Digital Quarters

This post appeared as a guest post on PaidContent on February 4, 2010.

It’s now abundantly clear that the ad model isn’t enough to support the New York Times’ online future—the company needs consumers to help pay the bills. Thus, its recent decision to go metered. But the plan to charge some subscribers is not the end solution, it’s more like one piece of the puzzle. The company needs to take a few other big steps to help ensure the financial viability of NYTimes.com.

To be fair, let’s start with the three things the NYT got right with its decision, before we look at three things it still needs to do. You can see the upsides of the metering decision more clearly when you actually crunch the numbers on how the new system will impact existing revenues and look more deeply at the costs of implementing other types of subscriber plans.

1) Preserving advertising revenue. As a public company, the last thing the Times Company can afford to do now is shrink its existing online revenues.

A freemium model with a cap of, say, 20 articles per month lets the NYT retain up to 50 percent of its ad impressions (based on Quantcast data)—but most importantly, the company is preserving the most valuable impressions. (Light users are actually more valuable per pageview since they don’t exceed frequency caps.) By always allowing access to premium pages like the home page and section index pages, the most lucrative placements on the site will be served to every reader.

And by maintaining open access to casual users, NYTimes.com can preserve its eight-figure reach, which is critical to winning deals from top advertisers and commanding a high price premium. (Had they gone members-only, even with equivalent subscription numbers to the Wall Street Journal’s 400,000, the NYT’s rank would plunge to #2,000 as a web publisher—hardly enough reach to matter.)

Bottom line: With this approach, the NYT will likely retain 80 percent to 90 percent of current ad revenues.

2) Segmenting customers. Every marketer knows the way to maximize customer revenues is price discrimination, charging different (and the maximum tolerable) rates for each customer. Currently, the New York Times (NYSE: NYT) scores a zero here: Content is free for every user.

The ideal program charges each person exactly what he or she’d be willing to pay. A metered system isn’t perfect, but it’s far better than the TimesSelect model, which according to my analysis cost the NYTimes.com half of its online revenues while alienating readers who weren’t going to pay much, if anything, anyway.

In this way, the metering plan helps create a smart foundation: A configurable platform supporting dynamic offers that will tap those willing to pay more to get more.

3) Fine-tuning the advertising-revenue/subscription-revenue mix. A paywall that cuts off the existing online revenue stream—even just temporarily in order to build subscriptions—would mean nearly tripling the holding company’s $40 million annual operating loss (see Excel modelhere). Even if the NYT were outstanding at converting users, this public company can’t stomach the interim revenue hit. If the NYT converted 3 percent of its monthly audience (similar to WSJ ratio) over three years it would suffer a quarter-of-a-billion dollar cumulative loss—and still not be in the black.

By implementing a metering system that is flexible and tuneable, rather than a straight paywall, the NYT will be able to turn the dials as needed.  Quick test-and-iterate cycles will let them optimize the meter settings without jarring the advertising dollars they depend on. In a strict paywall, it would have to make the switch with its eyes closed and fingers crossed.

But these three accomplishments just aren’t enough. What the Times really needs to do is adopt a whole new architecture for its digital business. In particular, the goals should be to develop compelling new kinds of content, new experiences and new offers. These are the sorts of moves that will generate huge interest and huge premiums, and they result from discontinuous, not incremental, thinking.

How will we know when NYT has summoned the courage? We will be looking for these signs:

1) Acquisitions. What new products, business models, and accelerators can the Times add to its portfolio to create discontinuous innovation? Nothing says “strategic change” like M&A, and the NYT signaled its digital directive in 2005 by buying About.com for $410 million, shocking everyone at how deadly serious it was about building digital capability. Now it’s time to acquire sites like Associated Content or Mahalo to build a new, scalable sourcing model for additional non-premium content to supplement its top-tier journalism; or blog networks like Gawker to enter new vertical categories and gain experience with new labor models.

2) Product and content offering. The NYT is a premium media property. What new premium content and products can it offer to coax new consumer spending? While the NYT has explored many new ways to read and interact with the paper’s content, the desperate straits call for more dramatic action: reinventing the whole publishing model—lest otherpublishers and device manufacturers get there first. Each new and innovative experience is a chance to lead the revolution as well as a premium revenue opportunity.

3) Talent. The innovation needed at the Times is unlikely to come from inside its headquarters. What outside talent can it bring in to orchestrate major progress, beyond putting aninsider in charge of the new metered model?  Erik Jorgensen and Scott Moore helped MSN break out of its rut with a whole new home page that weaves social media into the content experience. Jimmy Pitaro at Yahoo (NSDQ: YHOO) is demonstrating that he can create bold new programmingfor users. And Bill Wilson at AOL (NYSE: AOL) has created over six-dozen content destinations—and a marketplace for content—in his MediaGlow unit. These are the types of break-the-status-quo thinkers that could help Martin Nisenholtz bring the Times to find a new way.

And one final thing. Speed.

The NYT’s approach to the radical change in its business is anything but radical. It’s careful, considered, and incremental, and it’s missing an essential ingredient: speed. Breakthrough change doesn’t happen slowly.

In this era of “launch and learn,” it is a big mistake to wait until January 2011 to launch the new approach, as the company has said it will. Sure, technology needs to be built to handle subscription database ties, but that development can and should be done fast. The goal should be to deploy the system in 90 days and then tune the dials on the fly, developing and testing multiple products and offers to increase user spend. Every month they wait, another 12,000 subscribers may flee the core print business (based on its recent six-month circulation decline).

In the end, the challenge for the New York Times is not about consumer-payment mechanisms. The real challenge is to build something so great that consumers fall in love—and their credit card will be the surest sign of their devotion.