An Economist’s Take on Digital Paywalls

From premium newspapers like the Wall Street Journal and the New York Times to made-up news weeklies like Weekly World News to the satirical magazine The Onion, nearly all news websites have adopted, or at least tested, a paywall for online readers. Yet, prominent economists have discovered gaping holes in a business strategy that has almost become industry standard for turning online content into profit and recouping hemorrhaging ad revenues.

Economists Susan Athley – a Jon Bates Clark medal winner – Emilio Calvano, and Joshua Gans released a new study on online news paywalls last week. Their analysis pointed to a high cost to erecting a pay wall for online news magazines. They state that “[i]ntroducing a paywall does not just diminish readership, but it furthermore reduce (sic) advertising prices (and leads to increases in advertising prices on competing outlets).”  If one newspaper institutes a paywall while the other does not, the other newspaper will have higher readership. Therefore, the competitor will be able to receive higher advertising prices, because they will be able to attract more advertiser links. And if those alternatives outlets have more revenues, they can produce higher quality content, further digging a paywalled competitor’s revenues.

The theoretical paper arrived a month too late for the U.K. newspaper The Sun. In August after erecting a paywall, the first month The Sun put up its pay wall readership collapsed 62 percent and the average time spent online plunged 64 percent. The total loss in consumer attention was an enormous 128 million minutes, nearly 86% of the level before the paywall. Adding insult to injury, and as predicted by Athley et al., readership soared at The Mirror and other online, free, U.K. newspapers with similar online content.

The experience of The Sun opposes that of The Times, whose parent company earned over $150 million from online subscriptions, and the Wall Street Journal. However, both newspapers are the pinnacle of American journalism that, unlike The Sun, have few substitutes: The Times has earned 119 Pulitzer Prizes and the WSJ has 34. Even then, it has not been a smooth transition; The Times recently cut the price of a digital subscription when subscriber growth stagnated.

The competition for an online readers time is now too great for newspapers or any online media platform to provide anything but top quality content. For newspapers like The Sun that face a huge swath of competitors in the U.K., paywalls are a disastrous solution to collapsing advertising revenues if they cannot provide unique, engaging content.