The Free vs. Paid Debate

Newspapers must decide between short-term ROI and long-term goals

Status, Challenges, and Directions for 2001-2005 - October 2001

ACKNOWLEDGEMENTS

Borrell & Associates would like to thank the Newspaper Association of America for its support, and in particular Randy Bennett and Rob Runett. In-kind sponsors include Belden Associates Inc., whose continuing surveys of local-market websites provide valuable insights into what newspapers should do, and Clickshare Service Corp., which is helping the industry turn anonymous Web users into paying customers. Special thanks are also due to all the publishing executives and research professionals who shared their insights.

Gordon Borrell

Mike Donatello

Peter Krasilovsky

TABLE OF CONTENTS

• Industry Voices...................................................................................1
• Foreword by J. Stewart Bryan III .....................................................4
• Executive Summary ..........................................................................6
• Chapter 1: Newspaper Content Models ...........................................7
• Chapter 2: Non-Newspaper Content Models ................................14
• Chapter 3: The Primary Research: What Consumers Tell Us ......25
• Chapter 4: The Impact on Online Advertising ..............................35
• Chapter 5: Send in the Vendors.......................................................44
• Chapter 6: Conclusions and Recommendations ...........................48
• Appendices
  • Appendix A: ABC Rule Clarifications from July 2001 Board Meeting
  • Appendix B: Survey Methodology
  • Appendix C: Respondent Profile
  • Appendix D: Sources

INDUSTRY VOICES

“I don’t know of any loss [from charging for website access]. Seventy-five percent of our users were from outside the newspaper’s distribution area. How does that affect me negatively [to lose those eyeballs]? Advertisers are not going to be upset to lose hits from people outside the area.”

Jon Losness, general manager & editor The Rochester (Minn.) Post-Bulletin

“There’s a lot of interest by publishers to boost the ABC numbers. We should push the ball forward on registration … but not paid content because there’s no interest among consumers.”

Rohn Miller, vice president Knight-Ridder Interactive

“We’re sort of laying in the weeds waiting out this religious war. Most of our enterprises are generating enough revenue or planning to do so. They seem to be sharing the concern now that to charge would be a high-risk strategy.”

Greg Schermer, vice president Lee Enterprises Inc.

“As long as great papers like The New York Times and The Washington Post maintain free sites, I don't think you'll see many other papers going paid. For a while, at least, small papers in smaller markets may be the shock troops. My guess is that the industry will first move toward some sort of mandatory registration before moving to payment."

Mike Silver, vice president Tribune Interactive

“We’re testing the walled-garden approach at a twice-weekly newspaper in Prestonsburg, Kentucky. The biggest problem we have with these small markets is whether we have sufficiently attractive traffic [who would be willing to pay]. If Prestonsburg is successful, we’ll certainly consider adopting the same model throughout the company.”

M. Jack Quick, vice president Community Newspapers Inc.

“We … do not believe charging for any portion makes any sense. The potential for additional revenue is far outweighed by any loss we’d suffer…. If I were a small paper in a small town without much competition, I’m certainly going to consider it. But at some point I think it follows the cable model, a premium model.”

Mei-Mei Chan, vice president The Seattle Times

“Widespread registration to us seems the more sensible approach than to get to a subscriber revenue stream. That doesn’t mean we won’t have niches where we’ll charge for content.”

Alan Horton, vice president Scripps Howard Inc.

“Additional subscription revenue streams would both smooth advertising cycles and improve potential return on capital for the Web journalism brand. [But] I do not look to tiered service structures as a beneficial strategy. Either the journalism distinguishes itself as valuable, worth paying a subscription fee to obtain on-line, or the newspaper brand has ‘no clothes.’”

Leland Westerfield, industry analyst UBS Warburg

“If you could start counting [online users] as subscribers it would be a very good thing for the industry. It does translate to higher value if you show that you can increase circulation. [But] the Internet component is probably the last thing that a buyer is looking at. Whether the newspaper has a site is irrelevant to the buyer, believe it or not.”

Phil Murray, senior vice president Dirks, Van Essen & Murray

“It would definitely impact evaluation if they are getting paid for their content.” [The addition of niche paid products] “is the right direction to go. [But they] won’t be important until accounts for 1 percent or more of overall income.”

Kevin R. Gruneich, industry analyst Bear Stearns

“I don’t doubt there will be some incremental benefit to newspapers [from their online operations]. It will come from meeting needs of advertisers and developing better demographics of their subscribers. It’s still too early to judge the benefits of online, but they need to be there. Advertisers [are] not basing their [media budget] on circulation but on perceived value. … Are they generating store traffic? Are they reaching the right customers?”

Lauren Fine, industry analyst Merrill Lynch

(Message to readers found on the website of the 4,431-circ. Chanute Tribune) www.dailynews.net/chanute/notfree.htm

FOREWORD - By J. Stewart Bryan III Chairman, Media General Inc

With the emergence of the Internet as another news medium, the newspaper industry thrust itself into a so-called “mediamorphosis” unlike anything we’ve seen before. We could have, of course, chosen to co-exist with the Internet – much as we’ve lived in relative peace with radio, TV and cable. But we chose not to ignore this one and threw ourselves headlong into the Internet, creating thousands of websites. And in some sense, we succumbed to the Internet mantra that “information wants to be free.”

Nonsense!

I suppose that we as media corporate leaders fell for it because it was truly a new medium with an acronym-based language all its own. And those of us weaned on newspapers thought that this new-new thing was better left in the hands of those who knew and understood the difference between H&J and HTML. We were half right. We’ve allowed our interactive divisions to freely carve new marketplace value, but now is the time to bring in the business minds and start determining how to mine that value. It is abundantly clear that advertisers alone won’t support this medium – at least not as we’re offering it to them. We need to deliver a more specific, higher-valued audience. And we need to find out exactly what consumers are willing to pay. If our websites, as this report suggests, don’t hold high value for consumers, they won’t hold high value for advertisers either. Today the newspaper industry has created local websites second to none. Just as we continue to offer the definitive marketplace for local news and advertising in print, we have also begun building the same franchise online. But we’ve only begun. Half of U.S. households have yet to come online, and the overlay of broadband in homes – still in its infancy at less than 10% of household penetration – will undoubtedly create yet another wave of change in media-usage habits.

Consider the Free vs. Paid TV analogy from a generation ago: In 1967, TV viewers overwhelmingly said they’d rather have TV without commercials (just as they’ve said that pop-up ads on the Internet annoy them). But when cable came along and TV viewers were given the opportunity to pay for something that they already received for free – even with the enhancement of better reception and more channels – consumers did an about-face. By 1973, they overwhelmingly said that TV ads were a fair tradeoff for free programming. It took another 15 years for the majority of TV households to move from the free model to the paid model. What prompted them? Better (and more) programming.

The value proposition for website users is the same. This report tells us that 71% of our site users would go someplace else because “there are so many free sites out there.” We must offer better programming if we are to expect consumers to pay us. We must also prepare for the future of broadband, when that programming will likely include audio, video, animations, interactivity, and all the other features of convergence that this new medium allows.

Will our online customers pay?

All will, if we offer compelling news and information that has real value to them in their daily lives.

EXECUTIVE SUMMARY

Six years ago publishers were willing to accept the proposition that “information wants to be free.” Today, fueled by the dot-bomb debacle and new guidelines from the Audit Bureau of Circulations, publishers appear more eager to embrace the notion that “information providers want to be paid.” This turnaround threatens to dilute the accomplishments of a remarkable period when a $60 billion, 395-year-old industry reared up on its hind legs and began to achieve the unthinkable: It recognized a disruptive technology early, accepted an unconventional business model, and seized a market position.

At least one dozen daily newspapers have already erected tollgates on their websites. A poll of publishers indicates that 350 more are thinking about doing the same. 1 The movement is driven from the top, where patience has run thin after six years of waiting for the promise of online riches. It is also driven by an ABC clarification last summer that appeared to clear the path for newspapers to extract real value from the Web by counting online-only subscribers and giving free access to print subscribers as a perk. Now the ABC staff says the industry misinterpreted the rule.

With the help of an online panel furnished by Belden Associates Inc., we asked 1,895 newspaper website users in September 2001 how they felt about paying for access and registering for access. We also asked questions regarding Web usage and newspaper readership as a result of a highly charged news event, the September 11 terrorist attacks. The evidence is compelling. Based on these results, as well as dozens of interviews with industry and non-industry executives, and on data furnished by the pioneers who are attempting paid-access and registration models, the top-level conclusions are:

• Overwhelmingly, Web users will not pay for local content today, but this attitude will change in the long term.
• Overwhelmingly, Web users will register for access to local sites.
• Overwhelmingly, newspaper websites strengthen the core product by selling newspapers, increasing readership, and reducing churn. They do not cannibalize it.

The major recommendation: Don’t charge for site access just yet, but strongly consider “premium” information services where consumers have shown a proclivity to pay.

The message for publishers is, be patient. Turning to a subscription model for a website today is as risky as, well, adopting a “free content” web-publishing model in 1995. Neither shows an acceptable ROI at the moment. Moreover, there appears to be more risk today in relinquishing the six years of Internet ground that’s been gained than there would be in relinquishing any revenue to be plied from a consumer base that is, at best, skeptical of the value they’d receive from a Web subscription.

Chapter 1: Newspaper Content Models

Analysis of websites, new ABC rules, and PDF systems

Users won’t pay for generic local content today. This conclusion is based not only on what consumers say they’ll do, but what they are in fact doing. For instance, a spate of surveys over the past 12 months shows anywhere from 7% to 40% of online users saying that they’re willing to pay for local content (it depends on how the question is asked). What’s the real answer for local content sites? Fewer than 3%. Why? Because sign-up rates at newspapers that are charging for Web access range from 0.2% to 2.6% of a newspaper’s print circulation, even for websites that have been charging for nearly 2 years. Table I illustrates the sign-up rates over time for online-only subscriptions and subscriber-registered users at nine of the 15 newspaper sites restricting access today. [2]

TABLE I: Online Subscriptions and Registrations as a Percentage of Newspaper Print Circulation

The ROI on such a small subscriber base is hardly worth calculating. At the generally accepted rate of $60 per year or $8 per month, a 50,000-circulation newspaper would stand to gain, at best, $125,800 in online subscription fees today. Even if 1,483 daily newspapers across the U.S. erected tollgates at their websites, charged the highest rates ($8/mo.) being charged today and achieved the highest subscription percentage we’ve seen so far, the resulting business would be $150 million, or roughly 0.3% of total newspaper revenues and 1.3% of total newspaper circulation revenues. Factor in the additional costs of credit-card processing, site software and customer service, and the benefit of any “found” money from subscriptions looks hardly worth pursuing. But what about cost savings?

Will A Tollgate Reduce Costs?

Publishers may not gauge the success of these models in terms of online subscription revenue. They may view the success more in terms of reducing costs and eliminating the opportunity for erosion of the print subscriber base. (Note: We say eliminating the opportunity because no data as yet has shown a significant rate of subscription stops as a result of newspaper content being available for free on the Internet.)

On the issue of cost reduction, Borrell & Associates found no evidence that bottom-line costs were reduced at all for those sites now charging for access. The only area that seemed to be a viable target for cost reduction was site throughput – the bandwidth that a site needed to handle its traffic. It would make sense that fewer users would mean less traffic and therefore less throughput costs. But the results so far are mixed.

• At the Post Register in Idaho Falls, Idaho, page views declined 75% when the tollgate was erected 18 months ago.
• At The Standard-Times in New Bedford, Mass., the number of user sessions declined less than 10% when the tollgate went up in January 2000 but are now double what they were when the site was free.
• At the Albuquerque (N.M.) Journal, page views remained virtually the same despite a 25% drop in unique IP addresses.

The reason for increased usage from a smaller user base may be that paying (or registering) users may feel a higher buy-in and therefore use the site more to get their money’s worth. Table II illustrates what happens to costs when the tollgates go up:

The projected results in Table III are probably conservative when considering that newspaper sites are not entirely replacing one operation with another. Most newspapers still maintain a section of free content that includes headlines and sometimes articles, and almost always classified advertising. The Gazette (Cedar Rapids, Ia.) still maintains a free portal site, FYIowa.com, that it will use to generate traffic to ad-supported Web pages (classifieds included) and to www.GazetteOnline.com. In that case, adding another level of service in the form of registrations and subscriptions seems to virtually assure no cost reduction.

The same is true at DallasNews.com, the site operated by Belo Interactive for The Dallas Morning News. The Belo strategy is to maintain DallasNews.com as a free site and use it to promote traffic to niche products such as email newsletters. In an effort to raise the value proposition for that free site, it is now attempting to get registration information from users.

So far Belo has seen early success that is worth watching by the industry. The company had amassed 150,000 free subscribers to 16 email newsletters off the Dallas site since launching them in 1998. The newsletters focused on sports, movies, food and cooking, travel and today in history. At the end of the summer the subscribers were told they’d have to pay $12.95 per year if they wanted to continue receiving the service. Because these newsletters contained no advertising, there was no risk to Belo in converting them to a subscription model. The company selected Clickshare Service Corp. to begin handling all subscriptions and giving subscribers the opportunity to use their Clickshare account to register and pay for any Belo online product.

The free ride ended in mid-September. By early October, Belo executives were reporting a 1.3% conversion rate, or about 2,000 signups. Considering the fact that their only significant costs were content fees paid to writers, the profitability already looks promising: Belo says that one of the newsletters, Inside A&M Sports, is almost at break- even, and others were between 45% and 76% profitable. The results look even more promising considering the fact that Belo also plans to sell targeted advertising via opt-in email notices of promotions, sales and discounts.

Still, 2,000 email accounts at $14.95 comes to $29,900, hardly an e-goldmine.

The models for charging or registering users are variations on a theme. The general theme is to give print subscribers free access and to charge non-print subscribers to get in. The models range from a newspaper allowing only print subscribers to have access (barring everyone else) to allowing only out-of-market residents to subscribe to the online-only edition (barring in-market residents from having an online-only subscription) In Madison, Ky., The Messenger (circ. 8,864 daily) bundles website access with an ISP dial- up service.

Regarding content, the mix of offerings also varies widely. Some newspapers have thrown archives into the mix while others charge extra. The big news is that most of the newspapers appear to be conducting business as usual on their websites but are gradually putting more content behind the wall as they build the value for online registrants and subscribers.

Table III lists 15 newspapers, The Wall Street Journal included, that are charging for website access.

Table III: Newspapers Restricting Site Access

The New ABC Guidelines

New Audit Bureau of Circulations (ABC) guidelines issued in July 2001 gave new momentum to charging for access. The ABC meeting addressed two key issues governing electronic editions: paid web access for non-newspaper subscribers, and free web access for subscribers. (See Appendix A for full text.) The board action as it pertained to newspaper websites:

• Suspended for two more years the “premium” rule as it applies to newspaper websites. That allowed newspapers to continue giving free access to print subscribers, without it being considered a “premium” that must meet certain price guidelines, while charging online-only subscribers.
• Said a newspaper could count online-only subscriptions as net paid circulation as long as the fee was at least 25% of the cover price of the print subscription and came from the same editorial home as the newspaper.

Although there was ensuing confusion about whether newspapers could both charge non-print subscribers and give print subscribers free access, the ABC board reconvened in Florida in early November and further clarified the ruling in newspapers’ favor. The clarification stated that a newspaper “may sell subscriptions to its electronic edition and claim them as paid circulation while simultaneously giving traditional print subscribers access to its own Web site/electronic edition at no incremental cost, so long as:

1. A qualifying price is paid for subscriptions sold to the electronic edition, and
2. The electronic edition furnished to existing print subscribers is not included in paid circulation statistics.

A critical issue in this debate is that newspaper Web sites don’t include all the advertising that the print edition contains. Publishers must break out their circulation figures to show the electronic-edition subscribers. Even if (and especially if) those online numbers are large, it isn’t likely that print advertisers will swallow those numbers unless the newspaper can guarantee that the advertising appears online as well.

One of the most valuable assessments on the issue of how newspapers should handle their web “readers” comes from Matthew Spahn. As ABC chairman, his opinion counts. As director of media planning & analysis for Sears, one of the newspaper industry’s largest advertisers at $187 million in 2000, it counts even more. “I personally think there’s a big opportunity (to use the website) to strengthen the relationship with the reader and to use it as an additional channel for distribution. The challenge is how to make money at it,” says Spahn.

Regarding newspapers’ confusion over finding the right model to make money off the web, his response: “I don’t think newspapers should walk away from it. That would be a huge mistake.”

The non-Web alternative: An electronic “edition” in true form

A principal problem with counting Web access as an “edition” is that a large and valuable part of the newspaper is not included – the display advertising. One way around it that seems to be gaining momentum among publishers is Adobe Acrobat (PDF) and Microsoft Reader services. The ABC certified this whole-text format in 1998, helping launch several vendors that are presenting a partial alternative to HTML Web delivery of daily news content. These typically:

• Preserve the look and feel of the print newspaper
• Reproduce and enhance advertising beyond banners
• Allow full interactivity via hyperlinking and screen mapping.

Most importantly, newspapers can add users to their circulation figures – even if the users already subscribe to the print version. While smaller newspapers appear to be leading the way in trying to gain subscribers to electronic editions via the web, the larger newspapers appear to be migrating toward the whole-text format.

Major vendors today are all Acrobat-based, although the race for standards will heat up in 2002, when improvements to Microsoft Reader begin to enable dramatically smaller files that leverage off Microsoft’s eBook format.

Vendors in this area include Newsstand, Newspaper Direct and Olive Software. Austin- based Newsstand has been fast out of the gate via deals with The New York Times, The International Herald Tribune, The Globe and Mail, The Scotsman, The Australian, The Sunday Times (South Africa) and The Daily Deal. The New York Times Co., in fact, has taken an equity interest in the company. Using proprietary technology that manages billing and downloads, consumers access these PDF versions of the papers via Newsstand’s website, newsstand.com.

New York-based Newspaper Direct presents a different business model for publishers. Instead of requiring papers to use a third-party agent such as Newsstand, Newspaper Direct presents custom solutions for up to 90 newspapers. It also allows the papers to be read on screen without the use of Adobe Acrobat.

Newspaper Direct’s activities have focused on Hospitality and Corporate distribution such as cruise ship and airplane editions. But its “personal delivery” service is now running in Washington, Toronto, Vancouver, Moscow and St. Petersburg, with many Canadian markets being added. Partners for one or more of ND’s services – but not necessarily the personal delivery service – include such titles as The Atlanta Journal Constitution, The Boston Globe, The New York Post, The Philadelphia Inquirer, The San Jose Mercury News, USA Today and The Christian Science Monitor.

Denver-based Olive Software, meanwhile, has branched out beyond its roots as an archive vendor to provide ActivePaperDaily. The Daily service, which launched in mid- October 2001, has The Times of India and Der Standard of Austria as charter customers.

Summary

• Only a handful of newspapers are attempting to charge for Web access today. Results show that newspapers, at best, garner online-only subs equivalent to 2.6% of their print subscriber base and registrations (of print subscribers) up to 12.1%.
• There is no strong evidence to suggest that restricting Web traffic reduces costs. In fact, traffic and costs increase at some sites.
• The ABC clarifications regarding websites last summer need more clarification. Newspapers can count online-only subscriptions as net paid circulation under certain rules, OR can give free Web access to print subscribers without the “premium” rules being invoked. The industry would be served better if newspapers could do both. The board will take up this issue in November.
• While smaller newspapers are experimenting with subscriptions for electronic editions on the web, larger newspapers are experimenting with sales of electronic editions in PDF or other whole-text format.

Chapter 2

Non-Newspaper Content Models

Analysis of subscription sites

Online newspapers have been reluctant to charge for access, in part, because of consumer expectations that websites should be free. If there has been a taboo against charging for websites, however, non-newspaper sites have long ago broken it.

Borrell & Associates reviewed 27 non-newspaper sites that charge for access. These sites present a number of models that are applicable to newspaper services. While hardly universal, the presence of non-newspaper websites has influenced online newspapers to move forward with paid access experiments.

Describing why his site went to paid access in July, for instance, Cedar Rapids’ Gazette online manager Terry Bergen notes that “We had some focus groups and asked people if they would pay for content. Their first reaction was no. When we probed some more, we found that some people were already paying for content. Some were paying $29 a year for a health website, others were paying for sports reports. So people were paying for content.”

Table IV shows those websites that would set the standard for online newspapers.

TABLE IV: Non-newspaper Paid Websites

Paying for online content isn’t a new concept

Paying for content isn’t new. Some content sites have charged for access since 1985- 1988, even prior to the popularity of the World Wide Web. Premium business content sites targeted to male knowledge workers 30 or older were especially prevalent early on. Typically, these sites – part of a $25 billion business/professional market – offered online business research, business news retrieval, business product information and business product purchasing.

These paid sites have had relatively narrow appeal. As millions of consumers have come online, the premium business sites have been largely overlooked. But they continue to set the pace for a paid content environment. People remain willing to pay for content, so long as it:

• Makes them money
• Saves them money
• Ties into their career
• Ties into passionate interests

The tie-in with passionate interests is where a newspaper’s consumer proposition comes into play. In addition to business, non-newspaper paid sites have sprung up dedicated to classifieds, personals, sports, news archives, political analysis, community and ten other segments.

Some of the paid sites are directly competitive with potential newspaper products and would appear to be easily imitated. The “ESPN Insider” service and Traffic.com’s personalized traffic alert already have newspaper rivals. Newspapers might also form attractive partnerships with other content suppliers, such as TV stations, to build their own version of paid multimedia services, such as Real.com’s GoldPass.

Others have valuable models but probably fall outside of current newspaper competencies. In these cases, newspapers might form marketing tie-ins to earn 10-50% of their gross revenues. A model for building partnerships based on non-core competencies is The Motley Fool Financial Advisor. Many people come to the site for financial advice, although The Fool is basically providing investment information. Subsequently, it has decided to steer its traffic to the new Financial Advisor service, which is just a re-branding of personalized services provided by Ayco Co. and directAdvice. It will share revenues with those companies.

Another model is the partnership formed by iNet, a live operator Web assistance service, with Lycos for the Lycos 411 service. The two companies have a revenue sharing relationship.

TABLE V: Newspapers’ Ability to Adapt

The Transition: Keeping Free Elements

In moving to paid access, several non-newspaper sites made a concerted effort to remain a destination site by maintaining free areas. They also use the free areas to promote the paid offerings. In some cases, the free areas are the primary part of the site, while the paid offerings provide unique value; in others, the free areas address certain needs.

AmericanGreetings.com, for instance, has committed itself to providing large portions of its online cards for free. While its “Platinum Club” of special cards provides an appealing revenue stream, the free section is an important traffic driver and brand builder for the company, which is America’s second largest greeting card provider. Subsequently, the free section is probably a higher priority.

The Chronicle of Higher Education, similarly, keeps job listings, select articles and forum about higher education free to all. In its desire to maintain the highest exposure to its classifieds and key features, The Chronicle has adopted a position similar to many newspapers.

Major League Baseball, meanwhile, has been pushing its paid products hard, with a good portion of its content hidden behind the mlb.com firewall. But it maintains free access to daily updates and its “Daily Cuts” of video streaming highlights – partially, to promote the availability of its “Custom Cuts” video on demand paid product. Content delivered with up-and-coming technologies probably need more promotional boosts.

TABLE VI: Free Areas on Paid Sites

Non-Newspaper Pricing Models

The actual pricing models chosen by non-newspaper sites widely vary. Generally, they fall into six camps:

1. Monthly/Annual: The primary form of paid access is in the form of monthly or annual fees. Users tend to get a discount for buying on an annual basis. Sites charging on an annual/monthly basis tend to provide steep discounts for those taking the annual option. The discounts range from 49% for Consumer Reports.org to 8% for Assignment Editor. They average roughly 20%. Several sites, similar to magazines, don’t provide a monthly option, largely due to processing costs.
2. Seasonal: Some products, such as sports and gardening newsletters, may only have value during specific seasons. But some of these may be extended to off- season.
3. Incremental: Incremental fees make the most sense for directory services, where consumers are already conditioned to pay per lookup. They also can be applied for archives. Incremental fees may be bundled into various volume discount packages.
4. Limited duration: The value of lookups may have limited time value. This is especially true for Classifieds and Personals. Still, for sake of convenience, they may be priced on weekly, monthly or annual basis.
5. Membership with recurring monthly/annual fees: Like health clubs, services may see a primary value in memberships, and also have an ability to tack on incremental fees. To date, this model has generally been applied for software and service “utility” sales, such as Real.com’s GoldPass and eBay’s software manager.
6. Tiered: Services that provide different levels of service may be tiered. This model especially applies to hosting services, such as storefront providers. Since these services often provide access to software, they may also charge setup fees.

TABLE VII: Pricing Models and Examples

Summary

• 27 non-newspaper sites charge for access. These sites present a number of models applicable to newspaper services.
• These sites show that consumers are willing to pay for content, so long as it makes or save them money, ties into their career or ties into passionate interests. The tie-in with passionate interests is where a newspaper’s consumer proposition comes into play.
• Some types of paid sites would appear to be easily imitated by newspapers since they generate newspaper-like content. These include Classifieds, Personals, Sports and News Archives.
• Several types of paid sites probably fall outside of current newspaper competencies. In these cases, newspapers might form marketing tie-ins to earn 10-50% of their gross revenues.
• In moving to paid access, several non-newspaper sites made a concerted effort to remain a destination site by maintaining free areas. New technology areas, such as video streaming, especially require a promotional boost.
• The actual pricing models chosen by non-newspaper sites widely vary. Generally, they fall into six camps: Monthly/annual, Seasonal, Limited duration, Incremental, Membership with recurring charges and Tiered.
• Most sites provide monthly/annual pricing. Annual services are sharply discounted on average of 20% from the monthly rate.

Chapter 3

The Primary Research: What Consumers Tell Us

Paid access needs time to develop

“I would not pay for local newspaper news online.” Anonymous respondent

Previous research on the question of charging for website content has not been encouraging for publishers.

In a Spring 2001 survey, Lyra Research found that only 10% of online respondents acknowledged paying for “premium music and news sites.” Beyond behavior, consumer attitudes augur strongly against the prospects for pay-for-access success. More pointedly, Lyra reported an overwhelming reluctance among online users to pay for newspaper site content: Almost eight of 10 respondents “strongly disagreed that newspapers should charge for site access.”

For publishers of newspaper-affiliated websites, what’s still missing from existing research is greater detail on the attitudes and behavior of the current market for newspapers’ Web content. After all, the online audience for newspaper sites comprised just over one in four Web users in September 2000, according to measurement service Nielsen//NetRatings. That equates to more than 28 million Web users from whom newspapers stand to profit – or lose – immediately.

In conducting our research, Borrell & Associates sought to answer two basic yet unaddressed questions about newspapers’ existing audiences on the web:

• Will visitors to local newspaper sites pay for access to general content – and if so, how much will they pay?
• What are the key drivers of Web audiences’ willingness to pay?

Key Findings: Resistance to paid access; tolerance for registration

The market for paid access to local news content is undeveloped and will required substantial marketing efforts to meet goals. Consumers haven’t paid for content because:

1. They’re conditioned to expect news for free.
2. They don’t perceive incremental value in online news – either as a stand-alone product or as a value-add to the print edition.
3. The newspaper franchise is strong enough to lure a core audience online, but not strong enough to make them pay.
4. The logistics of making payments and securing credit card information reinforce attitudes against payment.
5. Consumer acceptance of registration has grown; in fact, they’re willing to provide substantial personal data in exchange for access.

The survey on which this report is based was fielded September 23-29, 2001. Respondents were members of an opt-in panel of nearly 16,000 visitors to 12 newspaper- affiliated websites, recruited during Waves 1 and 2 of Belden Associates’ Sales and Site Survey (February-June 2001). Initial and follow-up email solicitations to the entire panel resulted in 1,895 completed surveys. After “cleaning,” this represents a 13.3% response rate based on an adjusted total of 14,300 valid email addresses.

The sample yields an overall margin of error no greater than 2.3 percentage points at the 95% confidence level. Margins of error on subsamples are larger.

General findings

Overall, respondents were demographically upscale and from large metropolitan areas. Use of multiple local news media was strong among this sample, which comprised relatively heavy Internet users. More than 40% visited the tested newspaper websites five or more of the past seven days. There was little evidence of print cannibalization; to the contrary, frequency of use of the newspapers’ sites was positively related to readership of print editions. Penetration of high-speed and mobile Internet access was assessed at one- third and one-quarter of respondents, respectively.

A general profile of survey respondents appears in Appendix C.

The case for paid access hasn’t been made

The key predictors of consumers’ willingness to pay for products and services are (1) past purchase behavior, and (2) attitudes toward the offering.

Publishers do not appear lucky in either regard.

Roughly one in four respondents in this study indicated payment for some form of online news and information content during the past 12 months. Payment for content was in addition to any fees charged for Internet access. As might be expected, respondents were more likely to have paid for content for business use than for personal use.

At first glance, the 25% figure seems somewhat high when compared to other studies’ findings. Payment for news and information content, of course, is a broadly defined activity: It could mean paying for access to local newspaper archives, a subscription to The Wall Street Journal online, a Real.com GoldPass account, or access to the rumor and comment search at FuckedCompany.com.

For business use, the top three categories of paid content were:

• National and world news
• Financial listings or reports
• The catchall category “other”

• National and world news
• Local news
• Weather

Table VIII lists the proportion of respondents indicating that they paid for content during the past 12 months, by content type and business or personal use.

TABLE VIII: Respondents’ Habits in Paying for Content

Respondents’ payment for content was more than twice as likely to be for a subscription fee as a pay-per-use charge (72% vs. 29%), based on the last/most recent payment made. This is due to both the preponderance of subscription versus per-use models in news and information. Pricing schemes that give discounts for longer-term commitments versus one-off sales also contribute to the difference.

With this in mind, it’s not surprising that more than half of those who paid for content (54%) shelled out $10 or more for their last/most recent charge. Fourteen percent of those who paid for news paid less than $1; 12% paid between $1 and $2.99; 8% paid between $3 and $4.99; and 12% paid between $5 and $9.99. [3] _{3 Percentages for all price points other than “$10.00 or more” are based on cell size between 30 and 50 respondents and may therefore be relatively unstable.}

Payment by credit or debit card was the most popular way of dealing with charges, with almost six of 10 respondents choosing that method. One in six respondents (17%) had their charges paid by another party (e.g., employer). A variety of additional payment options, from direct bank debits, invoices for purchase the use of PayPal or Clickshare, and “other,” accounted for the remainder.

Reasons for not paying for content

The key obstacle for Web publishers, of course, is convincing consumers that site content is unique and worth paying for. In general, though, respondents view most online news content as parity offerings, each substitutable for another. When asking respondents why they hadn’t paid for news, nearly all (96%) agreed that “there are so many free sources of news and information available online, it doesn’t make sense to pay.”

Two-thirds of non-payers said online newspaper content has little value. Most said it was too expensive, compared to other news sources. “The information is already there, and they don’t have printing and distribution charges online,” is a sentiment often heard.

Publishers should find it troubling that current half the site visitors in our survey believe the newspaper information available online simply “isn’t worth paying for.” It’s clear that perceived value is the major obstacle for Web news publishers seeking to sell content. As additional data indicate, however, it’s not the only obstacle

Security of transactions is a second major reason for reluctance to pay for news online. More than seven of 10 in our survey indicated that “concern about my privacy online” was a reason they had not paid for content. Slightly more than half (51%) agreed that “I don’t feel comfortable giving out my credit card or other payment information.”

Finally, there’s some evidence that those who do not ask shall not receive. More than half of non-payers (54%) agreed that “I have never been asked to pay for news and information online.” Is the solution as straightforward as simply asking for payment? That’s unlikely, but until Web audiences grow accustomed to being asked to open their wallets, publishers should expect continued resistance.

If past behavior remains a guide to future behavior, the market for paid news content online is likely to remain small. What about attitudes toward payment?

Attitudes toward paying for content

Publishers hope that users accustomed to paying for content in print be willing to pay for content online. But users’ valuation of content is dynamic, not constant: What’s worth paying for can change depending on situational factors.

In attempting to gauge willingness to pay, we tried a multi-tiered approach. First, we asked respondents what their preferred payment arrangement would be, with the option to not pay at all for content. But rather than stopping there, we also looked at their attitudes under the three scenarios most popular in planning sessions throughout the industry:

Scenario 1: Requiring a subscription to the print edition to access online content. Here, access to newspaper websites is seen as value added to the print subscription – a reward or bonus to subscribers – and a tool to increase retention. Implicitly, the website is positioned as secondary to the print edition.

Scenario 2: Requiring a print subscription for continued free access, or separate charges for nonsubscriber access. While still rewarding print subscribers for their business, this model positions the website more as a partner with the print edition. Publishers considering this option recognize that some in the Web audience will never subscribe to the paper, because they’re single-copy purchasers, they’re out-of-market, or simply don’t want the print version. But revenue may still be gained by allowing Web audiences to pay for what they use. Pay-per-use fees may include both online-only “subscriptions” or actual per-article or per-access charges.

Scenario 3: Requiring all site visitors to register for access. The biggest payoff publishers may receive isn’t money but rather information. Instead of requiring either a print subscription or direct payment for online access, site users – print subscribers and nonsubscribers alike – are required to register. Registration typically entails choosing a user ID and password, furnishing a valid email address and, less frequently, providing demographic or other personal information. Under this model, finely honed audience targeting provides the value, sometimes in concert with the print side. Again, the website is positioned less as a secondary offering and more as a product capable of standing on its own.

In analyzing reactions to each of the three payment scenarios, we separated respondents into groups based on whether they subscribed to the print edition of the local newspaper, for two reasons:

1. With the exception of the registration scenario, each model treats current print subscribers differently than nonsubscribers
2. Positioning the website as a value-add to a print subscription is likely to generate different perceptions among those who currently see value in the newspaper (i.e., subscribers) and those who do not.

Paid access as a subscriber retention tool

The most tangible return publishers will receive from current subscribers under the first or second models is increased use or print retention. Here, we judge that restricting access to print subscribers has a measurable, but not overwhelming, effect on users’ perceived value.

On average, 49% of respondents who currently subscribe to the paper agreed that “a subscription to the printed edition of the newspaper would be more valuable to me than it is now.” A similar proportion (52%) indicated that they would be “less likely to end my subscription to the printed edition of the newspaper.”

Additionally, slightly more than one-third agreed that such a move would “show that the newspaper really values its subscribers.”

In our data, many subscribers were suspicious of any change from free access. Instinctively, many were repelled by even the concept of paid access: Depending on the scenario, between 38% and 48% indicated that a paid access model would cause them to “stop using the local newspaper’s website and find another online source for the news and information I want.” This is surprising, given that these respondents were already print subscribers and, therefore, would not be affected by the change.

Write off nonsubscribers?

Our data show that nonsubscribers are highly unlikely to pay for online newspaper content. Requiring nonsubscribers to either subscribe to the paper or pay to access the site may have strongly negative consequences, increasing likelihood of addition revenue (either through subscription or direct payment) by only a small amount, while potentially costing sites a large proportion of their nonsubscribing online visitors.

Only 28% of nonsubscribers agreed that a print subscription “would be more valuable to me than it is now” under either Scenario 1 or Scenario 2. A similar proportion indicated that they “would be more likely to subscribe to the printed edition of the newspaper.” Note that the phrase is “more likely,” not “definitely would.”

Only one in eight nonsubscribers agreed that restricting free access to print subscribers makes a print subscription more valuable. Coupled with similar attitudes among subscribers, it would seem a tough sell for publishers to convince their online audiences that raising the toll gate is an attempt to “add value” to the print subscription.

An overwhelming majority (85%) of nonsubscribing respondents indicated that restricting access to print subscribers only (Scenario 1) would cause them to “stop using the local newspaper’s website.” Offering free access to print subscribers and pay-per-use access to nonsubscribers (Scenario 2) drew almost the same response: More than three of four nonsubscribers (77%) indicated that they would stop using the site under this scenario.

Nonsubscribers had trouble envisioning that newspapers could add extra value to their sites. Fewer than one in five agreed that inducements such as improvements to the site or personalized news and information would lead them to pay.

Reaction to specific pricing

We also sought to assess nonsubscribers’ receptivity toward a relatively low, but more concrete, monthly fee of $3 for complete site access. Once again, nearly three of four nonsubscribers indicated that they would not pay. Only 20% indicated that they would pay the either the $3 fee or a lesser amount.

Using an adaptation of the van Westendorp Price Sensitivity Meter, we also queried respondents – both print subscribers and nonsubscribers – on their perceptions of appropriate pricing for access to local newspaper sites. Although this question may appear moot in light of the reluctance to pay for content, it’s important to establish directly what users perceive as reasonable, bargain and excessive charges for content. Results of this question appear in Table IX.

• The van Westendorp technique measures pricing perceptions in four categories – “too expensive”; “expensive but worth considering”; “a bargain”; and, “too inexpensive to be of quality” – to help pinpoint appropriate pricing levels.

TABLE IX: Median Price Sensitivity Toward Paying for Content

As might be expected, the “reasonable” median price for newspaper Web content is quite low: $1 per month. The higher, “expensive but worth considering” price, at $5 per month, is more promising, but quite close to the $7 median monthly fee at which respondents indicated access was too expensive to consider. The “too cheap” price, intended to measure the point at which consumers believe they begin to sacrifice quality, was zero – essentially, maintaining the free site model.

There are three key considerations in interpreting these figures:

1. The responses obtained here yield lower figures than Lyra Research found using the same type of measure. This may be due to subtle differences in question wording (i.e., asking about “your local newspaper’s website” versus newspaper sites overall) or to differences in respondent populations (i.e., only visitors to local newspaper sites versus online users overall).
2. Responses from both print subscribers and nonsubscribers were virtually identical, indicating that little flexibility exists for publishers in trying to segment markets on the basis of pricing alone.
3. It’s questionable whether the “too cheap to be of quality and accuracy” price – essential in calculating both penetration and revenue-maximizing prices via the van Westendorp model – is appropriate for news content in general and newspaper content in particular. Over the past seven years, users of newspaper sites have grown accustomed to the same quality of information online as they receive in print, for free. Respondents indicated a degree of doubt that content pricing and quality were related online. As many related, the only real “too good to be of quality” scheme under the free content paradigm is for users to be compensated for visiting the site.

What about registration?

It’s apparent that requiring either a print subscription or direct payment for Web access will be difficult. How, then, are publishers to increase income from their sites? We believe that the answer lies in required registration – provided that it is implemented in a way that clearly yields both benefits and protections to the audience.

Even though they’re already paying for access to newspaper content via the print edition

• Three-quarters of current print subscribers agreed that they might register, “depending on what information was requested.”
• Six in 10 agreed that they would “register to obtain access” without knowing any details of the registration process.

Only 20% of current print subscribers indicated that required registration would make them stop using the website. Actual availability of alternatives and potential switching costs (if any incentives for registration are offered) might drive this proportion down further.

Additionally, the promise of direct benefits of registration has appeal to a large segment of print subscribers. Many agreed that registration would be acceptable if:

• “I knew that it would help screen out advertising that did not fit my needs or interests.” (61%)
• “The site offered news and information personalized to my interests.” (56%)
• “If the site was improved in some [unspecified] way.” (49%)

Requests for registration information will be more successful if accompanied by plain- English privacy policies and the strongest assurances – and perhaps even guarantees – of confidentiality. Eight of 10 print subscribers indicated that registration would be acceptable “only if I was satisfied that the information would remain confidential,” and 61% agreed that “I would register only if I was asked before I was contacted for sales purposes.”

Nonsubscribers will register

Mirroring the attitudes of print subscribers, most nonsubscribers appear willing to registration as a means of securing continued access to their local newspaper’s website.

Three of four respondents (75%) who are not current print subscribers agreed that they might be induced to register, “depending on what information was requested.” As with subscribers, six in 10 nonsubscribers agreed that they would “register to obtain access” without knowing the details of the proposed registration process.

Nonsubscribers also echoed subscribers in their agreement that registration would be acceptable if:

• “I knew that it would help screen out advertising that did not fit my needs or interests.” (57%)
• “If the site offered news and information personalized to my interests.” (56%)
• “If the site was improved in some [unspecified] way.” (47%)

Concerns regarding confidentiality of registration information and use of such information for sales contacts mirrored those of current print subscribers exactly.

What information will they give?

Most respondents were willing to share information about themselves in exchange for continued free access. Specific details they would share included:

• Age.......................................................................................................64% of respondents
• Ages of children age 17 or younger..............................................32%
• Educational attainment...................................................................58%
• Full (first and last) name..................................................................53%
• Gender.................................................................................................71%
• Hobbies and leisure activities.........................................................51%
• Home ownership..............................................................................46%
• Marital status......................................................................................56%
• News and information interests....................................................67%
• Occupation.........................................................................................53%
• Presence of children age 17 or younger in household.............41%
• Street address.....................................................................................27%
• ZIP code.............................................................................................56%

Summary

• Consumers are not conditioned to paying for general access to local news online. In the near term, they will resist doing so.
• Newspapers need to market their online products. If the industry is to transition audiences to paid models, they need to make a compelling case for the change.
• Closing site content to all but print subscribers may reinforce the perceived value of that subscription among as many as half of subscribers – at a cost of up to nine of 10 nonsubscribers. Most nonsubscribers will be unwilling to either subscribe to maintain website access or to pay site-specific fees.
• Even those who are willing to pay place a relatively low ceiling on what they’re willing to spend. Unless resources devoted to the online product are increased dramatically, users are likely to balk at more than nominal charges (e.g., $1 - $2 per month).
• Enacting registration may be less troublesome than thought. Consumers appear willing to exchange information for access – provided there’s clear benefit in doing so. Requests for registration information will be more successful if accompanied by plain-English privacy policies and the strongest assurances – and perhaps even guarantees – of confidentiality
• Any transition from free access to either a payment or registration model must allay users’ suspicion of charges and concerns about security.

Chapter 4

The Impact On Advertising

When the users go away, what happens next?

Online newspaper managers see advertising and paid content as mutually exclusive. One comes in, the other goes out. In the early stages of the online industry, it has been true enough. For many publishers, getting paid for access to online content seems easier than selling advertising in today’s weak and relatively undefined ad environment

As the online industry begins to mature, however, the environment for advertising and paid content will change. Between 2001 and 2006, news products such as newsletters and new audio/video channels will be repackaged with various pricing models that will have paid, free and hybrid elements. At the same time, more data will become available on consumers and their online and offline habits, enabling better targeting.

Taken to its extremes, the new environment could resemble a cable TV-like model, consisting of “ad supported,” “partially-ad supported” and “all paid” content tiers. Under such a model, one could envision:

• A solid base of targetable readers
• Better complementary campaigns with print products
• Stronger capabilities for data mining.

As the industry evolves, degree by degree, advertising and paid content will naturally begin to work together. The challenge is getting to that point by properly incubating the environment. Table X illustrates how the cable-TV model of mixing ad- supported “free” channels with paid channels might apply to a local-market website.

TABLE X: The Cable-TV Hybrid Model, Applied to Newspaper Sites

How We Got To This Stage

With prospects for advertising limited, the trend is for newspapers and other content providers to shift from all advertising to all pay. This shifts the pendulum back to 1994-1997, when content that was offered on closed online systems or on computer bulletin boards began switching over to the World Wide Web. During that time, early paid sites were hatched, such as The San Jose Mercury News’ Mercury Center, The Atlanta Journal-Constitution’s Access Atlanta, Media General’s Tampa Bay Online, CBS Sportsline.com, ESPNSportsZone.com and Individual Inc.

These paid services were generally designed as “hybrids,” with advertising projected to account for 30% to 50% of revenues. In reality, the percentage of ad revenues proved much higher as subscription sales failed to emerge and advertising appeared to have more promise. Subsequently, the content publishers confused the buy/browse environment by:

• Extending “Limited Time” free trials
• Leaving larger sections of their products unrestricted to gain more eyeballs
• Watching over their shoulders in fear of losing readers to all-free competitors

By 1998, pay products were generally very limited, with the notable exception of specialized titles such as WSJ.com, ConsumerReports.org and various B2B services that had previously existed as premium newsletters. Microsoft’s inability to successfully launch Slate, a political journal, as a pay product during this time gave a good indication of the pay backlash.

Pay or No Pay, Ads Integral to Online Newspapers

Today, after a multi-year absence, some content providers are easing back into paid relationships. One “advantage” of paid content cited by a few non-newspaper sites is that they will delete all advertising for premium subscribers. Britannica.com and Salon are two examples of sites that have pulled all their advertising in order to add “value” to their subscription models.

Such an anti-advertising approach won’t work for online newspapers for three reasons.

1. Under new ABC guidelines, newspapers will attempt to add online subscribers to their net paid circulation thinking they might increase overall advertising revenues (under certain circumstances) as a result of those gains. Excluding advertisers at this stage isn’t logical.
2. A major reason for going pay is to protect paid print circulation from cannibalism.
3. Local consumers genuinely value and expect local advertising in newspaper products, online included. After all, nearly half of Sunday box sales are a result of the ads, not the news.[4]

Still, advertising inventory has not been aggressively sold just yet across newspaper paid products such as sports newsletters, premium crossword puzzles and other niche products. Managers say they are too focused on building up demand to aggressively sell online advertising. The Dallas Morning News, for example, is busy trying to convert 150,000 free email accounts to paying customers, but has definite plans in 2002 to offer opt-in email advertising offering subscribers notices of promotions, sales and discounts.

Restricting Access: Shoring Up The Print Base

Online ads may be integral to online newspapers in the scheme of things. But they still represent a fairly low priority for publishers who are more focused on their print businesses. And who can blame them? As best as we can estimate, newspaper websites are bringing in somewhere between $200 million and $370 million in online ad revenues, or less than 1% of total newspaper revenues. Subsequently, a critical reason to opt for paid access is to maintain current circulation levels. Paid access may also act as a barrier to entry for casual, out-of-market readers who represent little value to local advertisers, and may require publishers to add additional servers and other infrastructure costs to host them.

TABLE XI: Through the Publisher’s Eyes: Which Customer Holds More Value?

For some newspapers, it is just common sense to close the freeway and opt for paid access to the online product – even if it limits their overall distribution. In closing off free access in July 2001, G. Mark Kelm, the Information Technology Director for The Post Bulletin in Rochester, Minn., said, “significant pros outweigh very few cons. The fact is that the non-subscriber online news readers were of no value to us or our advertisers and were eroding the bottom line.”

Similarly, The Albuquerque Journal reports immediate results from its decision to set up a tollgate. In just two months, by September 1, its 600, online-only subscribers gave it half the revenue that it typically received in a year from advertising, according to Assistant Managing Editor Donn Friedman. In its first 12 months of restricted access, the paper is projecting subscription revenues of $20,000 to $30,000.

Larger online newspaper sites with national readership and advertisers, however, clearly don’t believe they would come out ahead by requiring paid access. New York Times Digital (NYTD), for instance, remains firmly committed to a free registration model for its flagship online news product. Eventually, NYTD expects that 50-to- 60% of its revenues will come from subscription products. But these products will likely be new, incremental products such as NYTD’s premium crossword club.

If newspapers with paid access are to sell online ads:

1. Will online newspaper services attract advertisers to a smaller advertising base?
2. Will these services successfully charge premiums for delivering highly targeted audiences?
3. Will fees be more prominent, or will free registration accomplish many of the same goals?

Can ‘Too Small’ Be Repositioned as ‘Highly Targeted’?

From an advertiser’s point of view, the major issue with restricting access is that it cuts into the user base, which may already be too small. National retailers such as Kmart and Sears demand TV-sized audiences for their weekly ads. “Restricting the size of audiences in any way contradicts the advertising model,” notes interactive ad veteran Greg Stuart, CEO, Deltaclick.

True Audience CEO Dave Morgan affirms that “lack of audience will be a serious factor for sites that initiate paid services or registration firewalls. Advertisers will want both highly targeted audiences and mass reach. It will mean that fewer people will play in the game.”

Taken from this perspective, online newspapers operate from a real point of weakness. But it is also clear this “weakness” can be repositioned by:

• So-called verticalizing content (i.e., developing a “high school football” section within the sports section)
• Developing highly targeted ad positions
• Aggressively selling to new constituencies (i.e., small business)

Certain advertisers would presumably pay higher rates, for instance, if they were given better opportunities to place their ads in context and in more heavily trafficked areas. If they could overcome the size issue, some advertisers “will really like the premium and committed audience and will pay more,” says Stuart of Deltaclick. Leslie Laredo, CEO of The Laredo Group, agrees but warns that newspapers will “need to provide attractive audience characteristics and targeting options, or it won’t be worth the advertisers’ time and energy. And it depends on how small,” she adds.

TABLE XII: Better Context = Higher Ad Rates

Such concerns about restricted access limiting audience size are not universally shared. This is especially true among smaller newspaper publishers that are accustomed to serving distinct, small communities where ad sales are tied less to audience size and more to the fact that they have an audience.

The Albuquerque Journal, for instance, lost 25% of its total IP addresses when its website switched to a paid content model in July. But its loyal base of paying users apparently felt a higher “buy-in” with the site and have been using it more often. This example appears to be an isolated one, but could become more the norm over time as publishers add more value to their paid services.

In shoring up online advertising revenues, publishers can also focus on seeking out more local advertisers, such as the small and medium sized enterprises (SME) traditionally drawn to the Yellow Pages. Today, for instance, The Kelsey Group reports that U.S. newspapers sell advertising to 2.1 million small businesses, or 42% of all small business advertisers. This is only half the penetration of The Yellow Pages.

TABLE XIV: Small Business Advertising Penetration

Evolving Towards ‘Data Mining’ and Local Online Commerce

Focusing on advertising in a vacuum may be too confining. Compared to what’s coming, today’s online advertising is basically one-dimensional. Today’s ads might reinforce branding and provide customers with information about the enterprise. In some cases, there may also be some transactional capabilities. In the future, however, advertising will lead to the broader concepts of “data mining” and local online commerce by incorporating:

• Registration information
• Personalization
• Offline databases

Marketers will presumably pay significant amounts to get data on users’ online habits and how they access their advertising – data mining. The end result could b an interactive marketing “funnel” where target marketing – as opposed to mass media marketing – has its own value. Such a “funnel,” segmenting the audience on the basis of registration data and verticalization, would lead to an interactive CRM hub, speculates Tom Miller, Senior VP of Cyber Dialogue, a CRM research firm.

TABLE XV: The Interactive Marketing Funnel

Such data mining information would be useful for predicting which customer and prospect segments are best suited to different targeting objectives. Indeed, the potential for data mining is huge, since a handful of customers typically drive a grea majority of the total value associated with any given business. Twenty percent of online adults account for over 90% of online spending; 20% of online adults account for over 80% of offline spending, says Miller.

The value of tailoring products for unique audience segments is illustrated by Cyber Dialogue’s assessment of the “mature” 50-and-over market, which shows it to be the best potential audience for many online premium services. “Matures” are significantly more likely to use online content pertaining to personal investing, health and medicine. They are also equally or more likely to retrieve online content related to news, travel, local info, government and community, food and cooking. They are also more likely to use online banking. They are less interested in getting information about movies and entertainment, sports, music, games and lifestyles.

In terms of advertising, it would clearly be best to charge Matures directly for accessing online content. Why? Cyber Dialogue data shows that they are less likely to retrieve product info or click on ads.

Reality Check on Data Mining

Successful data mining is highly contingent on the quality and depth of user registration data, and the ability to match it with online behavioral data and print subscription data. “The best shot for newspapers is to register their online users, match them against their offline subscriber list, and create a Total Market Coverage product of print and online and deliver the product with the total rate base,” notes True Audience’s Dave Morgan.

In fact, Morgan predicts such data mining will not just be a value-added feature in the future, but virtually a requirement. “CPMs will ultimately be determined by how well the campaign performed in terms of conversions, clicks, purchases, registrations and awareness,” says Morgan. “Of more importance, it is unlikely that sites without user data will even be able to play in the CPM game next year.”

Numerous skeptics, however, say the marketplace isn’t ready to integrate such complex data into normal marketing activities. “No one’s ever able to do anything with that data,” notes The ABQJ’s Donn Friedman. “The advertising department didn’t know how to use it. It’s really nice to have, but in the end it doesn’t get you anywhere.”

Friedman’s concerns are real and they are important. Newspapers will need to have a strong level of commitment to make data mining projects work. Smaller newspapers may have less need for such data than larger titles. But larger titles that compete for advertising with a variety of media might find it to be a significant leg- up.

Will Free Registrations Do?

A larger question is whether data mining and enhanced advertising in general is entirely dependent on getting customers to pay or register for content. Magazine advertisers have long valued newsstand readers more than subscribers and controlled circulation because of the commitment to reading the material. But it isn’t at all certain that newspapers must charge readers to receive high-level personal data from them.

Both NYTimes.com and WSJ.com, for instance, require extensive personal data from their subscribers and registrants. The WSJ.com data includes sex, birth year, profession, business nature and number of employees, frequency of print readership, and number of stock transactions (in addition to name, address, phone number, credit card info and mother’s maiden name). This data permits the online divisions of the newspapers to sell highly targeted advertising packages to specific psychographic, technographic and demographic groups. WSJ.com, for instance, lets advertisers specify their target based on usage frequency, by section, time spent online, by job titles, size of business etc. But it also offers “peepholes” into its sites for advertisers to target lucrative niches, such as entrepreneurs and job seekers.

There is, in fact, little quantifiably different value in the data provided by the two online newspapers, although NYTimes.com is free, and WSJ.com is not. The rough parity of the data, and the desire to reach a larger audience played a large role in Belo Interactive’s decision to require registration – albeit free registration – in Fall 2001.

While false registration data continues to be an issue – especially vis a vis reported income – it is not as much of an issue as in 1997, when a Georgia Tech survey in 1997 found that one of five registrants (26%) offered phony information. As Tim Ruder, vice president of washingtonpost.com notes, sites are able to qualify and match registration data for birthdates and horoscopes for instance – although they still have problems qualifying gender. In any case, charging for access wouldn’t change these results.

Ultimately, newspapers may restrict access to their sites to prevent any perceived o real cannibalism of their print base. By charging subscription fees, they may be able to capture a substantial revenue stream. An equally important long-term focus, however, should be to capture data on users and effectively target them for advertising and commerce via data mining.

Summary

• Many publishers are contemplating pay for access models. These models seem easier than selling advertising in today’s weak and relatively undefined ad environment.
• Online ads represent a fairly low priority for newspaper publishers, who are more focused on their print businesses. Subsequently, a critical reason to opt for paid access is to maintain current circulation levels.
• From an advertiser’s point of view, the major issue with restricting access is that it cuts into the user base, which may already be too small.
• In shoring up online advertising revenues, publishers can also focus on seeking ou more local advertisers, such as the small and medium sized enterprises (SME) traditionally drawn to the Yellow Pages.
• Focusing on advertising in a vacuum may be too confining. In the future, advertising will lead to the broader concepts of “data mining” and local online commerce.
• The end result could be an interactive marketing “funnel” where target marketing – as opposed to mass-market media – has its own value.
• Newspapers will need to have a strong level of commitment to make data mining projects work. Smaller newspapers may have less need for such data than larger titles.
• Hybrid models for advertising and paid content are likely to emerge. A new environment could resemble a cable TV-like model, consisting of “ad-supported,” “partially ad-supported” and “all paid” content tiers.

Chapter 5

Send In The Vendors

Critical considerations and the promise of the e-wallet

In years to come, the concept of the e-wallet may prove to have been the most important issue for local websites all along. It holds the promise of great opportunity for two groups: for an individual newspaper, the e-wallet represents the chance to use website registration as the seeds to start a direct-marketing business in earnest. For a vendor or consortium, it represents the chance to create a uniform transaction standard for millions of local consumers.

When newspapers rushed to secure their place on the Web in the mid-1990s they lost a core strength: the billing relationship with their readers. While newspapers provided the content, the major ISPs wound up “owning” the readers and redirecting eyeballs. The scenario was similar to cable companies siphoning power from local TV stations by creating a billing relationship with TV viewers and using it to promote other programming and control channel position. While newspapers created massive websites and spent millions promoting them locally, the ISP gatekeepers such as America Online and Microsoft largely ignored their existence by building their own homepage offerings and keeping the local newspaper site off the screen. It is no wonder that the Top 2 news websites are owned by AOL/Time Warner (CNN.com) and Microsoft (MSNBC.com).

The bill-paying relationship is no small matter. In our survey we found that, among respondents who use various ISPs either at home or at work, the proportion who consider their ISP either primarily a content provider or a provider of both access and content is relatively high. More than half of AOL and MSN users see those services as providers of content, and about four in 10 users of CompuServe and Prodigy respond similarly – strong, but not surprising, showings. The surprise lies is the proportion of respondents who count other ISPs as providers of content: one-third of RoadRunner users; three in 10 AT&T WorldNet users; one in four users of Earthlink/MindSpring or NetZero; and 22% respondents accessing through Juno.

Although newspapers may have forever lost the opportunity to own the delivery mechanism for their electronic editions, they do have the opportunity to regain control of once-anonymous Web users. As research bears out, this is an extremely valuable consumer segment. Compared with their online counterparts, newspaper website users [5]:

• Are nearly three times as likely to go online to find out about sales in local stores
• Are more than five times as likely to participate in online auctions
• Are more than six times as likely to download coupons

Newspapers, as they adopt a subscription or registration model, have the opportunity not only to capture that all-important subscriber/billing relationship, but also to achieve the industry’s elusive goal of creating a nationwide databank of customers. With Microsoft, AOL and now Sun Microsystems’ “Liberty Alliance” chasing the e-wallet registration dream, why not a network of 1,400 local newspaper websites?

The e-wallet concept is little more than a virtual credit card that users never have to show. The user registers all the information once and is given an ID that rests in a central databank. Whenever that user visits a site that participates in the e-wallet program, all the user needs to do is enter name and password, click on “enter” or “buy.” The simplicity of the ordering system is no small part of Amazon.com’s e-commerce success. In seven years, Amazon has established a billing relationship with 30 million customers.

Laid before newspapers today is the opportunity to create their own e-wallet network much like that envisioned by the New Century Network’s “Travel Pass” in 1995. That idea was derailed not by NCN’s failure as a consortium of the 10 largest newspaper companies, but by the refusal of the larger newspapers to participate. They wanted to be destinations, not portals that might send users elsewhere.

Meanwhile, the big players are just beginning to amass a lot of useful information. The major players, of course, are Microsoft and AOL. Microsoft’s Passport is already up and running, and AOL‘s screen name system regularly prompts users to buy magazines, computer hardware, software, music and services whenever they log on. In late September 2001, Sun Microsystems announced a “Liberty Alliance” consortium involving 30 other corporate heavyweights that claim to represent 1 billion consumers worldwide.

Can the vendors serving the newspaper industry today help publishers create their own e- wallet alliance?

We found seven vendors (Table XV) either serving the industry or actively pursuing relationships with publishers. Of those, Qpass and Clickshare have gained the most traction within the U.S. newspaper industry. Both have an interest in building networks among their clients to aggregate content. The big difference is the price. Qpass is clearly the vendor of choice for the largest clients such as The Wall Street Journal and The New York Times.

Clickshare, on the other hand, appears most interested in serving newspapers of any size. Its rapidly growing client list includes a diverse group from the 500,000-circ. The Dallas Morning News to the 19,000-circ. Lawrence (Kan.) Journal-World .

Several questions should be considered when selecting a vendor:

1. Does the newspaper site manager care who owns the end-user data? Some vendors want to “co-own” the customer while others give exclusive rights to the client. Co-ownership means customers might be asked to buy or subscribe to competing services. Ask a lot of questions.
2. Does the newspaper want to handle the end-user billing and customer service? Some vendors offer plug-and-play software but leave the customer service and billing to the client. If the newspaper wants the vendor to handle it, better check the track record first. After all, it’s the newspaper’s customers in someone else’s hands.
3. How important are privacy and security? Based on our surveys, the importance should be very high. Eighty percent of respondents were so skittish about registration – let alone giving out a credit card number – that they said they’d do so “only if I was satisfied that the information would remain confidential.” On the privacy issue, be sure to ask the vendor if the credit card data will be brokered out for use by a third party. On the security issue, let someone on the tech staff lead the discussion on how user data is handled.
4. Does the newspaper have news and information that might be valuable to a larger audience than its Web users, or might those Web users be good candidates for buying content from other vendor-affiliated networks (i.e., financial information, sports networks, other newspapers, etc.)? If so, look for a vendor whose platform includes the opportunity to cooperate with other third- party content affiliates. This is where the e-wallet concept comes into play.
5. What are the long-term projections for user sign-ups, and how scaleable is the vendor’s platform? As this report indicates, a good rule of thumb in the short term (2 years) might be that online subscribers will total less than 3% of a newspaper’s print circulation base and that online registrants might hit 12%. But in time, those numbers may soar. Would the platform handle it?
6. What’s the price? This is where a long-term ROI model would be useful. Based on a 50,000-circulation newspaper with 1,300 online subscriptions at $60 per year, Clickshare, InfoCon and MemberGate all weigh in below $20,000 for the first year of service, including setup fee. Sandlot, eMeta and IBM’s WebSphere have setup fees that are three to 10 times greater – and that doesn’t include ongoing per-user fees. But comparing vendors on fees alone involves the apples/oranges analogy. Each vendor, including the smallest one, has attributes that may appeal to a newspaper’s needs.

Finally, we should mention an alternative route of building it yourself or contracting with a local tech firm to handle the task. The Albuquerque Journal and Rochester (Minn.) Post- Bulletin chose this route. In Albuquerque, the system was created via Perl scripts using the .htaccess model to control access and hiring Internet Billing Co. for credit card processing. The Post-Bulletin hired a local group to build its system and handles the credit card processing – fewer than 100 over four months – internally. This route is perfectly acceptable and certainly less expensive, but leaves a lot at risk for a newspaper whose core competency isn’t building secure, customer-friendly billing systems. It also eliminates the possibility of participating in an e-wallet program with other content providers.

Table XV: Subscription Software & Service Vendors

Chapter 6

Conclusions and Recommendations

Seven key things publishers should do

1. Don’t charge for generic access to your website … just yet.

   While it’s good that a few newspapers are experimenting in this area, local newspapers that attempt to charge for access to their current sites will fail to build a significant business in the near-term. Moreover, they may be opting out of the future growth of the Internet. Our research shows 71% of newspaper site users surveyed agreeing that “there are so many free sources of news and information that it doesn’t make sense to pay.” And 46% of those who hadn’t paid agreed that “the news and information online isn’t worth paying for.”

   After nearly two years, the highest number of paid online subscriptions equates to 2.6% of the print subscriber base for 10 local newspapers that are already charging. In other words, a 50,000-circulation newspaper might expect 1,300 online-only subs. Even if that number quadruples, the resulting revenue stream would represent less than 1% of a newspaper's total revenue. [6]

   Finally, the argument that free content on newspaper sites cannibalizes the core product just doesn’t hold water. Our research shows that 76% of the site users are either already subscribers or are outside the market and can’t buy a paper anyway. There’s also strong data to suggest that the website actually sells newspapers.

   _{[6] Assuming annual revenue of $35 million for a 50,000-circ. newspaper and an online subscription at $60 per year.}
2. Register your users, and don’t be timid about it.

   Newspapers that attempt to register users to their current websites will lose a small share of them but gain far more in terms of advertising targetability and niche-product marketability. About 75% of the users said they would register for access to the site, a process that would allow newspapers to begin rebuilding a customer relationship with "readers" that have been anonymous until now. There’s no need to be shy about asking for details: 60% of the respondents said they would volunteer registration information without knowing the details of what they might be asked.

3. Maintain open sections of your site to market the core product.

   Newspapers that allow “free” access only to print subscribers may lose up to 25% of the print subscribers who come to the site. More importantly, they’ll lose 90% their non- subscriber audience. The evidence that newspaper websites reinforce the brand and sell single-copy papers is irrefutable: Our survey showed that 87% of site users turned to the Web for information in the days following the September 11 terrorist attack, and that 38% of them went out and bought a newspaper as a result. Let’s repeat that for emphasis: 38% of the non-subscribers saw something online that prompted them to buy a newspaper. One final reason to keep the site open is the value of this audience. Newspaper website users overall hold high value in terms of their age (they're younger) and spending habits (they use the Internet more to research products before they buy). It would be unwise to turn them away.

4. Find your community’s niches, and use the Internet to mine them.

   The Internet has handed local publishers the opportunity to expand their markets beyond their circulation boundaries. With the average newspaper site bringing in one-third of its audience from outside the newspaper's circulation area, niche content may strike a chord. Every market is known for something, even if it’s just a college sports team.

5. Survey your local Web users before moving forward.

   Each local market is different. Out-of-market usage can range from 33% to 75% of a newspaper's Web traffic, and Internet penetration varies widely between communities. Know the reasons why your users come to your site, and make realistic decisions based on these reasons– whether it is sports, politics, arts coverage or tourism.

6. Work with a vendor that provides scalability and portability.

   Relying on an in-house tech staff to build a site registration system works in the short- term but is not likely to hold long-term scalability. The decision boils down to this: If you have little faith that subscribers will sign up, building it yourself works…but then why are you doing it in the first place? If you have any resolve that online subscriptions and registrations represent a business model worth pursuing, you’d probably agree that the system (and your customers’ well-being) is best left in the hands of experts. The e-wallet portability concept just plain makes sense when you consider the strong proclivity of newspaper site users to make purchases as a result of online activity. Hold on to those customers!

7. Be patient. Online media are still in development.

   The economy is in a downtown, but online ad spending still represents one of the only growing ad revenue streams. Slightly more than half of U.S. households are online...which means that this game is barely half over. Broadband is still on track to reach 33% household penetration within four years, and when it does it will bring significant changes in media usage. Taken to its extremes, the new online environment that emerges this decade could resemble a cable TV-like model, consisting of ad-supported, partially-ad- supported and all-paid content tiers. Under such a model, one could envision a solid base of targetable readers, better complementary campaigns with print products, and stronger capabilities for data mining.