It does not matter to customers what your costs are

The arguments on paying for online newspapers focus on the cost of running the news operation including the news desks reporters, editors, web site etc. Proponents of pay to read say readers must start paying because of these costs. On the other hand those who argue that information must be free focus also on the costs, the marginal cost, and a make the case that it costs you nothing to serve one more reader and hence it must be free.

The cost arguments are irrelevant. One can charge for a product only because of the value it delivers to the customers and not because it costs the marketer to produce. Similarly, free argument based on marginal cost does not hold either. If the readers can get the same content elsewhere for free, the content becomes commodity and its price will spiral down to $0.00. It does not matter that there are fixed costs to producing and distributing commodity content. Content can only be charged if it has differentiated value.

There is an Ad in today’s WSJ on their news sports coverage. It says

“When we report on sports, we focus less on what you’ve already seen happen and more on what will happen next”

That is differentiation.

Is the end of free online newspaper nigh?

I love reading NYTimes online version and  love the fact it is free. Every time I read it I feel like I should  click on the Google Ads on its news pages. Rationally it makes no sense for me to do that, and I don’t click, because it is not enough that I click on the Ads if not many are going to. If NYTimes wants to give their content to me for free, I am only happy to consume like any other reader.

Unlike Financial Times and Wall Street Journal many online newspapers like The New York Times are free. They exclusively rely on page views to  drive Ad revenues. As the Ad revenue shrinks, the free model is proving to be  a bad one.

This week’s big news was the end of Rocky Mountain News, print and online version. Closely on the heels, Newsday a Long Island daily owned by Cablevision announced that they will move to pay to read model. Cablevision’s COO says he wants to:

end distribution of free Web content and make our news-gathering capabilities a service for our customers.

He is absolutely correct, the line of thinking that news has value and hence customers should be charged for this regardless of the distribution medium is slowly taking hold. If the online version of a newspaper has been free all along, can it successfully convert the readers into paying subscribers? If the newspaper can gain more incremental revenue from subscription than it receives from Ad revenue today, it is the right decision. But how can it convince readers to pay for something they always received for free?

ZDNet’s Tom Steinert-Threlkeld wrote a blog post on whether on not Newsday’s pay model is an Optimum one.  He says,

It’s not like I don’t value it. I just don’t have to pay for it, on screen.

Of course the question is not whether we value are not, we all value the service we get from Newsday or NYTimes despite the $0.00 price. It is also not the question of communicating this value. Like Tom, most readers will not accept the transition from fee to free model because of their reference price frozen at $0.00.  So if the NYTimes or Newsday  want to charge for what used to be free they need to focus first on impriving this reference price.

To answer the question, will Newsday succeed? Without any move to improve customer reference price, they are not going to find it easy to convert customers from free to fee. Take the case from airline industry. US Airways started charging for coffee and soft drinks in their flights but after seven months they decided to rollback their unbundled pricing. My recent consumer behavior experiment shows that such a move would have been successful if they had considered improving customer’s reference price.

Reference price rule applies to valuing any service and especially with valuing free.  WSJ and FT.com has it easy because they never made their online version free. For everyone else who want to move to fee model, “it is the reference price, stupid”.