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Summary:

The Financial Times and New York Times are at or close to the point where subscription revenue exceeds advertising revenue. This means their paywalls are working, but it also means advertisers are fleeing — and the implications of that for journalism could be significant.

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Both the Financial Times and the New York Times have either already crossed or are close to crossing an important threshold: namely, the point at which revenue from reader subscriptions exceeds the revenue they get from advertising. For an industry that has been as dependent on ad revenue as the newspaper business, that is a significant milestone — but it also raises a host of questions about the impact that shift could have on both the business of newspapers and the journalism they produce.

As my paidContent colleague Robert Andrews reported recently, the Financial Times has seen digital subscriptions soar in the past several years — the number of paying subscribers has tripled since 2009, and recently crossed the 300,000 mark after growing by 31 percent last year. That means the number of digital subscribers is greater than the number who subscribe to the print product (a shift FT managing director Rob Grimshaw forecast at paidContent 2012 in May). And while parent Pearson PLC doesn’t break out ad revenue numbers, Grimshaw has said subscription revenue will surpass ad revenue sometime this year.

The New York Times Co. crossed that point in its most recent financial quarter: subscription revenue for the NYT and the other newspapers owned by the company — the Boston Globe and the International Herald-Tribunetotaled $233 million, compared with advertising revenue of $220 million. The metered paywall plan that the New York Times introduced last year likely provided the bulk of that growth, since it now has over 500,000 registered subscribers, although the NYT has also seen a boost in print subscriptions because digital plans are bundled with print, and it has increased the pricing of its print product as well.

Subscribers dominate because advertisers are fleeing

Crossing that threshold is a triumph of sorts, since it means that getting subscribers to pay — something that was fairly controversial when the New York Times started doing it — can actually pay off to a certain extent. The question of whether paywalls would work and/or were a smart decision for newspapers to make has probably been one of the most contentious debates in the industry over the past couple of years, and something I have written about more than a few times, both from a professional and a personal point of view. The NYT’s success has also (rightly or wrongly) triggered a wave of copycat paywalls at dozens of newspapers throughout the U.S.

But as online-journalism veteran Steve Yelvington pointed out on Twitter recently, there are two ways of getting to the kind of crossover point that the New York Times and the Financial Times have reached: one is to increase your subscription revenue, and the other is to decrease your advertising revenue, and both newspapers have certainly done their share of the latter as well as the former. In the NYT’s case in particular, print advertising revenue has been dropping significantly in every quarter — and not only has digital advertising revenue not made up the shortfall, but it has actually been falling as well.

So what happens when your subscribers or readers are funding more of your business than advertisers are? Some argue that this shift is a virtuous one — in the sense that it forces newspapers or publishers to think more about what their actual audience wants, rather than what will please their advertisers. According to this argument, the Faustian bargain that the newspaper industry formed with the ad industry has done at least as much harm as it has good, since it has funded important elements such as investigative journalism, but also driven newspapers to produce all kinds of content designed primarily to get ads or clicks.

Dalton Caldwell, the entrepreneur who is trying to build a subscriber-funded alternative to Twitter, described the effect that catering to advertisers has had on social networks like Twitter and Facebook in a recent post about his project, but he might as well have been talking about the news business:

“All of these services are essentially in the same business: vying for the opportunity to sell you/your clickstream to advertisers. Why isn’t there an opportunity to pay money to get an ad-free feed from a company where the product is something you pay for, not, well, you.”

Being reader-funded could mean being a lot smaller

Caldwell’s concerns about the impact of advertising on such services highlight the fact that networks like Twitter and Facebook are gobbling up more of the digital advertising market (which brings its own potential for conflict, as Twitter has found out with the Olympics) and the result is that newspapers and other traditional publishers are left with less. And while prominent brands like the New York Times or those with targeted markets like the FT might be able to make the shift to subscriptions, many smaller newspapers simply won’t be able to make that transition, because they won’t have enough subscribers. So what happens to them?

As Clay Shirky pointed out in an essay about the Times of London paywall, catering more to readers rather than advertisers also carries its own risks. For one thing, there is a very real risk — not just for the NYT or Financial Times, but even more so for smaller newspapers — that relying on subscription revenue will result in a much smaller number of readers and also a much smaller business overall. What will that mean for the journalism that such newspapers produce? What happens to the public impact and social benefits that newspapers have always argued they bring to the table? Do newspapers just become a new variation on the controlled-circulation newsletter?

Outlets like the NYT and the Wall Street Journal will likely continue to offer a kind of “freemium” product for the foreseeable future, with free web content that is used as a loss leader to entice readers to subscribe. And no doubt they will always pull some important stories outside their paywall when they feel the societal value of those stories makes it worthwhile. But as more and more of their revenue comes from reader subscriptions, it seems obvious that more and more of their content will wind up being delivered only to those paying readers.

Is that a positive thing for journalism, or for society in general? I honestly don’t know, although I suspect it is not. But if print advertising continues its decline — and in its latest results, the Washington Post (which has said it will likely never have a paywall) said print revenue fell by more than 13 percent over the previous year — we are going to start seeing the effects of this transition ripple through the industry, and the impact on how mainstream news is produced and how it is consumed (and by whom) could potentially be far-reaching.

Post and thumbnail images courtesy of Flickr user Giuseppe Bognanni

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  1. Last I heard the wealthiest 10% of the US population control more than 80% of the wealth. Any sort of subscription model is fighting for a piece of that other 20%, competing with food, shelter, etc. Conversely, an advertising model can tap into investment dollars being spent to create demand for new products. I expect we will soon have reserve subscriptions where producers pay consumers to consume content and use products.

    1. Mathew Ingram tim Friday, August 3, 2012

      That’s an interesting idea, Tim.

  2. FT and other financial news services have nothing to worry about since a subscription is effectively an investment for their (wealthy) readers. With general newspapers like the NYT things are a lot murkier. Likely their reader base will shrink dramatically — on the other hand, so what?

    People who refuse to pay for a digital NYT subscription demonstrate that they see no value in it, compared to what they can get for free. So it stands to reason that the NYT either did not in fact provide any news whose loss society should mourn, or that equivalent news are now available elsewhere, or that the lost readers merely consumed them as interchangeable entertainment anyway.

  3. Carl V. Natale Friday, August 3, 2012

    Here’s the rub. Newspapers aren’t exactly known for their customer service. This can spell doom for papers with less sophisticated circulation departments.

  4. With advertising’s share of economic activity set to continue to see strong declines (as the value that advertising can deliver to businesses is a function of how expensive information is to create, distribute, and filter), the number of industries that can afford to have advertising as their main source of revenue will continue to fall as well. This is not just a problem for print journalism. When it comes to journalism, however, if readers (watchers, listeners, etc.) are unwilling to make up the shortfall brought about by such a decline, the value of journalism to most people must be lower than what it was previously imagined to be.

  5. postprintsachav Sunday, August 5, 2012

    There’s nothing wrong with advert free media spaces. The quality of the journalism produced within that kind of space could certainly benefit.
    In Australia, our print newspaper industry is struggling (like most other countries), but perhaps because we are a smaller country/industry the discomfort of the digital news shift seems more apparent, bewildering even.Especially in the last two months.
    The introduction of online paywalls on our general news mastheads is a necessary step our industry needs to take, unless newspapers take-up government subsidies, a concept that is believe it or not being discussed and considered.
    So for the Australian situation, reader-funded newspapers or news looks a lot more positive for journalism and our society than government funding.
    Thank you for your article!

  6. san diego fiber installer Sunday, August 5, 2012

    What happens when cable tv becomes a la carte and people only buy espn for example? They no longer have news channels, and that may help prop up some of the newspaper sites ad revenue youd think. Also, as ad revenue declines, news sites/papers will go under and the equilibrium point will be reached where there is some type of profitability. Once tablets are more commo.place who knows maybe news consumption will increase…

  7. Yes, being reader supported might mean to become smaller. But couldn’t we find a way that such reader payments lead to reliable, trustable news/information services that are bigger than what we have today?

    Newspapers specifically think more about how to repair their crumbling model, but the don’t think enough about what could be of value to readers.

    My take: Focus on data services, where the individual reader gets clear, personal answers – helping him to “see” the effects of a decision clearer. Prime example of how such data-driven services could look like is the “Rent or buy” calculator, created by the New York Times.

  8. A very worthwhile article. The NYTimes should join with PBS, and then be funded like the BBC. We must stop corporate control of the news and messaging.

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