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March 08, 2010

Another Brick in the Pay Wall: Views on Publishing's Future

Catherine New
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Build an iPhone app or create a pay wall? Three professors share their thoughts on how the print industry might shape its business model for a digital future.

What Can Online Newspapers Learn from the Airline Industry?
Brett Gordon, Assistant Professor, Marketing

When fuel costs spiked in 2008, none of the large air carriers wanted to be the first to charge for checked baggage. Few had noticed when low-cost carrier Spirit Airlines began charging for the first bag in June 2007. Nearly a year later in May 2008, American Airlines — one of the “majors” — announced that it would charge for the first bag. Before the end of summer, five of the seven largest North American carriers followed suit.

In some ways, the online news industry is facing a similar problem, albeit one without as simple a solution. After months of speculation, the New York Times recently announced that it would implement a new payment system starting in January 2011. Despite a few early chargers (e.g., Wall Street Journal) the vast majority of online news is provided freely to the public. Most newspapers would like to charge, at least partially, for content, but no one wants to be the odd paper out and make the first move. In the academic parlance of game theory this is called a coordination problem, and it occurs repeatedly in countless industries. So how do firms solve this issue?

Members of the airline industry are highly sophisticated at interpreting other airlines strategies. Smaller airlines tend to look to the majors before instituting pricing changes. The large airlines recognize their role and plan accordingly. Online newspapers need to develop a similar ability if the industry is to successfully move to a dual paid/ad-supported revenue model, however, their task is harder in part because the industry is more fragmented.

What Will the Publishing Industry Do Next?
Rita McGrath, Associate Professor, Management

A new development is that the Web itself is starting to splinter. In the early days, you had one way of accessing online content — that was through a computer — and developers could optimize for a certain kind of user experience. Today, people access content in myriad ways that are not always compatible with each other or optimized. A developer or a publisher has to decide whether to hit every platform or optimize for Blackberry, iPad or some other platform. They have to ask, “What is going to be our platform of choice?”

The content business model will be less driven by the need to aggregate the most eyeballs on a common platform, and move towards a model determined by the ecosystem that can draw the most participants. For example, Apple is trying to create a vertically integrated ecosystem with its products and partners. Rival ecosystems will start to compete for business with publishers, and media companies and content providers will watch to see where people are participating.

Publishers will have to come up with ways to monetize their participation in an ecosystem. There is hope that content providers can cut themselves more lucrative deals on these coming platforms.

What Is the Right Price?
Ava Seave, Adjunct Associate Professor, Finance and Economics

It is not unreasonable for companies to charge for information on the Internet. Many try-before-you-buy and sampling schemes are being tested across all types of media. Practically speaking, before companies make decisions about pricing, they should test the proposed pricing models as much as possible before rolling it out.

When the New York Times raised its newsstand and subscription prices in May 2009, they got a good idea of the inelasticity of their consumers’ demand. The move likely emboldened the paper to announce its current scheme. With time before the debut of its pay wall in 2011, the news organization can solicit customer feedback — and handle the blowback.

Every product is different in terms of where the company should put the price. The Times can measure the frequency with which people come back to the site, so it can set the pay wall at the optimal place for maximizing revenue. It is likely that the Times will adjust its online price as needed as its experience with it evolves.