In the last part, I discussed how many of the reactions to TimesSelect were more driven by emotion than anything else. Just yesterday, Morgan Stanley announced that they were selling their 7.2% stake in the The New York Times Company. The reactions piled up ( “Another Grim Milestone,” “Getting out while the getting is bad,” and taking the cake: “Another Bullet in the Old Gray Lady's Ass”). More of the media bloggers have stronger backgrounds in reporting than in publishing, and thus don't naturally delve into the numbers.

Also, doing the numbers takes time. People who can ably crunch numbers are in the finance business, and know the value of not giving away their findings for free. The private equity firm Veronis Suhler Stevenson annually publishes the VSS Communications Industry Forecast, which projects over the next four years. It costs $2,495. (talk about a paywall! perusable at your local business library.)

The exceptional free research comes from Scott Karp, until recently the Director of Digital Media for the Atlantic Media Group. In July, he wrote about the “10% Problem” whereby, in the case of the Times, print has 10% of the reach of online, but online has 10% of the ad revenues. (Strangely, he didn't link to this seemingly important analysis in either of his two subsequent TimesSelect reflections.) Karp has coined the Advertising Trend Ratio as the ratio of online advertising gains to print advertising losses. But let's go a step further and add in the losses due to subscriptions, since TimesSelect was all about creating online counterparts to them.

I'm not a financial analyst, just a programmer. I'll try to make sense of what's in the NYTCO Annual Report for 2006 as relevant to our study (page numbers below refer to the PDF numbering). We do want to know whether, as Jeff Jarvis charges, the “circulation mentality” has had its “last gasp.”

The Numbers

The New York Times Company earned $3.2 billion in 2006; $2.08 billion came in for the flagship paper, $637 million in subscriptions, $1.27 billion in advertising, and an additional $171 million from other sources (p. 43). There were 1 million weekday, and 1.6 million Sunday subscribers. Thus each reader (counting a full-week subscriber twice) was worth $245 in subscriptions, and $487 in advertisements to the newspaper, or $732 combined.

From 2005 to 2006, the Times lost 3% of their subscribers: 32,200 weekday and 47,000 Sunday (p. 14), which effectively cost the company $58 million dollars.

Would they be able to make it up in online ads alone? For 2006, the Times Company earned $274 million in online advertising (p. 4) and predicted 30% growth in 2007 (p. 4). But that includes the revenues from About.com ($80 million), and the other properties. The NYT newspaper took in 71% of the total ad revenues, but let's assume that between 90% of those revenues came from NYTimes.com and not Boston.com or Telegram.com. Thus we guess that NYTimes.com revenues to be $175 million, and if we multiply that by the predicted growth rate of 30%, that brings us to $52 million – not quite offsetting the revenue of the lost subscriptions. And instead of 30%, the online growth was only up to 22% in the first five months, CEO Janet Robinson announced in June. New projection: $38.5 million.

Also, if we take the number 13.4 million unique visitors to the Times website, and divide into $175 million, that means that each visitor brings in $13 a year. Let's segment the readers to provide more realistic numbers. A tenth of the monthly readership visits everyday. If we assume that this tenth accounts for half of the overall traffic, then these daily readers are bringing in $62 a year, and the monthly visitors, $7/year. (The annual report for the Washington Post Company, by comparison, shows that the website brought in in $102 million, or $12 a reader a year.)

Overall, the Times has five times the number of online readers, each bring in a fiftieth of the revenue of the print subscribers. That translates to one-tenth the revenue, as Karp and others have reported. To put it another way, the print subscriber is paying a third of the cost towards the paper. The online advertisers pay one-tenth of the cost, and the online subcribers, nothing.

How long can this continue? If online ad revenues grow by 21% a year, as the VSS estimates suggest, it will take 12 years of growth to fully replace the print revenue. On the bright side, 21% growth does point the way to the way to online ads offsetting the $50 million annual subscriber losses in the next year.

The overall monthly readers averaged 13% over the last two years of TimesSelect, while the daily growth appears to have stabilized. From those numbers, more of the monthly growth came from the occasional visitors (on the other hand, the numbers from compete.com show that the percentage of referrals coming from search engines has not grown in two years.)

To meet the revenue growth projects, the Times (or any newspaper) has these options:

• Grow the number of readers coming in via search engine referrals

• Convert the two-cents a day searchers into regular readers

• Sell more ads per page, make the page visits more expensive (more intrusive)

• Target the ads better (which involves registering users)

• Find a way to get regular readers to pay

For argument's sake, let's leave the fifth option on the table. While community publications, whether they serve geographic areas or interests or professional practices, will always be able to support themselves through advertising, national public affairs reporting cannot. (Kenton Kelly, a CPA, wrote a very colorful post in 2005 about about why political reporting is difficult to sustain through advertising in any medium.)

The Times is both– it's a community publication for the 8 million people in New York City and 20 million in the metropolitan area, while it is very much the newspaper of record in national affairs. Television network news long ago fully ceded the business model to advertising. It's hard to produce a media critic who finds comfort in this. In 1992, Neil Postman and Steve Powers wrote How to Watch TV News, the ninth chapter of which was titled “The Commercial.” The authors concluded that commercials bring your focus on yourself, while news brings your focus away from yourself and to the larger world, and thus,

in the intermingling of news and commercials we have a struggle of sorts between two different orientations. Each tries to refute the other. It will be interesting to know which point of view will triumph in the long run.

Thanks to the grave dancing on TimesSelect, we know who won this round.

The Chinese Wall

Long before the concept of the “paywall” was coined, the wall that newspapers had was called a “Chinese wall.” Given the substantial income from advertisers, the Chinese wall represents the isolation of the editorial coverage from the business operations. But even a rock-solid wall doesn't contain the inherent problems of advertising-supported news (why else is public television so popular – and so lauded?)

The introduction of the Times Op-Ed page in 1970 also brought a new revenue stream: advertising space on that same page. In 1973, Mobil Oil began a practice (which still continues for ExxonMobil) of writing their own editorial columns within this space, which came to be called advertorials. The American Society of Magazine Editors caught up in 1982 by issuing advertorial guidelines so that readers wouldn't be confused. Jonathan Alter called it “The Era of the Big Blur” in a 1989 Newsweek article.

In an article in the Winter 2000 Newspaper Research Journal, Glen Cameron of the University of Missouri examined advertorials as “one of the fastest growing trends in the advertising industry.” He concluded: “Essentially, the newspaper advertorial borrows, or more candidly, steals editorial credibility from the newspaper and in the process pollutes one of our only sources of clean, reliable information.” (This article is free via findarticles, which also supplies a print-friendly format.)

Clyde Brown and Herbert Waltzer of the University of Miami (Ohio) have written a number of papers over the last decade – all of which are behind the pay walls of the academic publishers (that's not to say that the professors wouldn't release them to a public researcher). With respect to Mobil's advertorials, Brown and Waltzer examined their content (“Every Thursday: advertorials by Mobil Oil on the op-ed page of the The New York Times,” Public Relations Review, June 2005: $30), while another pair of scholars, Christopher Cooper and Anthony Nownes, tried to gauge their effect (“Money Well Spent? An Experimental Investigation of the Effects of Advertorials on Citizen Opinion”, American Politics Research, 2004: $15, free here). Cooper and Noynes showed the Op-Ed pages with and without the Mobil advert to college students. While the test group of students were not swayed to Mobil's opinion, they did become more salient about the issues Mobil talked about. They concluded: “Although our findings are far from definitive and a number of research questions deserve further attention, our data should provide comfort to ExxonMobil and other practitioners of advertorializing.”

[Disclosure: I'm an ExxonMobil shareholder; the dividends I get are far less than what I pay the Times in annual subscription, though I don't really think of that when I balance my personal budget.]

The continued ceding of ground to advertisers will bring more studies and more questions. Last month the Times got rapped by their own Public Editor when they inadvertantly sold an advertorial to MoveOn.org at a discounted rate. (Bucking the trend of a people refusing on principle to pay the NYT, MoveOn paid the difference two days later.) The irony here is that no one's figured out whether the Big Impact Advertorial would exist in the same interrupting manner on news website – or whether newspapers are going to find themselves selling out more print advertorials as demand slackens.

What has brought us to this advertising-soaked age? At the start of the decade, Naomi Klein called for resistance (No Logo), while Douglas Rushkoff signaled surrender (Coercion). In 1999 Rushkoff explained in an Edge interview: “People who want free email or ISP service have to submit to advertising. It’s as if they are required to get remedial education in marketing. Only the poor must submit to the ads until they figure out how to participate in the market.” That may be true, if only we change our definition of what “poor” means in this context. At that time, there were 40 million MSN Hotmail users; today there are 380 million.

Rushkoff's point immediately before that was about what he called the “MovieFone syndrome” – where something of convenience (reserving a movie over the phone) had gotten so popular that the fees of conveniences had become the norm. Few shared Rushkoff's itch, perhaps the MovieFone charges still had enough competition to keep them low, as compared to Ticketmaster's egregious convenience fees for live shows. Premium charges abounded: Microsoft, Yahoo, and other webmail providers introduced a pay level fee for users who desired more storage and other services. The most recent numbers, from 2005, show that 5% of the subscribers paid the premium fee. But $180 million in extra revenues is nothing to sneeze at. And that gives us an idea.

The Convenient Solution

For the last two years, I had grown comfortable with the sponsorship of my Op-Ed reading falling on the shoulders of an entity I trusted – me. When the Times dropped TimesSelect, they picked American Express to pick up the tab. How on earth can this be seen as progress? (A month later, American Express decided not to renew. The sponsor today is… The New York Times Tech section.) 

I can't be only one in this capitalistic society who thinks that consumers should have the opportunity to pay for quality content. In the Radio Open Source show mentioned in previous part, a fellow commenter articulated it this way: “since I want the New York Times to stay in business (as long as it maintains quality reporting) I should worry about how it is surviving financially and should be willing to pay for that.”

Clearly, charging for content is difficult: there's competing/derivative/copied content which is free.

But there is another way of asking for money. I have called it PaperTrust.

In short, online publications that are consigned to delivering free news ought to realize that they can charge for service. If, as we've calculated, advertisers are paying $60/year, why can't a reader bear those costs directly – and avoid the ads? Similarly, paying subscribers could “fast lane” through the comment moderation process. If you break the commenting rules, you could find your subscription suspended, and back in the moderation queue.

Anything that could be construed as a “service” can simply be limited to paying customers. Publishers could not be accused of withholding content behind a paywall.

I'll add one simple idea here. Online publishers have gone to great lengths (literally?) to break up articles into regular chunks, in order to maximize the ads. This is an annoyance that a paying customer ought be able to do without. A blogger wishing to link to a piece of an article has this dilemma: link to the first page? To the page with the quote? Or to the single-page version? The solution should be that the publisher promotes a uniform, permanent link to the article. When a reader clicks that link, they will see either the full-page (ad-free) version if they are a paying subscriber, and the chunked version if they are not. [Note: this series you are reading has been chunked into logical parts. You are encouraged to link the logical section or the front page of the series. The first page of the series has a link to a printable version.]

Added up, these aren't essential features, and one might be skeptical about marketing it to hundreds of thousands of readers. But then again, if the American public limited its expenditures to what is essential, the economy would go bust. There is a brisk business in providing convenience for a fat fee, especially in media. Like a millions of fellow subscribers, I shell out hundreds of dollars a year for the mere convenience of being able to spread the Sunday Times sections all over my couch. There are conveniences to be offered online, and any online publisher should well monetize them.

The Response

I shared the idea with a number of colleagues in the online journalism community, yet only Chris Daly at Boston University has picked it up. I suspect that many social media boosters might be hesitant to embrace such a two-tier system, which is the very sort of thing the Net Neutrality crowd is fighting against. I also ran the idea by a friend and news junkie who had just completed his PhD in economics. He uses ad blockers.

Ad-blocking is not illegal – at least, not yet. According to CNET, the Interactive Advertising Bureau is starting to look at this issue, and there's no reason to expect the practice will continue unabated. File-trading was once justified by users under what could be called “civil expedience.” Eight years ago, there was no way a user could buy just just one song; they had to pay for the whole album, and thus it was just expedient to download the one song via Napster, the RIAA be damned. But by the time the Ninth Circuit Court order Napster to shut down, that moral argument had crumbled. Apple began selling digital music singles through iTunes, which has been an enormous commercial success.

Similarly, once online publishers begin offering legal ways to hide ads (by paying subscription fees), there will be no civil expedient defense for using ad-blocking software. (I'll fess up: I had my home router block adtmt.com for a time, which serves ad content. When the Times began serving its stylesheets from that server, I stopped doing that.)

Sooner or later, the laws of paid news content are going to have to obey the laws of gravity. When it doesn't – when the public believes that news can be done purely through advertising dollars – there are profound consequences for a democracy.

And Don't Forget About the Elephant in the Living Room

Let's remember that TimesSelect involved 227,000 people willingly paying $49.95 to the New York Times Company in exchange for goods & services, which added up to a meager sum of $10 million. We cannot fault them any more than we can the millions of Americans who threw away $117 million to see Ocean's Thirteen this summer. (I was one such sucker.) Just as well, the PaperTrust model above is based on willing contracts.

Both print media and the movies have the sense to ask for money from their customers. Compare this with cable news, which is sustained by both ads and subscriptions. The funny thing is, those subscriber fees are never directly disclosed to the American public, and rarely get reported outside the trade press. Last month I looked into these numbers, and learned that Fox News Channel had renegotiated its carriage fees to 75 cents a month. Over twelve months, that is $9 a year, and multiply that by 94 million cable subscribers, and we find that there is $850 million dollars flowing from the pockets of American cable subscribers (it is now more than CNN and MSNBC combined).

And as I pointed out (in the 4,000-word Prix Foxe analysis), Fox News famously eschews all of the things that one would expect of a cable news network – like having foreign news bureaus, or reporting on the Iraq war. So while the vaunted Times struggles to justify $10 million in subscription fees, no one bats an eye that Fox News was able to suck $850 million from their “subscribers” over the last year.

For now, the Times is betting its future on the magic money of search referrals. We're going to look at that next.