News Consumers, Paywalls and Useless Tourists

Includes: GCI, GHC, MNI, NWS, NYT, SSP
by: Felix Salmon

John Gapper returned to the subject of newspaper paywalls yesterday, saying that in the UK, Rupert Murdoch’s Times (NASDAQ:NWS) will have to appeal to a narrow elite if it is to succeed online — something Murdoch has never been comfortable doing. Going after a mass audience online is hopeless, he says, in the face of much lower-cost competitors like the Huffington Post:

Mr Murdoch’s News Corp estimates that the marginal revenue from an occasional browser is less than one tenth of a penny a year. Even Group M, the media buying agency of WPP, the advertising group, argues in a research note that the bulk of news surfers are “useless tourists” who not only pay nothing but have little advertising potential.

What Gapper is recommending to Murdoch is the have-your-cake-and-eat-it holy grail of publishing online: set up a paywall, get subscription revenue, and then see your advertising revenue rise at the same time, when media buyers start being able to target your specific subscriber base rather than just chasing “useless tourists”.

The logic here has existed in print publications for years: newspapers with a cover price tend to have higher ad rates than free sheets, because their readership is more affluent and is also more likely to actually read the paper (and see its ads).

But essentially what’s happening here is that advertisers are using willingness to pay for a newspaper as a proxy for all manner of other desirable traits in newspaper readers, just because there’s no other way of really knowing who’s reading what.

Online, however, is different. Newsletters still exist — where one or two people put out a specialist product, charge a lot of money for it, and manage to make a living on subscription revenue alone. But when it comes to bigger news organizations, no one has even come close to covering their editorial costs with online subscription revenues. So while paywalls can turn out to be an important part of a publisher’s online strategy, a lot of their value comes not from direct subscription revenues but rather from the fact that they allow advertisers to target a specific group of people.

So far, so print-like. But the fact is that online there are much more useful and granular ways for an advertiser to work out who they’re targeting, beyond just saying “we want people who are willing to pay to read this publication”. Media buyers evolve slowly, and they’re used to that model, so they’ll stick with it to a certain extent as they migrate their budgets online. But eventually they’re going to realize that if they stick with that outlook, they’re going to lose access to a huge number of high-value consumers. Millions of people are willing to pay for a physical object — a newspaper — but are not willing to pay to read that same newspaper online. It doesn’t make sense that those millions of people are hugely desirable readers when they’re reading a physical newspaper, and hugely desirable readers if they pay to read content online, but are just “useless tourists” if they don’t pay to read content online.

So advertisers, looking to reach a large audience online, are going to have to look past the simple question of whether or not people are paying for content. And they’re going to end up with a much more granular and useful way of working out who’s seeing their ads: social media.

The fact is that if I sign in to a free site using my Twitter login, I’m actually more valuable to advertisers than if I paid to enter that site. That’s because the list of people I follow on Twitter says a huge amount about me, and a smart media-buying organization can target ads at me which are much more narrowly focused than if all they knew about me was that I was paying to read the Times.

We’re not quite there yet. But it seems to me that online publications are making a big mistake if they make subscribers go through a dedicated registration and login process, because the demographic information they can get from that will be less useful and less accurate than if they outsource the reader-identification procedure to Twitter or LinkedIn or Facebook. And people will definitely enjoy an automatically personalized reading experience, where they can see what their Facebook friends are reading and what the people they follow on Twitter are reading.

At that point, they’re not “useless tourists” any more: they’re highly valuable and targetable news consumers. And the question of whether or not they’re paying for their news becomes much less important to advertisers. And, therefore, to publishers as well.