Monday, April 4, 2011

The New York Times Paywall

In my 2010 JCDL keynote I reported Marc Andreesen's talk at the Stanford Business School describing how legacy thinking prevented the New York Times from turning off the presses and making much more profit from a smaller company. Part of the problem Marc described was how the legacy cost base led the NYT to want to extract more money from the website than it was really capable of generating. In other words, the problem was to get costs in line with income rather than to increase income to match existing costs. This is essentially the same insight that the authors self-publishing on Amazon have made; the ability to price against a very low cost base creates demand that generates income. The NYT's paywall demonstrates that Marc was right that they are hamstrung by legacy thinking.

First, in order not to suffer a crippling loss in traffic (Murdoch's London Times lost 90% of its readership) and thus advertising revenue, the paywall cannot extract revenue from almost everyone who reads the NYT website:
  • Subscribers to the print edition, who get free access.
  • People who read the website a lot, who get free access sponsored by advertisers.
  • People who don't read the website a lot, who can read 20 articles a month for free.
  • People who get to articles free via links from search engines, blogs, etc.
  • Technically sophisticated readers, who can get free access by evading the paywall
From whom can the paywall generate income? Technically unsophisticated non-subscribers who read a moderate amount but not via links from elsewhere. That's a big market. Legacy thinking requires generating lots more income but the ways to do it are all self-defeating.

Second, because the paywall that would be unnecessary if the cost base were addressed needs all these holes, it is unnecessarily complex. Therefore, as Philip Greenspun reveals, it is unnecessarily expensive. How did an organization one would think was tech-savvy end up paying $40-50M to implement a paywall, even if it is a complex one? The answer appears to be that some time ago, presumably to reduce costs on the digital side of the business, the NYT outsourced their website to Atypon. Apparently, they have repented and have taken the website back in-house, so the $40-50M is not just implementing the paywall but also insourcing.

These costs for undoing a decision to outsource, together with Boeing's 787 outsourcing fiasco, should be warnings to libraries currently being seduced to outsource their collections and functions.


Chris Rusbridge said...

I know it's not at all the same thing, but I'm currently doing a quick straw poll via JISC-REPOSITORIES list on the numbers of IT support staff nominally deployed yo support an institutional repository. The mode answer is currently running at 0.5, but the winner for leanest is an institution that outsources to, at a total cost of around 0.2 times basic IT salary, but <0.1 times loaded IT costs!

David. said...

Yes, in almost all cases outsourcing looks cheaper at first. There are two points to bear in mind.

First, the one I am illustrating from the NYT and Boeing examples. If outsourcing turns out to be a major problem, as Boeing was warned it would be and has now admitted it was, and as the NYT appears to have discovered, the costs of recovering from the problem likely dwarf any possible benefits that could have accrued had it been successful.

Second, the one I didn't discuss. If outsourcing is a success, the split of the benefits between the company and its outsource provider will in the long term be decided by successive negotiations on the price of the contract. Given the costs of moving back in-house (see Boeing and NYT), at each successive negotiation, the company will be in a weaker position and the outsource provider will be in a stronger position. Thus over time more and more of the benefit of outsourcing will accrue to the outsource provider and less and less to the company.

Libraries should bear this in mind, and not assume that once they are a captive customer their supplier will, out of the goodness of their heart, refrain from jacking up the price.

David. said...

The New York Times numbers for Q1 are really, really bad. A $3.6M rise in on-line ads failed to compensate for a $17M drop in print ads. Print ad revenue dropped so much it was below circulation revenue despite circulation dropping 4%.

"The Times Co. said Thursday that it has attracted more than 100,000 subscribers so far. The company said those numbers exceeded expectations but cautioned it was too early to estimate how many it will retain after their promotional periods expire." I'll bet the part about "promotional periods" means that the 100K numbers include people like me, who could be described as "subscribers" although we don't pay them anything.