The revenue-neutral NYT paywall

By Felix Salmon
January 28, 2010

Journalists love to talk to each other at parties, and Davos, being in many ways one big party, is covered with pockets of hacks gossiping away about off-the-record events. And one factoid which has emerged from the off-the-record fog is a story which will come as a great disappointment to many journalists hoping that paywalls will be the savior of their profession.

I hear that the brass at the New York Times expect its paywall to be revenue neutral — the amount of money they expect to bring in from online subscriptions is pretty much equal to the amount of money they expect to lose from online advertising.

I’ve been running the numbers on the NYT paywall for a while now, and this comes as no surprise to me. But if the NYT doesn’t expect to make money doing this, why are they still going ahead with it?

The answer is that a paywall comes with a certain amount of option value. Once it’s implemented, nytimes.com will have two revenue streams rather than one, and diversification in and of itself is quite a good thing. If the online ad market gets worse rather than better, the subscription base will help to cushion the blow. More generally, a metered paywall is a flexible thing: if it turns out to be costing the paper money, the meter can be dialed back so far that almost nobody ever hits it. On the other hand, there’s a small possibility that the paywall will be an enormous success, and make a large difference to total revenues — maybe not at first, but once you have your subscribers, they tend to be pretty price-insensitive, and will happily keep on renewing even as you continue to raise the subscription price.

Essentially, then, the paywall looks, on its face, a bit like a free lottery ticket for the NYT. It probably won’t pay out, but it might, and if it doesn’t, at least the paper won’t have lost much if any money.

What’s sad here, of course, is that the NYT has given up its dream of winning the other lottery: becoming such a popular and high-value global news source that it will be able to make a very large amount of money from a free website. And it’s also sad that the NYT is happy to risk losing its paper-of-record status online for the sake of making this bet.

My feeling is that there’s a very good chance — say 1 in 3 — that the new NYT paywall will end up bringing in less money than the failed TimesSelect managed to generate. I never suspected until now, however, that the internal analyses at the NYT might be saying exactly the same thing.

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