Economics of Media

Written by Dr. Hugh J. Martin Friday, 07 December 2012 16:00 PDF Print E-mail
Newspaper paywalls are a rational response to competition - what took so long?


Sometimes it takes a long time, but in the end rationality will have its say.  This appears to be the case for some prominent members of the newspaper industry, which has struggled to adapt to competition from the internet.

The steady stream of reports that more and more newspaper companies like the New York Times, Gannett, and E.W. Scripps are beginning to charge some customers to access news and advertising shows the executives making these decisions are starting to figure out the economics of the internet.

The tactics may not work for every newspaper.  When the tactics do work, newspapers are unlikely to ever regain dominance in their respective markets, but that is not the point.  Those markets changed and become more competitive, and newspapers have to figure out how to compete.

Papers are starting to divide readers into groups based on each group’s willingness to pay for access to news.  Some readers are satisfied by reading a few articles occasionally, and they are unlikely to every pay anything at all.  Newspapers can satisfy these readers by allowing everyone to access a limited number of articles – 10 or 15 seems to be a common number – each month.

But other people want access more often, perhaps because they want to regularly read specific kinds of news and advertising, or perhaps because they are willing to pay for the convenience of access in multiple delivery channels – print, the internet, mobile devices – or perhaps for other reasons.  If they have to, the groups that want access more often will be willing to pay for it. Each group will be willing to pay a different amount depending on the strength and characteristics of their demand.  This means newspapers can charge each of these groups different amounts for access to news.  The different prices or combination prices for various apps, mobile access, web access and print show newspapers are starting to do just that.

Economists call this price discrimination, and I understand why that’s not a great way to market one of these new pricing plans.  But the industry has come up with an even worse way to describe them – paywalls.

The industry’s inelegant term does, however, remind us that part of making price discrimination work required that newspapers first stop allowing everyone to access all of their content for free. Scholars such as Steve Wildman, Danel H. Simon & Vrinday Kadiyali and Florian Stahl(et al), have pointed out that newspapers are competing with themselves if they charge for access to print editions and also give away news on the internet.  Once readers figured out what was happening, they of course began to abandon the paid option in print.

There are many non-trivial reasons the newspapers that are changing might have stayed with this irrational strategy for so long.  It takes time to react to and understand new forms of competition. Just acquiring and learning to use the technology that allows price discrimination probably required substantial time and effort.

Another reason might have been that newspapers were told – and are still being told – they should not charge readers for access because many of their new media competitors like search engines and social media make money without charging for access to news and other information.  But search engines and social media have a very different business model, and that model would collapse if the new media companies had to pay for the creation of content as newspaper companies do.
So it was good to see this week that newspaper executives are talking about things like subscriber retention and creating different bundles of digital and print subscriptions (another kind of price discrimination) that focus on high quality news. It will still be a long, hard slog, but at least they are giving themselves a fighting chance.