Building a better paywall:strategies for monetizing newscontentBy Paul SweetingThis research was underwritten by PayPal
CONNECTED CONSUMER                        Table of Contents                             Table of Contents                 ...
CONNECTED CONSUMER                        Executive summary                        Changes in technology have shaped the e...
CONNECTED CONSUMER                        Introduction                        As with previous periods of change, it’s not...
CONNECTED CONSUMER                        and the rise of new third-party aggregators have together robbed publishers of t...
CONNECTED CONSUMER                        promoted their content’s unpaid “pass-along” circulation for setting advertising...
CONNECTED CONSUMER                        were relatively hard to come by, given the high fixed costs associated with publ...
CONNECTED CONSUMER                        Figure 2: Total paid circulation, U.S., 2000–2009                               ...
CONNECTED CONSUMER                        Figure 3: Newspaper advertising revenue (millions), 2005–2010                   ...
CONNECTED CONSUMER                        online, while paying subscribers got access to the full site.                   ...
CONNECTED CONSUMER                        In other cases, publishers have erected paywalls largely as a defensive measure ...
CONNECTED CONSUMER                        full bundle of content, there’s no point in breaking it up.                     ...
CONNECTED CONSUMER                        Figure 4: Share of total monthly unique visitors by type of visitor, U.S.       ...
CONNECTED CONSUMER                        daily print run of 90,000 and an online readership of 450,000 unique visitors pe...
CONNECTED CONSUMER                        To maximize revenue, therefore, it behooves publishers to discover where those p...
CONNECTED CONSUMER                              players develop their own virtual alter egos, usually involving heavy inte...
CONNECTED CONSUMER                        to pay than were casual and social gamers.                        Figure 8: Pay ...
CONNECTED CONSUMER                                                                                                     Sou...
CONNECTED CONSUMER                        Figure 10: More likely to purchase virtual goods if you could . . .             ...
CONNECTED CONSUMER                                                                                                      So...
CONNECTED CONSUMER                        Those five factors were consistent across all four categories of gamers, althoug...
CONNECTED CONSUMER                        likely to increase their purchases. In particular, online video buyers placed a ...
CONNECTED CONSUMER                        unlimited access to content.                        We know from the Scout Analy...
CONNECTED CONSUMER                        generated many more page views and averaged 4.83 and 7.71 page views per month, ...
CONNECTED CONSUMER                        incentivizing desired behavior, simplifying and removing friction from the check...
CONNECTED CONSUMER                        The audience-size paradox                        Contrary to the experience of m...
CONNECTED CONSUMER                        a reflection of the vast gulf between the CPM rates that publishers are able to ...
CONNECTED CONSUMER                        exclusive content to subscribers of its ESPN Insider service.                   ...
CONNECTED CONSUMER                        Aggregation and investment                        The object of any paywall is t...
CONNECTED CONSUMER                        get, never to see it monetized. Or, as with metered paywalls, they can tolerate ...
CONNECTED CONSUMER                        While some publishers may see that as a loophole that ought to be closed, by leg...
CONNECTED CONSUMER                        The most obvious example is eBay, which has built a vast online auction and reta...
CONNECTED CONSUMER                        Conclusion and key takeaways                        The strategy of making infor...
CONNECTED CONSUMER                              Most critically, engagement matters more than total audience size. The bas...
CONNECTED CONSUMER                              products from time to time to keep up with the shifts in consumer tastes a...
CONNECTED CONSUMER                        About Paul Sweeting                        Paul Sweeting is the founder of Concu...
CONNECTED CONSUMER                        Further reading                        What media companies can learn from the b...
CONNECTED CONSUMER                                                        Want more information?                          ...
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Gigaom Pro Building A Better Paywall Strategies For Monetizing News Content

  1. 1. Building a better paywall:strategies for monetizing newscontentBy Paul SweetingThis research was underwritten by PayPal
  2. 2. CONNECTED CONSUMER 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............................................................................................37GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 -2-© 2010 GigaOMAll rights reserved monetizing news content
  3. 3. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 -3-© 2010 GigaOMAll rights reserved monetizing news content
  4. 4. CONNECTED CONSUMER 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,GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 -4-© 2010 GigaOMAll rights reserved monetizing news content
  5. 5. CONNECTED CONSUMER 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 oftenGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 -5-© 2010 GigaOMAll rights reserved monetizing news content
  6. 6. CONNECTED CONSUMER 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 impressionsGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 -6-© 2010 GigaOMAll rights reserved monetizing news content
  7. 7. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 -7-© 2010 GigaOMAll rights reserved monetizing news content
  8. 8. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 -8-© 2010 GigaOMAll rights reserved monetizing news content
  9. 9. CONNECTED CONSUMER 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 storiesGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 -9-© 2010 GigaOMAll rights reserved monetizing news content
  10. 10. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 10 -© 2010 GigaOMAll rights reserved monetizing news content
  11. 11. CONNECTED CONSUMER 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 theGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 11 -© 2010 GigaOMAll rights reserved monetizing news content
  12. 12. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 12 -© 2010 GigaOMAll rights reserved monetizing news content
  13. 13. CONNECTED CONSUMER 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 aGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 13 -© 2010 GigaOMAll rights reserved monetizing news content
  14. 14. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 14 -© 2010 GigaOMAll rights reserved monetizing news content
  15. 15. CONNECTED CONSUMER 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 whichGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 15 -© 2010 GigaOMAll rights reserved monetizing news content
  16. 16. CONNECTED CONSUMER 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 likelyGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 16 -© 2010 GigaOMAll rights reserved monetizing news content
  17. 17. CONNECTED CONSUMER 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 gamersGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 17 -© 2010 GigaOMAll rights reserved monetizing news content
  18. 18. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 18 -© 2010 GigaOMAll rights reserved monetizing news content
  19. 19. CONNECTED CONSUMER 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?GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 19 -© 2010 GigaOMAll rights reserved monetizing news content
  20. 20. CONNECTED CONSUMER 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/scenariosGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 20 -© 2010 GigaOMAll rights reserved monetizing news content
  21. 21. CONNECTED CONSUMER 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 moreGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 21 -© 2010 GigaOMAll rights reserved monetizing news content
  22. 22. CONNECTED CONSUMER 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 forGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 22 -© 2010 GigaOMAll rights reserved monetizing news content
  23. 23. CONNECTED CONSUMER 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,GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 23 -© 2010 GigaOMAll rights reserved monetizing news content
  24. 24. CONNECTED CONSUMER 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,GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 24 -© 2010 GigaOMAll rights reserved monetizing news content
  25. 25. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 25 -© 2010 GigaOMAll rights reserved monetizing news content
  26. 26. CONNECTED CONSUMER 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,GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 26 -© 2010 GigaOMAll rights reserved monetizing news content
  27. 27. CONNECTED CONSUMER 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, offeringGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 27 -© 2010 GigaOMAll rights reserved monetizing news content
  28. 28. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 28 -© 2010 GigaOMAll rights reserved monetizing news content
  29. 29. CONNECTED CONSUMER 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 otherwiseGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 29 -© 2010 GigaOMAll rights reserved monetizing news content
  30. 30. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 30 -© 2010 GigaOMAll rights reserved monetizing news content
  31. 31. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 31 -© 2010 GigaOMAll rights reserved monetizing news content
  32. 32. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 32 -© 2010 GigaOMAll rights reserved monetizing news content
  33. 33. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 33 -© 2010 GigaOMAll rights reserved monetizing news content
  34. 34. CONNECTED CONSUMER 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 newGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 34 -© 2010 GigaOMAll rights reserved monetizing news content
  35. 35. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 35 -© 2010 GigaOMAll rights reserved monetizing news content
  36. 36. CONNECTED CONSUMER 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 in the industry. Whether you’re beginning to learn about a new market or are an industry insider, GigaOM Pro addresses the need for relevant, illuminating insights into the industry’s most dynamic markets. Please visit us at http://pro.gigaom.comGigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 36 -© 2010 GigaOMAll rights reserved monetizing news content
  37. 37. CONNECTED CONSUMER Further reading What media companies can learn from the book industry’s disruption Weve 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. Rowlings 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. Heres 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 37 -© 2010 GigaOMAll rights reserved monetizing news content
  38. 38. CONNECTED CONSUMER 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.GigaOM Propro.gigaom.com Building a better paywall: strategies for September 2011 - 38 -© 2010 GigaOMAll rights reserved monetizing news content

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