12 Aug 2010 | Technology

Constructing the Case for Paywalls 

Colin Renton discusses the increasing trend in the use of paywalls to charge for access to online content.

Two of the industries hardest hit by the global economic downturn are construction and media. So, it might seem an ideal solution for both that building walls is an activity regarded by some as the potential saviour of newspapers.

However, this is not a case of investment in bricks and mortar coming to the rescue of the beleaguered media industry. The barriers which are becoming increasingly popular are paywalls – a system of charging readers to view articles online.

The topic has divided opinion among media organisations and, while some of the bigger players have already introduced charging structures or are planning such a move, others steadfastly refuse to do so.          

The need for drastic action by companies in the sector was illustrated by events at the New York Times in April 2009. One day, the newspaper won five Pulitzer prizes, then the next it announced the biggest quarterly loss in its history – $74 million. And that situation is being reproduced across the print media industry, with circulation continuing to plummet.
 
The nub of the problem is that advertising revenues have traditionally paid for the production of news, but recently the flow of income from that source has been reduced to an intermittent trickle and, in some cases, a drought. 

From 2005 to 2008, print advertising revenue in the US declined by $12.7 billion while online revenue – which had been regarded as a means of offsetting that fall – grew by only $1 billion. The downturn has continued, forcing many newspapers to close and has cost around 200,000 jobs in the US alone, according to estimates by the magazine, Advertising Age.
 

Mixed News on Charging

Around the world, there are examples of long-established newspapers which have adopted charging structures. The Wall Street Journal in the US, Le Monde in France, Germany’s Berliner Morgenpost and Yomiuri Shimbun in Japan are among the high profile publications that charge readers for access to online content.  In the UK, the Financial Times has a well established bank of around 126,000 subscribers, each paying around £170 per year for a range of services, and the Johnston Press Group has been conducting trials on fees for some of the local newspapers in its stable.

However, the development that raised the temperature of the public debate was the move by Rupert Murdoch’s News Corporation to introduce a charging structure for The Times and The Sunday Times.    

That stance is strongly opposed by rivals including The Guardian, which nevertheless does charge for an application that delivers its content to mobile phones. Guardian management believe that online advertising will grow to compensate for losses of print revenues and that hiding content behind a paywall will simply limit the audience and exacerbate the problem. Even ardent readers of The Times have baulked at being asked to pay for online access, with around 90% stating in a recent survey that they would not be prepared to pay the charges of £1 per day or £2 per week to view standard news items online.
 
The proponents of charging have various options at their disposal, including a mix of free and premium content – dubbed freemium – which is the most common. Under such an arrangement, only certain content is locked out. This may cover niche subjects or columns, or it could be the case that the first few lines of an article are free and only paid subscribers see the whole piece. 

An alternative is a metered solution, where users can read a set number of articles before the paywall appears and they are asked to subscribe. One further possibility is micropayment, which enables the reader to buy specific content rather than to subscribe to an entire website. It allows one-click impulse purchases of articles.
 

The Investment Story 

Many observers of the current situation in newspapers draw parallels with events in the music industry, pointing to the process that Apple has implemented to market iTunes – effectively selling online content which customers could previously obtain free from the likes of Napster.

The arrival of media such as online television and growth of other mobile facilities offering alternative methods of accessing news have introduced a new aspect to the debate and could offer opportunities for investors. However, until there is clearer evidence of the success or failure of charging for content, the arguments look set to continue.

One thing beyond doubt is that change is underway – we are now operating in a new environment for the media, and the pressure to generate alternative sources of income is building as the pool of advertising money that sustained newspapers for so long is evaporating.
 

Author: Colin Renton
Colin Renton is an investment writer in the Institutional Clients Department of Baillie Gifford. He joined the firm in May 2007 having spent the previous seven years in similar roles with two other investment managers. Colin has more than 20 years experience in financial services and holds professional qualifications from the Chartered Institute of Bankers in Scotland and the Chartered Insurance Institute.