The business case for TimesSelect
October 20, 2007
Last month, the New York Times discontinued TimesSelect, the program that required readers to pay a subscription fee to read popular columnists and access the paper's archives. The news was greeted with whoops and hollers from the members of the web's hallelujah chorus, who take as a personal affront any attempt to charge for "content" online. ("Content" is to informational goods what "commodity" is to material goods.) In their view, and despite the Times's claims otherwise, the paper's decision to end Select was an admission of failure; the creation of the Select paywall was from the start an obviously stupid and costly error. "Content is now and forever free," crowed Jeff Jarvis. "No one with sufficient experience ever thought that TimesSelect made good business sense."
But it's not that simple. Tim Harford, of the Financial Times, points today to a recent study "that suggests that there has been no expensive mistake. Both the subscription model then, and the advertising model now, were likely to have been reasonable choices. Free online access makes more sense now not because of some fundamental law of online economics, but because the online advertising market has matured."
The study, by the University of Chicago economist Matthew Gentzcow, examines the economic consequences of shifts in readership between the Washington Post and its online site, post.com, as well as the local competing newspaper, the Washington Times, during a period from 2000 to 2003. Gentzcow concludes that a newspaper's print edition and its web site are substitutes rather than complements - the site cannibalizes, rather than promotes, the paper edition. The substitution effect is quite specific: On any day that a Post reader looks at post.com, the odds of him buying a copy at a newsstand go down significantly.
If the print and online editions were complements - the demand for which rise or fall in tandem - then a newspaper's online pricing strategy would be pretty much a no-brainer: it would give away the online edition in order to expand print readership and harvest an added source of ad revenues. But the fact that the two products are substitutes complicates the strategy. If you rush to set the price of the web edition at zero too early, before online ad sales reach a certain level, you may sacrifice revenues from print sales and ads without making them up through online ad sales. The better strategy, explains Gentzcow, would be to charge a fee for access to the online news (or at least, by implication, some part of it valued by print readers). That way you dampen the loss of print sales and ads and maximize your overall revenues and profits. At some point, once online ads sales strengthen sufficiently, it may then make economic sense to remove the fees for accessing the site.
Even though news may, for better or worse, want to be free on the web, that doesn't mean that charging for online news is always wrong. Jarvis dismissed TimesSelect as "a cynical act doomed from the start." More likely, it was a wise business decision that made the Times, and its shareholders, more money than they would have earned without the paywall. Gentzcow's paper will serve as a profitable read for any manager struggling with setting strategy for an online operation that cannibalizes a traditional business line. What it underscores is that setting prices should be a rational act, not an ideological or sentimental one.
I think the counter-argument to Gentzcow is that going with the subscription approach doesn't provide the proper motivation to optimize online advertising. It may be optimal in the short-term, but over the long-term, I think you end up leaving dollars on the table.
It's a typical innovator's dilemma situation-- the NYT is really good at selling print ads, and so setting up the subscription model protects those print ad sales for awhile. In the meantime, a more innovative competitor puts all of its focus on getting really good at online advertising, since they don't give themselves any other choice. That skill could turn into a competitive advantage going forward, as the ad market strengthens.
Posted by: josh at October 20, 2007 02:05 PM
Josh, Maybe, but I don't see any evidence of that. The Times was still aggressively trying to sell online ads during the TimesSelect period (and, like other papers, it is still aggressively trying to sell ads in print). It seems to me much more likely that TimesSelect helped them avoid leaving money on the table by protecting print sales and taking in the Select revenues. Nick
If you rush to set the price of the web edition at zero too early, before online ad sales reach a certain level, you may sacrifice revenues from print sales and ads without making them up through online ad sales. The better strategy, explains Gentzcow, would be to charge a fee for access to the online news (or at least, by implication, some part of it valued by print readers). That way you dampen the loss of print sales and ads and maximize your overall revenues and profits. At some point, once online ads sales strengthen sufficiently, it may then make economic sense to remove the fees for accessing the site.
This is classic "profit maximization" - there is nothing evil or immoral about it - it is simply business strategy. However, I do agree with the "hallelujah chorus" (though I am not one of them!) that this is a *stupid* strategy, even in hindsight.
In periods of fundamental technological change & discontinuity, leaving money on the table may well be a smart strategy. After all shareholders are *not* looking for profits this year and next - stockmarkets look forward (they get it wrong at times, particularly in periods where the Federal Reserve is intent on promoting bubbles!) and those forward looking markets have looked at the NY Times strategy for years, and have pronounced it dumb.
Companies such as Costco or Southwest *explicitly* leave money on the table, for example. Sam Walton (whose descendants collectively are now the richest people in the world) pointedly refused to price the goods at the "going rate", which a Harvard Business School prof of that time would have considered stupid.
So Times would have been better off if they had recognized it at that time. At least they are smart enough to recognize it now.
there is nothing evil or immoral about it
Of course not.
So Times would have been better off if they had recognized it at that time
You provide no evidence that either (a) the Times didn't recognize the shift or that (b) they would be "better off" today is they hadn't had TimesSelect. You're right that there are times when you need to forgo current revenues for future ones. I just don't see any indication that this was one of those times.
BTW, in late 80's, Larry Ellison, nobody's fool as a businessman, enunciated it thusly: in early markets, maximize marketshare, not profits. NY Times should have become *the* go-to place for news & views online. They always had the breadth & depth of content. The fact that they let a whole lot of other sources jump ahead speaks volumes of their failure of vision.
If they had that vision, it is possible that most respected bloggers (like you!) would have found it profitable to channel their content through the NY Times online site, which got, say, 50 million readers a day. In that world, it is also possible to envision that they spin out the print division itself, becoming an all-online operation.
As a businessman, I can tell you that these are the types of fundamentally unmeasurable opportunity costs that visionary leaders are aware of at a gut level.
You provide no evidence that either (a) the Times didn't recognize the shift or that (b) they would be "better off" today is they hadn't had TimesSelect.
I agree I provide no evidence or data that they would have been better off today if they had been free in the beginning. These questions of business strategy are fundamentally unmeasurable - which is precisely why "What they don't teach you at Harvard Business School" types of stuff will always be popular.
I agree it is impossible for a public company CEO to go to the board with "visions of grandeur" which may well lose them money for a while. That is what spells opportunity for the new guys who are unencumbered by the past.
As an example of a public company CEO who got these types of "impossible" questions very right (and who was vilified throughout), look at Amazon. You may recall how many times Bezos caught flak in the late 90's (and now for his S3/EC2 strategy!) from financial types.
The cost of missing out on thousands, if not millions, of inbound links from other sites referencing content hidden in TimesSelect and other subscription services shouldn't be overlooked. That's a serious source of both direct traffic and search authority that was missed during the subscription period.
Posted by: Ed Kohler at October 20, 2007 05:03 PM
Yes, NYT lost out by not making its online content free a lot earlier. However, even if it had pursued an open strategy and doubled, tripled, quadrupled its online earnings--that still wouldn't be enough revenues to pay for its costs of doing business.
The rates for online advertising are set by the overall market which is represented by all the other online sites, including Google. GOOG can sell advertising for a lot less money than the NYT. Because its costs of publishing a page of content and advertising are so much less than NYT's cost of publishing a page of content and advertising.
"You can't get there from here" is the way I would describe mainstream media's problem in monetizing online content versus newstream media and its low costs of content creation.
the site cannibalizes, rather than promotes, the paper edition.
This is very bad news for the newsies. Online advertising is likely to have a lower yield, so even as they have to grow the online editions to keep up their total news market share they have to cut costs as online ads replace offline.
The NYT is the NYT, and in today's world, everything cannibalizes the old media but only up to a point. There are some people who will always love their newsprint edition. But today you have to feed using all media. So, yes, the Times blew it.
In the bread and butter world of classified they should have seen what craigslist.org was doing, and immediately produced an ad-backed version.
The game continues to change, however, and new opportunities are arising. With the Apple iPhone giving users a real Web-browsing experience in a hand-held, with the ability to finger-zoom stories, what all newspapers should be doing is downsizing their paper size to optimize this new viewing experience and form factor. The iPhone combined with Apple iTV also easily enables wireless newspaper viewing on your TV.
The problem the big papers now face is this: there is only one Amazon, there is only one eBay, there is only only Wikipedia, there is only one Google. What US paper will emerge as the standard? Probably there will be one or two national standards, with local editions tagged on.
All the news that's fit to webcast.
("Content" is to informational goods what "commodity" is to material goods.)
This parenthesis hits on something quite significant and weird. Economically speaking, a commodity is by definition something with a price tag. "Content", by contrast, is in itself uncommoditised - it's not even advertising (inducements to buy commodities), but an inducement to read inducements to buy commodities. It's not clear to me where, over the longer term, the money's coming from.
Posted by: Phil at October 22, 2007 05:31 AM
false premise. Sorry kids, but you don't have an argument. content has a utility function and needs to be measured as such. I would suggest reading "the new media equation" Reaves & Nesss. real empirical study of how media is consumed and value perceived. the advertising, vs commercial debate is sophomoric at best without real research and analysis of the utility function of a consumer. Just becuase you can read and write doesn't mean you understand empirically what you are consuming and how people value it.
Posted by: nick gogerty at October 22, 2007 09:21 AM
I don't think the viability of a pay-for-content model was an either/or proposition. My personal issue with the TimesSelect nonsense, and the reason I thought it was a stupid, was the exorbitant rate they charged ($50) for access to premium Op-Ed content.
In a vacuum, this could perhaps be considered a fair rate, given that it included access to the Times vast archives. But for me, and I suspect for the vast majority of nytimes.com readers who were irked by TimesSelect, the only content I wanted was the Opinion section. $50 is a lot to pay to read a few hundred words from Thomas Friedman a couple times a week.
Putting aside the question of whether a major global thought leader like the Times does itself a disservice by limiting the reach of its opinion-makers, the stupidity of the model was that, by offering only a "deluxe" pay package at a deluxe price, they priced out thousands of people, like myself, who would have promptly signed up for a less expensive subscription.
You make a fair point about the Times's potential to attract a lot of bloggers and other online content. I'd just point out that that's a separate issue from TimesSelect. It could have done what you say while still keeping some print columnists and the archives behind a paywall. TimesSelect provided an incentive for (a) current subscribers to maintain their print subscriptions (remember that a benefit of subscription was that you bypassed the paywall) and (b), to a lesser extent, others to initiate subscriptions (since that also got you passed the paywall, often for not much more than it would cost to get just a TimesSelect subscription). The program, as I said, deterred cannibalization for a period when that was likely more valuable than the ad revenues that would have otherwise been generated. TimesSelect in no way prevented the Times from pursuing other free-content programs such as publishing bloggers.
Phil, the problem with "commodity" is that it has many definitions. The one I was using here (mainly) was the idea of a fungible, nondifferentiated good, which is the way many people seem to view news online (any source is equivalent to any other; buyers make no distinction as to the quality of the writing and reporting).
Ed, Yes, you're right. The value of lost links would have to be taken account in any full accounting of TimesSelect's impact.
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