Special thanks to Compete.com who provided web traffic information on the NY Times for this post. Compete.com helps the world's top brands improve their marketing through the information they provide on the online behavior of millions of consumers.
On March 28, 2011, the NY Times instituted a Paywall on its site to do what has historically proven all but impossible – getting readers to pay for content online. With its circulation plunging (down 17% between 2006 and 2010) and traditional sources of revenue like classified ads stolen by Internet competitors like Autotrader and Hotjobs, the company had to do something. So, was instituting a Paywall a last ditch attempt by a desperate company or a stroke of genius? Can this strategy save the Times?
The NY Times faces a trend that has become extremely common in digital era – the proliferation of free competitors. Beyond publishing, the phenomenon of free competitors extends to software (through Open Source), online services (through free email marketing tools, invitations, greeting cards, etc) and more.
In a market filled with free competitors, companies essentially have 3 alternatives:
- Find a way to survive on advertising alone
- Create a ‘Freemium’ model where limited services are provided free, but higher levels of service are charged for
- Offer enough value that customers are willing to pay for your service outright.
In the case of the NY Times, they were left with no other option other than trying a Freemium model. Online advertising alone could never support the business. Looking out to the future where the paper is only available digitally, it would still cost somewhere between $500 million and $800 million a year to run The Times. Currently, the paper generates just $140 million in online advertising revenue, and given that digital newspapers are already a maturing category, it‘s hard to see, how online ad revenue could increase enough to cover operating costs and earn a reasonable profit.
Is the NY Times Paywall an Act of Desperation?
So was the decision to go Freemium an act of desperation from a company whose business was collapsing or is it a legitimate strategy with a real chance of success? Creating any successful Freemium is very difficult. It requires:
- Developing a deep understanding of the customer base, how it segments, and how the needs and behaviors of each segment differ.
- Crafting targeted offerings that deliver enough value that customers will actually pay for them
- Setting the free vs. pay bar at just the right level- not giving away too much while at the same time attracting enough free users to develop into paying customers.
A Brilliant Strategy with Brilliant Execution
In our analysis, the NY Times has done a brilliant job of setting up its Paywall and has a real chance to make it work. The company needs somewhere between 1 million and 2 million total subscribers (print + digital) to make the business a success. Most of these subscribers will come from ~1.5 million who are currently print subscribers. With digital subscription prices of $15 to $35 per month, not too much less than the cost of a print subscription:
- The loss of print subscriptions can be stopped ("If I have to pay for it online, I might as well keep getting the paper")
- Print subscriptions may even grow ("If a print copy is only a few dollars more a month, I might as well get it in print copy too")
- If a customer switches from digital to print, the company is pretty much financially indifferent.
The rest of the subscribers will come from the pool of ~2 million digital readers who are currently above the paywall threshold of 20 articles per month but are not print subscribers. Given that the company sold 100,000 subscriptions in just the first few weeks, it seems likely they could increase this number by a factor of 2, 3 or even more.
Finally, the company does not count any traffic that comes in via a search engine or referral from another site like HuffingtonPost.com toward a user’s 20 articles per month limit. This segment – for whom the NY Times was not the destination but simply a link – would be unlikely to pay for the site so blocking them access would not increase subscriptions. But, leaving this door open enables the company to profit from this incidental traffic (worth $10 million to $30 million in revenue per year) while exposing potential future subscribers to the site.
What Does the NY Times Experience Mean for Other Businesses?
The strategic challenge that the NY Times faced – deciding among Ad-supported, Freemium, and Pay Outright models – is one that most companies who play in markets where there’s effectively no cost to adding an incremental customer will have to deal with. Although it hasn't received much attention, the high-flying email marketing company ConstantContact is currently facing this exact problem. Up-and-comer MailChimp is undercutting ConstantContact's Pay Outright model with a Freemium model. As the NY Times experience shows, it’s hard to get this right. Success requires a combination of great strategic thinking and a deep understanding of customers and the market.