Pay Walls Are Smart Rationing: The Goldilocks Principle

Rationing has been made a dirty word in the healthcare debate.  But appropriate and successful rationing has been in effect for years in the publishing world, only we haven't expressed it that way.  

Most of the commentary on the New York Times announcement about its so-called "metered service" set for launch in 2011 has been focused on the need to have readers pay for content online "like they do offline."  Observers like Tech Crunch, Ken DoctorMashable,  Paid Content, and the Wall Street Journal, have all focused on whether "enough" readers will pay.  But that's only half the story.



Newspapers and magazines have used paid circulation as one of the approaches to effectively ration who gets a copy of their publication and who doesn't  --  in order to bring circulation costs into line with advertising revenues.  I call it a form of rationing, because the price of a copy in no way reflected either the value or even the cost of delivering that copy.  There are exceptions, of course, but the bulk of consumer magazines and newspapers charge less than it costs to print and deliver the subscription.  When the cost of marketing a new subscription to replace an expiration is added in, even more publications drop to the circulation-losses side of the ledger.   

Every market and media has a sweet-spot where the price advertisers are willing to pay, is profitably balanced with the costs of delivering more and more reach -- in print, measured as circulation. 

To be sure, there are other successful rationing approaches. In the B2B sector, many use free circulation rationed by job function or business size.  And there are many free circulation consumer periodicals, like "alternative newsweeklies," in almost every market.  Among healthcare publications, for example, copies of professional magazines are sometimes rationed to go out to physicians who prescribe a certain volume of "scripts" for patients.

When circulation volume gets out of line with advertising revenue, it drives losses.  Surprisingly for many paid circulation magazines and newspapers today, more paid circulation means more losses.  This counterintuitive scenario may have first happened back in the day when Life and Look's advertising base began to be drained away by television.  Their high circulation at low prices began to be a liability rather than an asset.  The same thing is happening now with the many magazines and newspapers that have seen their advertising base decline.

Let's be clear: circulation revenue for most newspapers and magazines has never been a profit center.  Circulation has been run as a loss leader because so many advertisers were willing to pay so much.  Circulation was pushed as high as possible based on bigger and bigger marginal losses on the extra thousand or ten thousand or hundred thousand "paid" circulation.  When -- suddenly -- advertisers are no longer willing to pay as much, or only a smaller number of advertisers are willing to do so, more "paid" circulation only leads to larger losses.

The same balance is important in Internet publishing.  Too much "circulation" measured in unique users, and especially in page views, creates an oversupply that can't be sold.  That drives down the prices on what can be sold.  Meanwhile, advertisers - generally - want to maximize their "reach" of unduplicated individuals, while limiting excess frequency.  An advertiser simply doesn't want to pay to reach a prospect for a fifth, sixth or seventh time on a single day.  Advertisers are well served by adhering to the Goldilocks Principle: to reach their prospects not-too-frequently and not-too-infrequently, but just the right amount.

The Goldilocks Solution

So the New York Times plan to ration its content by introducing "metering" is an elegant solution.  Allowing a limited number of pages to be viewed free by every Internet user maximizes the "reach" of Times inventory, while ensuring that the publication doesn't give free rides to the readers who value it most, as shown by how frequently and in-depth they consume the content.  This not-too-much-and-not-too-little, but just-right, solution allows the Times to intelligently ration access to its content to maximize revenue opportunity and minimize the oversupply that makes the content seem not as premium as it should be.  It puts the Times  in a better position to be able to earn back revenue through pricing more on value, and less on the low (Internet) cost of delivery.

This elegant, just-right solution has another advantage for the Times' print business.  It makes the print subscription more valuable, at a near-zero cost to the Times.  Since the added value of the unlimited access can be delivered at a very low cost of serving, it supports the other clear strategy the Times has adopted: aggressively raising prices for single-copy buyers and subscribers. 

6 comments about "Pay Walls Are Smart Rationing: The Goldilocks Principle".
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  1. David Culbertson from LightBulb Interactive, January 28, 2010 at 2:52 p.m.

    The reason I largely pay for the print edition of a newspaper or magazine is because it's being physically delivered to my house.

    I'm already paying for Internet connectivity - don't try to hit me up again to "deliver" your website to my house.

    Perhaps it's just a bad implementation, but the subscription flop ($4 million for website with pay wall nets 35 subscribers) is a bad omen.

  2. Nelson Yuen from Stereotypical Mid Sized Services Corp., January 28, 2010 at 3:08 p.m.

    I want to agree with David, but the owner has a point. Implementing the pay wall is the only way to test the elasticity of news in general.

    There is a larger war going on behind the scenes. The players just don't really understand it right? On one hand, real-time search might altogether eliminate a large organization that aggregates information as a whole, and on the other hand, end users may be in jeopardy of never seeing "quality" content every again.

    (Hard to follow, I know... I confused myself too.) Just pay attention to the name - what if the NEW YORK TIMES, was only a valuable hub of information for NEW YORKERS?

    Imagine if real time creates this microcosm of "atom" news structures that aggregates information based on search parameters? If you're reading a story about an earthquake in California, you're going to a website from CALIFORNIA. If you're reading about the Saints game, you're getting that piece of news from NEW ORLEANS.

    The pay wall is like a small test to the changing paradigm of how we consume our news. The question we are answering is "what's the definition of quality content?" Is it how it's presented or is it the validity of the source?

  3. David Hawthorne from HCI LearningWorks, January 28, 2010 at 3:10 p.m.

    There has to be a happy medium here. As a one-time paperboy it always seemed unfair to me that the Philadelphia Bulletin charged people for me to deliver their newspaper, but only paid me with 'tips'. Then, along comes the internet, and people get the content for free but pay the delivery boy. Strange.

    I like the 'goldilocks' model, but would suggest, instead, that newspapers and other publishers develop "apps" that make the 'content' more useful, and then charge for the apps (like research links, download with citations, links to secondary sources, etc.). The people who really use this content for 'market value' ought to pay for its 'utility.'

  4. Jonathan Mirow from BroadbandVideo, Inc., January 28, 2010 at 3:19 p.m.

    Paywalls can't possibly return lost newspaper revenue - and here's why: they won't bring back the billions in lost classified revenue that was lost to Craigslist and eBay by and industry that was either too stupid to see this coming or simply wasn't paying attention. To david@lighthouse - can you send me someplace to read the deal on newsday?

  5. Daniel Ambrose from, corp., January 28, 2010 at 5:07 p.m.

    Interesting comments from Jonathan and others. I would point out that I don't assert this strategy will solve all the problems faced by newspapers. Only that it is one smart strategy, one that supports another.

    In 10 years it will be clear that successful content companies deliver through many channels, each of which has it's own revenue model. If people will pay for an app on an iPhone or iPad that will add two more items to the revenue stream. I suspect the sum of them, in time, will be profitable.

    But I suspect David is right that there is no replacement for the classified revenue that was a license to print money for monopoly newspapers in many markets back in the day.

  6. David Culbertson from LightBulb Interactive, January 28, 2010 at 11:24 p.m.

    For those asking about the pay wall fiasco, here's one article -

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