Why is (Free) Content Still King

I was so excited this week. I planned my blog post out in advance, took notes, found links – I was ready to go. Then I read an article that derailed my plan, because it covers a subject I have a strong opinion about – paywalls. More specifically, paywalls for newspaper publishers.

The article, from Columbia Journalism Review, focuses on the online paywall models of the largest newspaper publishers in the US. The conclusion is that, despite being in the ‘paywall age,’ most of these publishers still prioritize ad traffic and ad revenue over subscription revenue.

I’m not sure if the general public understands how most website display advertising works, but it sucks. It’s a broken system with ineffective technology and hundreds of vendors. These vendors prey on the ignorance of legacy publishers, acting as a middle-man where one isn’t needed, taking pennies out of dollars that already offer minimal returns for publishers and advertisers.

The result?

Online advertising makes Lincoln sad.

Publishers are lucky to get anything close to five dollars per one thousand ad impressions (CPM), and advertisers are lucky if they get a click-through rate (CTR) of more that 0.25%. These figures are both generous. I’m only using them to make my example more simple.

If you play this scenario out for a single story, a publisher needs to display 1,000 ad units to get $5. There are a few ways to get there, but let’s say you put four display ad units on each story. To get your $5, you need 250 views.

That doesn’t sound too bad, but it’s more difficult than it sounds. For the 25 publishers in the aforementioned article 250 views isn’t much. Each has an audience of tens-of-millions. However, I’ve been the director for sites with over six million page views, and as little as 100,000, and most stories do not get 250 views. And it doesn’t matter if you have 100,000 views of 25,000,000, the economics are the same.

When you consider just the cost of creating a story, this is not a sustainable model. A journalist making $12-an-hour, taking an average of three hours to create the story needs at least  1,800 views to break even in my example. That comes out to $0.02 per view.

Lincoln is still not happy.

And don’t forget, you still have technology costs to consider. Despite popular opinion, it’s not free to publish on the internet.

And the advertiser? Those four ads would each average one click for the 1,800 views. One.

I could go into more granular detail and really nerd-out on this, but the point is, for a publisher to create a sustainable business using display advertising is a fool’s errand. And based on trends, this isn’t likely to change in the near future.

What’s the alternative? Easy, online subscriptions.

Well, it’s not really easy.

I’ve been a proponent of online subscription models for news, otherwise known as a paywall, for years. In 2006, when I worked for The Daily Record in Wooster, OH, long before it was cool, we had a paywall.

Do cool kids still use these?

The downside to using a subscription model is that it’s hard work. It takes time and technology to set it up and keep it running efficiently. If you want to be successful you have to work at it. It’s not a set-it-and-forget-it tactic. It’s a long-term strategy. While subscription revenue has a higher learning curve, it also has a much higher return and provides a recurring revenue stream that advertising can’t.

For example, in my experience, a general website user might view two stories a month – that’s four cents a month based on my example above. By comparison, I’ve found that the average subscriber views around 100 stories a month. If you use the five bucks I’ve used previously as your benchmark, that’s a 12,400% increase.

One final example. I saw a statistic recently that claimed only 1-2% of online readers are willing to pay for news content online. Let’s assume this is true – however, I would argue even if it’s true today, that volume will only increase in the future.

For a small news website with a unique monthly visitor count of 50,000, a 1% subscription conversion rate is 500 subscribers. At $5 per month, the annual revenue is $30,000.

While this is not a sustainable business model on it’s own, compare it to what it would take to get that same $30,000 in display advertising using my original example. The publisher needs 500,000 ad impressions per month. With four ads per page and two views per visitor, the publisher still has a 25,000 impressions shortfall per month.

Personally, I can see a much clearer path to profitability using a subscription model. And there is no rule that says you can’t have both, in fact most publishers do. However, if you do combine ads and subscriptions, focus on a user-friendly ad experience. Otherwise you’ll piss off your subscribers and you’ll have a retention problem that impacts your existing business challenges.

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