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”.

Rocky Mountain News Folding

After tomorrow Denver will have only one newspaper. The Rocky Mountain News said that it will cease publication after tomorrow. They are not talking just about stopping the print edition, they will cease news reporting, print or online.

The story reported in Rocky Mountain News website says why they decided not to go to online only version:

Mark Contreras, vice president of newspapers for Scripps, said the math simply didn’t work.

“If you cut both newsrooms in half, fired half the people in each newsroom, you’d be down to where other market newsrooms are today. And they’re struggling,” he said.

As for online revenues, he said if they were to grow 40 percent a year for the next five years, they still would be equal to the cost of one newsroom today.

It  shows again the   high fixed cost of newspaper operation. The fact that online version has a marginal cost of $0.00 is immaterial, they still need the news room to report news.

Can they go to a fee version? Not at this juncture. Once you give away  a service for free, customers are not going to value it enough to pay for it at a later stage. According to their cost estimates the total revenue (subscription plus Ad ) has to be at least $100 to break even. A tall order.

So can free work for all the other Web2.0 services?