The New York Times vs. Google

In Tuesday’s post about the New York Times and its paywall, I made the passing comment that Sergey Brin and Larry Page might be able to design a paywall that wouldn’t hurt the paper’s bottom line. But after thinking about it some more, I think this is actually wrong. One of the most distinctive things about Google’s business strategy is its absolutely relentless focus on improving customer satisfaction to the exclusion of all else—including short-term revenue generation. Not only does Google regularly release products with no apparent prospects of monetization, the company will actually change its products in ways that reduce revenue but improve the user experience. For example: Google’s decision to enable POP and IMAP access for GMail, which means less time spent on the GMail website looking at ads (at least in the short run). Or the decision to penalize advertisers whose websites load slowly.

This is not altruism on Google’s part. While I’m obviously not privy to the thinking of senior management, there are some solid business reasons for behaving this way. First, the economics of information goods means that they can afford to give their products away for free. Once Google has created a new software product, the marginal cost of providing it to one more user is very low. This means that unlike a typical business, Google doesn’t care about costs per customer. More customers are almost always a benefit, even if many of those customers are contributing very little to the bottom line.

Second, I think Google understands that its brand is its most valuable asset. Behaving in a promiscuously pro-consumer fashion has given the company a sterling reputation with consumers. Indeed, Google’s branding is so strong that just adding Google branding to competitors’ search results causes customers to rate those results more highly. Every time Google improves one of its services, it strengthens the “halo effect” around the Google brand and thereby gives a boost to every other product in the Google stable.

Finally, and most importantly, the web is a young medium and it’s hard to predict exactly where opportunities for monetization will pop up. By worrying about maximizing “eyeballs” now, Google puts itself in the best possible position to exploit unexpected opportunities that do arise. For example, it’s not clear what the dominant business model for online video will be, but it’s likely that YouTube’s huge user base will be an asset once someone figures it out.

How does this apply to the New York Times? One thing to keep in mind is that a site’s heaviest users are the most valuable. They not only see the most ads, but they’re also the most likely to help the site in other ways: promoting its content, participating in its communities, trying out experimental new features, and so forth. If the Times demands that these users pay for access, some of them will leave. But more importantly, forcing users to pay will subtly alter users’ attitude toward the site. People will do things to help out a site they feel warm and fuzzy about that they won’t do for a site with which they feel they merely have a business relationship. Much of Yelp’s success, for example, comes from its habit of assiduously rewarding its most prolific reviewers. The Times should be looking to build that kind of relationship with its readers, not trying to wring subscription fees out of them.

Moreover, the business imperatives of the paywall will necessarily discourage certain types of experimentation because the people running the paywall will fight to kill products they view as holes in the dike. Reduced experimentation will mean missed opportunities. Obviously, I can’t predict exactly which opportunities will be misssed, but that’s the point. Neither can the Times executives, which is why it’s risky to close off any doors.

One obvious retort is that Google’s massive profits give it the luxury of making long-term bets without immediate prospects of monetization. The Times, in contrast, is struggling to make ends meet so they need revenue now. This is a fair point, but I think it’s worth looking at things the other way around: Google’s huge profits are due, at least in part, to its pursuit of a promiscuously pro-consumer business strategy over the last decade. We’ll never know how much damage the last paywall experiment did to the Times‘s reputation and traffic, but I bet it was significant. Likewise, we don’t know what kinds of successes the Times might have had if it had experimented more aggressively with new products a la Google a decade ago when it was still flush with cash. Conceivably, the Times could have captured the classified market before Craig Newmark (another guy with a relentless focus on customer satisfaction) did.

Of course, the Times didn’t do this because it didn’t have Google’s corporate culture. And it still doesn’t, so it will probably go for the short-term revenue offered by the paywall.

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9 Responses to The New York Times vs. Google

  1. Craigslist is relentlessly focused on consumer satisfaction? I don’t think so:

  2. Kevin, what about that article suggests to you that Craig isn’t focused on customer satisfaction? The article suggests he’s not the world’s most effective manager, but I don’t think there’s any doubt he’s focused on serving his users’ needs.

  3. Jed Harris says:

    Your analysis seems spot on and important. Sadly companies like the Times likely cannot take your advice for the reasons discussed in Christiansen’s The Innovators’ Dilemma. They have to sustain their original revenue stream while they experiment with giving away their products. I’m not sure there is any good recipe for that. Also their cost structure has hardened around the old costs of production and distribution, so there are large entrenched internal constituencies that would be massively disadvantaged by the new strategy.

    So I’m sorry to say that in the vast majority of cases the old media companies won’t make the strategic transition quickly enough to sustain most of their value. We’ll lose valuable capabilities — largely ones we can’t even describe — and suffer a lot of painful turmoil and value-destroying rear-guard actions.

    Note that this analysis does not apply to companies like Apple because they can’t replicate their goods for nearly free. I have not yet seen an interesting analysis of the strategic role of Apple’s new “controlled ecosystem” of apps etc. While I’m sure Jobs’ personal preferences are a factor, it is also a strategy that stands up to their internal analysis and that has worked for them — I don’t think the success of the iPod and iPhone was in spite of their being controlled ecosystems, and I think we’ll see the same success for the iPad.

    As one more datapoint, note that the iPod migrated to non-DRM music as soon as Apple could get the IP owners to agree. So I don’t think Apple has an overwhelming bias toward excessive control, closedness, etc. In this case they had to offer the DRM to get the IP owners to sign on initially.

    One similar constraint for the iPhone and iPad may be the need to offer cellular networks control over the kind of use permitted. Note that for cellular networks, providing service to more customers is also not almost free. If anyone who bought an iPhone or cell-enabled iPad could install VOIP software that used the cell data connection, and the provider continued to offer “all you can eat” data plans, the cell provisioning might become uneconomic (at least for the time being). Even if a device vendor such as Apple wants to mediate a transition to open (as with music DRM), they have to make an initial offer that gets the network operators walking down that road, and their best option for this may be a closed ecosystem.

    Getting back to the print media, potentially Apple is initiating a similar process there, where they ease the print business toward open content business models. Of course this is speculation but not groundless.

  4. Wilson says:

    Y’know who’s paywall seems to be working? ESPN.COM. They’ve not only had the paywall for a while but they’ve INCREASED the amount of content covered under it in the last few years (in my opinion, I haven’t counted, but I used to be able to read Keith Law and Buster Olney and now I can’t). Maybe it has to do somehow with the synergy with ESPN the magazine, but I don’t think so. It is even more surprising given that unlike financial information, people have no incentive not to spread the information far and wide. Lastly, not everything on the site is behind the paywall. The most popular stuff, like Bill Simmons, are on the outside.

    So it seems to me, that perhaps certain types of content beyond financial information can successfully exist beyond a paywall and some of the Times’ content might fight in this category.

  5. Wilson, that’s interesting. I don’t follow sports so I have no idea what might explain the difference, but I’d be interested in any theories other readers have.

  6. If it’s true that craigslist has put up technical roadblocks to block third-party apps, that doesn’t seem to be focused on users. The fact that it’s such a mess, so difficult to search and track, and so easy to scam, doesn’t seem to be focused on users. Maybe that’s what we get for free — I get that — but I don’t see craigslist as a model of a company that’s providing oustanding service.

  7. Fair enough. I think there’s a difference between intention and execution. I think Newmark and Buckmaster are sincere in their belief that they’re making their decisions in the best interests of users, even if the results leave something to be desired.

  8. Roger says:

    Tim – great blog.

    A case against Google’s willingness to support non-profitable products was their axeing of Google Notebook last April.

    At least for Firefox users who had the add-on this was vastly superior to other online note making apps like Zoho and Evernote and a lot of us had created hundreds or thousands of items on it over a period of several years.

    However although it was pretty much fully developed and can’t have been hugely expensive to maintain google dumped it because they could find no short-term way of monetising it.

  9. Akusu says:

    I just want to point out the unerring annoyance I feel when a blogger that I read constantly links me to an article that’s behind a paywall.

    It makes them look like a shill, and I become forced to rely on their opinion without being able to read the context. The fact that I’m being asked to pay for the information when I’m not a regular reader of that “publication” just plain puts me off it, and usually puts me off the blog for at least a few days.

    I wish this would mean that less people would be willing to even look at those sites, because they can’t link it reliably, but I’m really not sure because of it.

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