Managing the Digital Transition at the New York Times

There’s something about the New York Times that seems to drive people beyond all reason. For the right, the newspaper is the embodiment of every straw-man cliche of liberal elitism. For the media, it is the universally envied institution simultaneously blessed and cursed with status of the newspaper of record.

The amplification of the internet has taken the newspaper’s historic role and blown it out of proportion. This applies nowhere more than with its inevitable decision to build a paywall.

Today’s Wall Street Journal story outlining the paywall plans offers a good opportunity to talk about what is and isn’t at stake. The WSJ has some details on the paywall’s pricing that have been leaking out all weekend. To wit, the digital subscription will match the Kindle pricing at $20 per month. Online-only access will be half that amount and those who subscribe to the paper in print format, whether they get the full-boat subscription or one of the slice-and-dice partial subscriptions, will get free access to the website.

Why is any of this important when two of the newspaper’s most important competitors–the Wall Street Journal and the Financial Times–already have pay-for-access programs in in place? The answer is that it really isn’t. The truth of the matter is that free access to the paper online has been the anomaly, not the rule with newspapers.

The enormous audience that the Times generates through the internet hasn’t proven very valuable. The WSJ tells us that online ads only bring in $100 million in revenue for the newspaper. This is in contrast to the $2.4 billion that the NYT made last year. Basing the business on internet advertising is simply not an option.

Looking at the NYT’s last 10-Q filing, you can see that circulation and advertising bring in the same amount of money. It would be tempting to think that you can shift the circulation from paper to pixels and keep the savings. But that’s not how it works.

Of the advertising in the newspaper itself, the overwhelming majority is national ads. That ought to be a good sign for the company’s online prospects. But online revenues are 20% of what print revenues are. So any migration of print readers to digital will be a dramatic loss for the Times.

Here’s where it gets really tricky for the Times and, unfortunately, its not a part of the business they’ve show themselves adept at over the last few years. Print ads are a relatively high-margin revenue source that must be managed down. There’s going to be demand for print ads for some time to come. So the newspaper has to figure out how to reduce the cost of distribution while adding to the subscriber base.

That’s surely one reason that we see the proposed structures which encourage print subscribers to keep their newspaper coming no matter what schedule they choose. The Times wants–needs–those subscribers to stick with the print paper.

Meanwhile, the WSJ gives a sense of what’s possible with the digital subscriber base:

As a free site, the Times online attracts more than 30 million monthly unique visitors, according to comScore Inc. […] Times Co. executives have said that only about 15% of the paper’s online readers are “heavy users,” meaning the vast majority probably won’t trigger a payment requirement.

That suggests there are 4.5 million potential digital subscribers who will pay somewhere around $10 per subscriber. We know the paper doesn’t have anywhere near 4.5 million paper subscribers, so there’s room for some real gains. The FT has 200,000 digital subscribers on a base of 485,000 print circulation.

That suggests the NYT should be aiming for 500,000 subscribers in the first year of the paywall out of the potential 4.5 million mentioned above. That’s an additional $60 million a year to the Times.

Nabbing another $60 million from the work you’re already doing is a good thing even if it won’t solve your problems. The better news is that there’s bigger potential subscriber base out there. Though even if all of those 4.5 million potential digital subscribers signed up, the revenue would only replicate what the Times is already making from its circulation.

Print ads remain the crucial base of the business. There’s no reason to think that tablet ads will have any greater value than online ads. So the job of the NYT’s management over the next few years will be to hold on to print circulation while it ramps up digital subscriptions and clamps down on printing and distribution costs.

Given the Times Co.’s poor record managing its non-NYT properties. This should be the cause for concern, not the paywall itself or how it is implemented.