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Salmon: How Paywalls Are Evolving

Stocks in this article: NYTAMZN

NEW YORK ( Reuters Blogs) -- Last week, I hypothesized that the publishing industry was going to informally settle on a single management-consultancy company to ask for paywall advice from. That consultancy, having seen everybody's internal figures, could then tell everybody else what "industry best practice" was. It's the time-honored management-consultancy m.o., reselling other clients' confidential information, suitably anonymized, of course, so that everybody learns from everybody else's successes and failures.

This is a winner-takes-all business: It works best if everybody hires the same consultancy. And now it's pretty clear which consultancy is going to win: Mather Economics. It says it has worked for pretty much everybody, at some point, and that it directly manages some $2 billion of subscription revenues for its clients.

So, what do Mather and paywall provider MediaPass see as the future of paywalls? What is best practice in the industry? Interestingly, as Anthony Ha reports, they're not particularly enamored with the meter system, despite its high-profile successes at the Financial Times and the New York Times.

Although MediaPass supports "metered" systems, MediaPass President Matt Mitchell says he sees more potential in creating a specific mix of free and paywalled content, although that mix will differ from site to site.

Publishers should think of their free readers as leads who might eventually become paying subscriptions, he says. For example, for a long time Mitchell read ESPN.com for free, but a year ago he stumbled on a paywalled article that he really wanted to see, and since then he's been a subscriber.

"What a meter does is give you 10 views free, and on the eleventh you're asked to subscribe," Mitchell says. "That's rolling the dice and gambling that the article I see on the eleventh view is the one I'm willing to pay for."

It's worth noting, here that even the FT and the NYT don't have "pure" metered systems, where every pageview counts towards the meter. In the early days of paywalls, some content was free, while other content you needed to pay for; the meter, in theory, replaced that system with one where the determination as to whether an article was free or not was a function of how many other articles the reader had read, rather than being a function of the content of the article itself.

There's always a trade-off, however, and there are certain areas of the FT and NYT Web sites which are always free and don't count towards the meter. Finance, interestingly, is one: You can read as much Dealbook and Alphaville as you like without a subscription. And Mather's Matt Lindsay said that the NYT quietly does the same thing for its entertainment section, during peak season in the fall: There's a huge amount of advertising demand, and it doesn't want to put any obstacles in the way of tourists looking to the NYT to work out what shows they want to see.

Talking to Mather and MediaPass, it's clear that their idea of "best practice" doesn't rely much on meters at all. They have the numbers, remember: They know what kind of walls are best at maximizing revenue, and what kind of walls just end up turning readers away. Crucially, one of the biggest lessons they've learned is that it's a mistake -- at least from a purely financial perspective -- to treat all readers equally. Some readers have a much greater propensity to pay than others; ideally, you want to extract a lot of money from those readers, while also allowing the vast majority of your visitors -- the ones who will never pay you anything -- to still consume your content and view the associated ads.

For instance, it's often easier to persuade people to subscribe to sports content than to entertainment content, even as it's easier to sell ads against entertainment content than it is against sports content. So it does make sense to keep entertainment free and put some kind of paywall around sports.

Although readers hate the kind of extreme opacity practiced by the FT, where there's basically no rack rate and nobody knows what anybody else is paying, from a revenue prospective it makes a lot of sense. The FT knows quite a lot about its registered readers, so it can be quite effective at charging the highest prices to people with the greatest willingness to pay, while charging much lower rates to readers in, say, India.

That kind of thing can be dangerous, from a PR perspective. Amazon.com, for instance, got into trouble when it was caught selling the same products at different prices to different customers. But there are other ways of achieving much the same end: You can set a relatively high official price, for instance, and then start showing various special offers to people whom you think might be willing to subscribe if you offer them a discount. No one really minds that.

Certainly it seems to be a good idea to offer a range of subscription lengths, priced so that there's a strong incentive to go for the longer-dated annual subscription, even if, again, that means a substantially lower rate on a per-month basis.

It's not all that hard to tell who's likely to be willing to subscribe, and who isn't. Print subscribers, for instance, are much more likely to be willing to pay for a digital subscription than a reader who doesn't already pay for the print version. People who visit frequently, and who read a lot of local news, or sports news, are also more likely to subscribe.

In general, the trick is to get as many subscribers as you can -- because once a person subscribes, they generally turn out to be surprisingly loyal and price-inelastic. You can keep on charging their credit card, even at steadily rising rates, and they're not going to unsubscribe. And then, for the 90% of readers who don't subscribe, it's a good idea to find content for them, too. The paywall shouldn't just be a "pay here or get nothing" option: the "no thanks" button should take you to valuable free content.

That's why, as NYT spokeswoman Eileen Murphy confirmed to me, the NYT is looking at rolling out a new digital subscription product, priced below the current cheapest option of $3.75 per week. Most NYT readers are understandably reluctant to spend $195 a year on access to a single site, so the NYT might well offer something cheaper, without the full unlimited range of content that subscribers get with the current digital package.

What's impossible to calculate, of course, is the long-term opportunity cost of driving away people who want to read your content but aren't willing to pay. MediaPass's Mitchell told me that in most cases, the act of putting up a paywall is the act of "essentially harvesting revenue from a loyal long-term audience" -- people who have been reading the publication for years, and have turned it into a habit they don't want to give up. That's fine, as a short-term means of maximizing revenues. But it's dangerous in terms of getting new loyal readers. Which is one reason why online media startups almost never have paywalls: They want as many people as possible to discover them.

My expectation, then, is that newspaper paywalls will become both increasingly sophisticated and increasingly expensive over time -- but that paywalls are not going to migrate very quickly out of the newspaper world and onto the rest of the internet. In a dying industry, the sensible thing to do is to maximize your revenues before you die. Paywalls might well make money for newspapers. But that doesn't mean that newspapers aren't dying. Quite the opposite.

-- Written by Felix Salmon in New York.

Read more of Felix's blogs at Reuters.

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