Round about the same time as it makes a bid to acquire the whole of BskyB (BSY), News Corp. (NWS) has also erected a paywall around The Times. Analysis of this move to date has focused on what this means for The Times qua The Times, and what the lessons are for newspapers generally, and produced some valuable insight as to the meaning behind the fluffy numbers.
But I believe this move has almost nothing to do with The Times and everything to do with News Corp.'s wider bundling strategy, and that considered in this light erecting a paywall around The Times was a sound strategic move which has the potential to return The Times (not just the website) to break even.
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Considering that The Times lost £87.7m last year and BskyB recorded profits of £855m on revenues a shade under £6bn, the obvious question for anyone holding both businesses is not "How can we make The Times make more money?" but "How can we make the Times make Sky more money?".
Sure, while a BskyB subscriber is worth £508 per year and someone buying both The Times and the Sunday Times every day is worth £312, the reality is that not every Times reader subscribes or buys every day (fewer than 150k subscribe, from a circulation around 500k at The Times and 1m at the Sunday edition); the circulation figures for the papers fell 15% and 10% respectively year on year; and in any case that's all just talking about the print audience. The online audience, which pre-paywall stood between 3m and 6m depending on which web analytics provider you believe, is estimated to have been worth £10m-£20m in ad revenues last year.
That works out at an average value of a visitor to the pre-paywall Times website of about £0.30 per month or £3.33 per year, which in my experience is certainly the right order of magnitude and likely to be in the ballpark. In context, Times Online visitors were about 1/100th as valuable as a print edition loyalist, or 1/150th as valuable as the average BskyB subscriber. Losing 90% of them, and the attendant £10m-£20m in online ad revenues, is a shame, but on an ARPU calculation for News Corp. it simply doesn't matter.
So the paywall isn't about monetising The Times (the best estimates hold that the paywall is generating revenues between £4.8m and £5.5m pa,which in the context of £6bn pa isn't worth the trouble of counting it). BskyB has about 10m subscribers. Of those 2.6m take broadband, 2.4 take telephony and about 2m (21%) take the lot. The business added 1.4m subscribers last year, but with a churn rate of 10.3% that only added a net 400k to the total - or, to put it another way, last year 1m customers worth £508 each or half a billion pounds walked out the door. The Times paywall, therefore, is not about directly monetising The Times but about bundling The Times with News Corp.'s other services, notably broadband but also TV and telephony, to decrease churn and add customers to the valuable growth part of the business.
The three major UK providers of bundled services are already operating a confusopoly - a search on the major comparison site for a TV/broadband/phone package at a sample London address indicates most clearly the presumably deliberate impossibility of comparing like with like. For £190 a year is Virgin's "medium" TV package with 40 channels and 10mb broadband a better deal than Sky's "basic" TV package and 20mg broadband for £258 a year? Clearly and deliberately this is a decision that cannot be made on price alone, and adding the newly-paywalled Times to that bundle makes it possible for News Corp. to retain or add more valuable subscribers to its core business.
Looking at the numbers, the pre-paywall Times generated 41m pages from 6.4m users; that's now down to 4m pages from 2.4m users. Elsewhere this has been interpreted as a loss of 60% of the audience - I think the lost audience figure is far higher, since pages are down 90% and the way traffic is counted almost certainly includes as "visitors" people who bounce off the paywall. The real audience, actually reading pages rather than bouncing off the paywall, is probably reflected by the page views figure and is down from 6.4m to around 640k. That's 5.8m who used to read The Times Online and now can't.
At this point it comes down to marginal decisions. We've seen that you can't compare the TV/bb/phone packages on price - the confusopoly makes it impossible. So at the margin, how many people need to decide that on balance a free sub to The Times Online is worth switching from Virgin or BT to Sky for this to work? Top-end estimate for lost online ad revenue is £20m; knock £5m off that for online subs under the new model and the paywall is losing £15m a year. With BskyB running an ARPU of £508, if fewer than 30,000 people make the decision to move to (or stay with) Sky because they get the Times Online bundled in, News Corp.'s paywall initiative breaks even. If 200,000 do that's the annual losses of the newspaper operation covered too.
In context, the UK pay TV market is about 14m people (own calculation from Sky results plus here and here); the broadband market about 19m; and Sky already churns a million people a year. 0.2% of the UK's broadband market needs to switch to, or stay with, Sky this year for this to add up. Assuming I'm right and they are going to bundle, the maths at the News Corp. level work out just fine for a paywall around the Times. And I hear rumours that the Sun and the News of the World have websites too.
Addendum. This is obviously back of an envelope stuff. Without access to Sky's internal figures it can never be anything else. There are complexities underlying these basic numbers - for example there would be some, perhaps considerable, deadweight loss in both directions if the bundle was as simple as I've suggested. No accountant would really attribute every penny of a marginal decision to spend £508 a year on a package of TV channels and connectivity to the presence within the package of a free online newspaper.
But I believe it's directionally right, and the picture looks even rosier when you consider that if News Corp. really does pursue this strategy the audience for the Times Online is going to increase dramatically; it will continue to be made up entirely of paying customers for whom News Corp has credit card details and all sorts of deep behavioural data; and at that point the people who are currently eschewing the site as an advertising medium might be willing to reconsider.
Disclosure: No positions