New Zealand Herald, 17 July 2012
Nathan Field, Senior Equity Analyst at Gareth Morgan Investments
They say there's no such thing as a free lunch, but this adage was popularised long before the internet came along. Getting stuff free is regarded as a birthright by the generation that grew up online, and the concept of paying for content - particularly news - is seen as antiquated, flat-earth type thinking.
New media experts are quick to point out that news is digested differently these days, that the old formats aren't delivering what people want, and fuddy-duddy newspapers need to adapt to the digital age. These points might be valid, but from a business owner's perspective, there's little to be gained from adapting if people still refuse to pay.
Hence the decision by Fairfax Media to put its newspapers behind a paywall, effective next year. It's not as if the Sydney Morning Herald and Melbourne Age have lost relevance in the digital age. In fact, the collective readership has grown from 5.5 million to 7.2 million over the past five years. But with 77 per cent of its readers now online, and non-paying, circulation revenues are falling.
All over the world, newspapers are suffering similar financial pressures. It's not just falling subscription revenues - advertising trends are also negative, and a lot of the easy revenue is never coming back. The big classified categories of cars, real estate and employment are shifting to specialist sites, and this trend is unlikely to reverse.
Digital advertising has not been the saving grace newspaper executives hoped it would be. Growth has stalled for a variety of reasons - the slowing economy, the way digital ads are sold and discounted, and weak audience metrics (measures like time per visit and page views).
Like many newspaper companies, Fairfax has been forced to lay off staff and shut down printing presses to lower its cost base. The traditional broadsheets are being shrunk to tabloid-size. But even if the Fairfax papers eventually morph into digital-only formats, they will still need a steady stream of cash to cover the costs of running full-sized editorial teams.
Installing a paywall is an attempt to create a sustainable business model. The knee-jerk reaction from internet boffins is that paywalls don't work because they inhibit "connectivity", apparently a bad thing. But is there a viable alternative?
Much has been written about newspapers that have fully embraced the digital age, such as the Guardian and the Mail Online. But buried at the bottom of these articles, or sometimes not mentioned at all, is the fact that neither business is making money. The model of building up a massive non-paying readership and eventually the cash will pour in remains unproven. Innovative apps aren't paying the bills at the Guardian. And even if the Mail Online manages to convert its zillions of hits into profits, the scale requirements are clearly enormous.
There are, however, early examples of newspapers with profitable paywalls. It's a select group, admittedly. Specialty business publications such as the Financial Times and the Wall Street Journal have rigid paywalls, and are in a category by themselves. But the most commonly cited example of successfully charging for content is the New York Times.
Fairfax sounds like it's going to take a similar "metered" approach to charging, whereby readers will be able to access a set number of articles a month before being asked to pay. Under this model, Fairfax hopes to retain the bulk of its readership while adding incremental subscription revenues. Sounds encouraging and all very sensible. But there are caveats.
First, the excitement over the New York Times paywall is a bit premature. Half a million digital subscriptions in a year is undoubtedly a good start, but the paper needs a lot more people to sign up to offset the sharp decline in ad revenues. You only have to look at the company's share price chart to see that a rosy future is by no means assured.
Secondly, there is a big difference between the New York Times and just about any other newspaper. The Grey Lady is probably the most famous paper in history, beloved by news junkies, book-lovers and hand-wringing liberals the world over. For many people, it's a must read, paywall or no paywall. Are readers of the Sydney Morning Herald and the Age equally as passionate?
Regardless of whether a free or paywall model is best, it's clear the industry is at a tipping point. Warren Buffet has been buying up small newspapers in the US because he believes the days of free content are over. In a letter to the papers in his stable, he urged editors to make their content "indispensable" to local communities. Therein lies the key, but it's much easier to say in a letter than put into practice.
The paywall failures - like the Boston Globe and the Times in the UK - are discovering they are not indispensable. The Sydney Morning Herald and the Age will find out next year.
Nathan Field is a senior equity analyst at Gareth Morgan Investments. Any opinions expressed in this column are his personal views. These opinions are general in nature and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial products. Readers should seek independent advice before making an investment decision.