Users of Netflix’s (s nflx) digital movie-rental service have been up in arms about a sudden change to the company’s pricing plans, which appears to be aimed at reducing demand for its DVD-by-mail service by jacking up prices. In other words, Netflix is trying to manage the transition of users away from the physical product and toward digital streaming. Are there any lessons newspapers and other media companies can learn as they try to move away from the physical print product and toward a digital-only future? Yes and no — publishers shouldn’t get their hopes up too much about copying the Netflix model, because the two businesses are very different.
Media analyst Ken Doctor, author of a book on the news industry called Newsonomics (and a blog by the same name), took a look at the comparisons between the two in a post for the Nieman Journalism Lab. He notes that the obvious impetus for Netflix to change its pricing plans — which effectively penalize people who want both the physical DVD-rental part of the service and the streaming digital part — is to simultaneously generate more revenue that can be applied to the physical parts of its business, and at the same time reduce demand for that product.
The similarities to the traditional news publishing business are pretty obvious. Newspapers and magazines and other print-based entities are also trying to do two things at once: to manage a business that involves a shrink-wrapped physical product that gets shipped to people’s homes — and therefore involves trucks and plants and other expensive things — while trying to simultaneously shift that business into a digital-only product that is far cheaper to produce. Doctor describes Netflix’s rationale for its pricing change:
In the new strategy, we can see how Netflix can both push the digital transition faster and manage the DVD decline better. We can assume that the digital customer is worth more in profit to Netflix than the DVD customer. Then, Netflix wants to take out as much of that cost infrastructure (Post Office, warehouses, associated customer service) as possible, as fast as possible. Differential pricing is one way to do that.
So why don’t newspapers just hike their prices the way Netflix is? Well, the short answer, as Doctor notes, is that they are; many newspapers have boosted their cover and subscription prices by substantial amounts over the past few years. I was in a meeting at one major metropolitan newspaper in which the editor-in-chief bragged about how much the paper had been able to jack up its prices for print subscribers without much backlash. The plan was to just continue to do this until people started cancelling their subscriptions en masse.
In many ways, newspapers are a lot like Microsoft (s msft). The software giant is wedded to a shrink-wrapped product that involves huge amounts of revenue for the per-seat licenses it sells for Microsoft Office, and that makes it hard for the company to make a transition to a “cloud-based” model that sees the same services delivered online. Newspapers also get vast amounts of their revenue (as much as 80 percent in some cases) from their print product. How do they give that up as they move to digital only?
But the biggest issue for newspapers and other publishers is something Doctor mentions towards the end of his analysis: namely, that media companies rely on advertising for their bread-and-butter revenue, not subscriptions (which pay for, at best, a small fraction of the cost of a newspaper). The problem with that model is that online advertising produces a tiny fraction of the amount of revenue per reader that print does — up to 10 times less, in some cases. While some newspapers such as John Paton’s Journal-Register have committed to trying to make this transition from “print dimes to digital pennies” work, there’s no proven method for doing so.
So while Doctor says the future of print is “price increase after price increase,” as publishers try to force readers to make the transition to digital-only, the biggest stumbling block isn’t the behavior of users the way it is with Netflix; it’s the behavior of advertisers. Until they decide to start paying dramatically more for online ads than they have in the past — something that isn’t likely to happen — traditional publishers can only look at Netflix’s model with envy.