dwindle.

From where I'm sitting, it sure looks like the same is happening in the newspaper business. The ruthless efficiency of the Internet, for instance, is changing the way ads are paid for. In print, an advertisers places an ad and pays for it; end of story. Online, most ads generate revenue only if the readers actually click through to them. And the rates are much lower.
William Bird, a Citigroup analyst who covers the newspaper business, says that 6 percent of all newspaper ads are now online. He compared it to taking money out of one pocket and putting it in another. But here's the painful twist: "For every dollar coming out of the dead-tree pocket," he said, "only 33 cents is going back into the online pocket."

Doesn't TimesSelect suggest that, down the line, there will be a similar contraction in circulation revenues? And that's if the experiment succeeds! Esther Dyson, who edits the influential technology newsletter Release 1.0, compared the effect of the Internet on the newspaper industry to the effect of the open source movement on the software industry: "It doesn't steal your business," she said. "It erodes it."

As a business journalist, I've tended not to have a lot of sympathy for music executives trying to salvage their broken business model. My general view has been that if they can't adapt to disruptive technologies, then they probably deserve their fate. But in the six months I've been in the newspaper business, I've learned to have some sympathy for those who are staring down the barrel of the Internet.

It's not fun.


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