Will the NYTimes Paywall “Work?”

The New York Times says it plans to introduce a paywall next year. Tom Lee says it won’t work. Jerry Brito says it might:

If the NYT website’s readership is like anything else, there’s probably a power law at work. A small minority of readers make up a sizable percentage of pages read. Put another way, there’s probably a small minority of users that read a considerable amount more articles than the average user. They need to set the number of monthly free articles high enough so that the bottom (say) 98% of readers never even notice that there’s a paywall, but the top 2%, which are presumably devoted NYT fans would be affected.

Now, that’s easy to say, but figuring out the balance might be very tricky. Whatever it does, the NYT doesn’t want to affect the ad-revenue-generating traffic it’s getting. How does it do that? First, it seems to me, is that the NYT has to be realistic about how many people it can get to subscribe. It’s going to be a tiny, tiny number, but that’s money it’s leaving on the table right now. So the number of monthly free articles needs to be in the 100+ range, not the Financial Times‘ 10 a month. Second, it needs to set a reasonable subscription price. The top readers are probably devoted fans, but that doesn’t mean they’ll pay anything, and if they don’t the NYT will lose not only the subscription, but the ad revenue it now generates from those folks.

This analysis makes a lot of sense, but I think it underestimates the danger that the metering mechanism introduces frictions that discourages casual users from using the site. The plan is apparently to force users to sign up for a nytimes.com account before they can read articles. This is a fairly small hurdle, but it is a hurdle. Some fraction of users who encounter a registration form will be annoyed and push the “back” button.

Not only does the Times lose some ad revenue when users decline to register, but some of the lost readers are influential bloggers, Diggers, Tweeters, and so forth. Hence, the registration requirement may cost thousands of readers who will never even show up in the visitor logs. And this effect can snowball: fewer Diggs and tweets means fewer new readers, and the lost readers means even fewer Diggs and tweets.

These effects are really difficult to measure, and as a consequence they’re constantly being underestimated. And they’re especially likely to be underestimated by a large, conservative bureaucracy like the New York Times company. For example, the Times continues to shoot itself in the foot by refusing to offer full-text RSS feeds, making people like me less likely to read their blogs. Similarly EMI, publisher of OK Go’s new album, is shooting itself in the foot by disabling embedding of the latest OK Go videos, dramatically reducing the chance the the videos will go viral as OK Go’s previous videos have.

I think this is largely a consequence of the phenomenon I discussed back in November: the way middle managers act as “information funnels” between rank-and-file workers and senior management. The information funnel tends to overweight short-term, quantitative arguments. If middle manager Smith says he has a plan that will produce a million dollars in revenue this year, while middle manager Jones says the plan will stunt long-term growth and cost tens of millions of dollars over the next decade, senior management is more likely to go with Smith’s recommendation even if Jones is right. This is not only because senior management tends to be risk-averse, but also because Jones’s argument is likely to be much subtler (harder to summarize with bullet points in a PowerPoint presentation) and is therefore more likely to get mangled as it makes its way up the organizational hierarchy.

So it might be true that a New York Times Company run by Sergey Brin and Larry Page could design a paywall that could generate (a relatively small amount of) subscription revenues without undermining its existing advertising business. But the actual New York Times Company is likely to build its paywall in a greedy and inept manner that costs far more in long-term advertising revenue than it generates in subscription revenue.