Let’s come back to the business model question. My 15 January column featuring a simple model for digital newspapers triggered a number of emails and comments, many questioning my assumptions (my thanks to readers of the Monday Note who take the time to make insightful contributions to the discussion).

Let’s see if we can sort through the questions and come up with a few helpful answers.

1 Advertising revenue. Let me set the backdrop here. My model projects what I’ll call a mature market. First and foremost, time spent v ad spending for print, web and mobile, which currently looks look this …

Source: Internet Trends, Mary Meeker, KPCB Oct 2011

… will have morphed into a graph showing more balance between categories. In my projections, ad spending converges to time effectively spent on various medias. Also, we’ll see a sharp rise of the mobile segment, and a sub-segment made by tablets will carry its specific business model (apps, subscription, ads).
This will happen at the expense of the print media, a sector that, considering the time people now spend on it, is still vastly over-invested. Dailies are bound to suffer more than weeklies (or Sunday editions) because their primary function (delivering news) collides with mobile devices. Having said that, newspapers will survive (after further shrinkage) thanks to an unabated base of loyal readers ready to pay almost any price for their favorite daily. This is the rationale behind recent price hikes (see Cracking the Paywall). In Europe, I see all quality papers priced at 2€ within two to three years and I don’t believe such prices will accelerate reader depletion. Holding print prices up might be critical for survival.

On this topic, this is the email I received from Jim Moroney, publisher and CEO of the Dallas Morning News:

On May 1, 2009, The Dallas Morning News raised home delivery rates across the board by 40%. The price increase was even greater for the most geographically distant delivery. We doubled daily single copy price to $1.00 and Sunday single copy price to $3.00 in two steps each. Today we yield 93% of our retail rate, i.e., we are doing very little discounting. Lots of papers claiming to raise their home delivery rates and then turnaround and offer discount after discount. If the most valuable asset we have is the content we originate, as an industry, why do we keep deeply discounting it as if it were damaged goods? Our home delivery rate is $36.95 per month, making it the third highest priced metro in the U.S. after NYT and Boston Globe.

In March, we made all access to what we distribute digitally paid access.
Website, iPad and smartphone are $9.99 each per month. All digital access is $16.95 per month. So there is a lowly metro doing something akin to the NYT and FT.

Also, because of its unique advertising value proposition, I won’t sell short print media. In a nutshell, no one expects a Dior campaign to look as gorgeous on the screen of a computer or on the four-inches display of a smartphone as it does on quality print. For such high-priced ads, print is likely to remain vastly superior for a long time – and should therefore be part of any well-rounded business strategy.

Coming back to digital media, in my view, a mature market also means a clean one. Today, many news websites URLs have very little to do with editorial. In places, the number of URLs whose only purpose is to gather “eyeballs” represents as much as 30% to 40% of all page views. Look at what Le Monde does: when you look at a web page through Readability (an app that basically extracts relevant text), you see every verb appear in red and linking to… Le Monde’s grammar conjugation service:

That’s good for SEO shenanigans. Nothing is too petty to churn audience numbers (and Le Monde is no worse than its competitors)

To sum up, here is why I think prices on the internet are likely to go up in a near (2-3 years) future :

• A cleaner internet will yield a much better performance advertising-wise than it does today,
• I nventories will have to be limited (read: closed down). No market whatsoever can withstand the type of unlimited supply we see today on the web. In our current oversupply situation, we often see more than half of the pages sold for a CPM below one dollar or euro,
• As discussed before, we can expect a strong adjustment on ad spending vs. time spent, it will benefit digital media,
• The ad market suffers greatly from current economic conditions (debt, political tensions abroad, elections in several countries, uncertainties everywhere …) Those won’t last forever.

My mention of a $20 CPM sounded overly optimistic to many readers? It is by today’s standards. But once a number of adverse factors are attended to, I think the $20 assumption will hold (and, by the way, I’m referring to revenue per page, not per module).

2 Subscription revenue. Many are challenging my 10% transformation rate (one reader out of 10 is willing to pay $10 a month in my model.) Objection taken. Again, my projections go beyond today’s deflated market. It will take a while to get to 10% when a large site such as the New York Times is at 1% or 2%. And converting readers to pay something/somehow will require imagination beyond single pricing; I’m told large newspapers charging $15 or $25 a month are considering low-cost subscriptions plans as low as $5 per month to capture young readers and boost their conversion rate. From an editorial product perspective though, I’m a bit skeptical. What will such a downgraded offer look like: stricter paywall; low-cost apps?

3 Mobile apps. Although I explored this issue in previous Monday Notes (see The Capsule’s Price and Mobile First, and a Mag), I should have been more forthcoming about mobile apps. My belief is this: overtime, thanks their greater ability to carry subscriptions and high yield ads, apps, not web sites, will be the path to decent ARPUs.

I will acknowledge another misconception in my plans and leave it to Vin Crosbie, new media professor at the S.I. Newhouse School of Public Communications at Syracuse University, New York, who commented my piece in the Guardian.

Here’s the crux: Even if Federic’s model could work for a national daily, will it scale to work for the average newspaper? Maybe NYT, WSJ, or USAToday could eek out 2% profit margin using it, but what of the other 1,412 daily newspapers in the U.S., the average-sized of which is 18,000 daily circulation? Do the math. […] Look at the paltry signup rate NYT has achieved. Scaled to a 18,000 circulation daily, NYT’s results would mean less than 180 paying online subscribers.

Vin is basically right. One of the tragedies of the digital media model is this: unlike the newspaper model, it doesn’t scale down well. There are plenty of local web sites faring well, but none comes close to supporting a 200 staff newsroom costing $25 or $27 million to operate.

—frederic.filloux@mondaynote.com